🎙️ Sorry, Realtors

NYU’s Aswath Damodaran, the academic expert on equity valuation, brought the goods in a terrific interview with The Financial Times this week.

💭 The elephant in the room: Is this market, and AI stocks specifically, overpriced in the near term?

“I think the market is fully priced, not cheap by any means,” he said.

We’ve got a whole lot more from “The Dean of Valuation” below 👇

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Evaluating the AI, tech-led stock rally

• A fresh outlook on the housing market

This, and more, in just 5 minutes to read.

Chart of the Day

In The News

🤔 Examining This AI, Tech-Driven Rally and Where We Stand

As the intro above prefaces, NYU’s Aswath Damodaran thinks the market is expensive—no kidding. But as he knows, that doesn’t mean stock prices will fall: John Maynard Keynes famously noted that markets can stay irrational for longer than you can stay solvent. As it goes, stocks can be “overvalued” for months or even years. 

Damodaran gets fairly technical in the interview, but here’s the gist:

• That “AI mania” is a bubble on the verge of bursting and is “kind of overwrought,” he says, because it’s based on a price-to-earnings (P/E) ratio that’s too high. Although it’s a simple way to evaluate a company, it can send false signals. And it hasn’t worked out very well in evaluating the Magnificent 7 over the last decade as their shares have soared higher.
  

• As Damodaran points out, the P/E metric doesn’t account for growth. Two stocks might have the same P/E today, but if one company is growing earnings at 50% annually and the other’s earnings are about flat, that’s a sizable difference for the same “value.”
  

• Damodaran lays out many other ways to evaluate this market, and he doesn’t specifically say whether we’re at or near a market top. He says that market cycles always repeat themselves, and a correction is only a matter of time, especially if earnings are slowing down quietly “under the surface.”
  

• “When you’ve gone up this much this quickly, there will be cleaning up,” he says. “Are there segments where the market has over-reached? Absolutely…But if you have them already in your portfolio, I wouldn’t be selling them and running for the hills.”

Why it matters:

So-called “bubble talk” has heated up as tech stocks and small-caps move higher. But swings in both directions are natural parts of the market; corrections and bubbles come and go like clockwork. 

• “What’s so wrong about a bubble?” he says. “A bubble is the way humans have always dealt with disruptive change. What makes us change is the fact that we underestimate the difficulty of change and overestimate the likelihood of success. Whenever you have a big change, everything in that space will tend to get overpriced because people will push up the numbers, expecting outcomes that cannot be delivered.” 

Trust the process: Damodaran also knows that doing intrinsic valuation and picking stocks doesn’t guarantee outperformance. Many of the smartest minds and most-sophisticated mathematical models still fail to match the benchmark S&P 500. He picks stocks over sitting in index funds because he enjoys the process, even if he doesn’t beat the market. 

• Everyone’s playing a different game, with varying risk tolerances, time horizons, and objectives. He says it’s meaningless to “wag your finger at people” who buy Nvidia today or plow money into other rising shares. “Let other people play a different game,” he adds.

Read more (FT)

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🏡 What to Expect From the Housing Market in 2024

The second-order effects of economic changes are never as obvious as they seem. Take interest rates, for example. Surely, higher rates, boosting mortgage costs, would suppress homebuyer demand, resulting in lower housing prices, right?

• In reality, whatever effect higher mortgage rates had over the last two years on housing prices was offset by a lasting shortage of homes.

What about homebuilders, then? In theory, they should seize the opportunity to boost housing supply.

However, homebuilders also rely on financing, so higher interest costs raise the bar for housing projects they’ll consider undertaking. Combined with a surge in input costs for labor, lumber, copper, and more, the economics of filling that housing shortage aren’t as attractive as you’d think.

Housing prices ⬆: Consequently, housing prices nationwide are expected to keep rising as demand still outstrips available supply (new and existing homes for sale). Thus, Goldman Sachs projects a 5% increase this year followed by a 3.7% rise in 2025 — revised higher from previous forecasts of 1.9% and 2.8% respectively.

• Rate cuts to come: Goldmans’s analysts outline how expected interest rate cuts this year will likely spur a faster demand response (more people suddenly wanting to buy homes, particularly first-time home buyers) than a supply-side response (people wanting to sell their homes or new home construction.)

• While they anticipate 30-year fixed mortgages falling from their current levels (just under 8%) to 6.3% by year-end, modestly lower interest rates may still exceed existing homeowners’ mortgage rates locked in during the pandemic — the nationwide average mortgage rate is around 3.9%.
  

  Many may ask themselves, “Why undergo the hassle of moving homes and taking on a higher mortgage rate?”

Why it matters:

Meanwhile, Friday brought another major development in property markets: The standard 6% commission on home purchases is no more.

The National Association of Realtors (NAR) announced a settlement, agreeing to pay $418 million in damages while eliminating its commission rules and reducing the frictional costs of buying and selling homes.

• In November, a federal jury found the NAR and two brokerages liable for almost $2 billion in damages for “conspiring to keep agent commissions artificially high,” writes CNN Business.

Sorry, realtors: The NAR has long required home sellers to pay a 6% commission that’s usually split equally between the seller’s agent and the buyer’s agent.

• Realtors will now compete on commissions, giving more power to prospective buyers to compare broker costs.

Read more

More Headlines

🛍️ Amazon will debut its first “Big Spring Sale” on March 20th, open to everyone (not just Prime members)

🤞 Steve Mnuchin wants to assemble an all-star team of investors to buy TikTok’s U.S. operations, but the Chinese government is signaling it would block any forced sale of TikTok

💰 Can a wealth tax on the super-rich really work?

🚗 Lyft, Uber to cease operations in Minneapolis after new wage law

💸 For the second year in a row, investors are more interested in hedge funds focused on credit than any other type of strategy

Quick Poll

Yesterday, we asked: What do you believe has been the primary driver of U.S. inflation?

— The overwhelming majority blames the money printer, namely pandemic-era stimulus and relief. One reader succinctly noted, “Stimulus means printing money, which leads to your money being worth less and prices going up.”

—Added another, “Pay the piper! We continue to spend funds far beyond our tax revenues. The spending during and after Covid has been beyond excessive.”

—A reader who pointed to rising corporate margins wrote, “These companies sell the products that have high (inflated prices). We, as consumers, have no choice but to buy these products, as most of the everyday products we use belong to large conglomerates. These companies are turning massive profits on the backs of consumers.”

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See you next time!

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