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16 Oct 2023 - 10k Words | October 2023

By: Equitable Investors

10k Words

Equitable Investors

October 2023

"Small caps have gone through scotched earth in the US & here," Bell Potter highlights, with JP Morgan showing small caps to be the most volatile and lowest returning asset in the past ten years. JP Morgan also shows us inflation still running above trend in developed markets, leading to a "relentless" rise in bond yields according to SentimenTrader - the flipside of which is a massive equity-like drawdown in bonds charted by @leadlagreport. Mortgage repayments, @cullenroche notes, have rocketed up. But P/E multiples haven't really responded to the shift in rates yet - Endeavour Equities charts the gap between the Nasdaq's P/E and real yields - then points out that in 1987 a P/E derating lagged higher real yields. Factset has the S&P 500's forward P/E at 17.7x, just above the 10 year average of 17.5x (calculated over a period of lower interest rates). Equitable Investors looked at Australia's 10-year government bond hitting a high not seen since 2011 as the spread between the bond yield and the ASX 200 dividend yield turned negative. We also looked at the spread between corporate "high yield" debt and the earnings yield in the US. That's as credit ratings agency Fitch sees corproate interest coverage declining "modestly" as rates stay higher for longer. Finally, Morningstar charts how Australian consumers are spending more of their income and saving less.

Weighted harmonic average P/E (excluding non-earners) for the Russell 2000


Source: Bell Potter

World equity market returns

Source: JP Morgan Asset Management

Headline consumer prices year-over-year, quarterly data

Source: JP Morgan Asset Management

US bond yields rise as news articles label the move "relentless"

Source: SentimenTrader, Bloomberg

2020-2023 - 20+ year US treasury drawdown compared to largest stock


Source: @leadlagreport

Monthly mortgage payment using median existing home pirce in US with a 20% down payment & average 30Y mortgage rate

Source: @cullenroche, Bloomberg

Nasdaq P/E v inverse of the real yield on 10 year inflation-protected treasuries

Source: @EquitOrr / Endeavour Equities

In 1987 P/Es derated as a delayed reaction to higher real yields


Source: @EquitOrr / Endeavour Equities

S&P 500 forward 12 month P/E ratio - 10 years

Source: FactSet

Australian government 10-year bond yield

Source: Iress, Equitable Investors

Spread between S&P/ASX 200 dividend yield & 10 year bond yield

Source: Iress, Equitable Investors

Spread between US BBB corporate bonds and the S&P 500 earnings yield


Source: GuruFocus, Equitable Investors

US "high yield" corporate bond default rates rising

Source: S&P

Change in Fitch's forecast for 2023 inveterst coverage (EBITDA / interest)


Source: Fitch

Real household incomes declining and saving rates low



Source: Morningstar, ABS

October Edition

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Equitable Investors Dragonfly Fund


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