Wally Weitz of Weitz Investments, which manages around $4bn, believes that “the majority of stocks are very highly valued relative to… their business value”. The main reason for these high valuations is low interest rates and quantitative easing (money printing by the Federal Reserve). However, at some point, today’s “artificially low” rates “will get back to normal”. Indeed, they might even “get above normal”.
At the same time, there is growing evidence of “reversion to the mean of growth rates, market shares and profit margins” (in other words, those measures show signs of falling back towards their historic averages). “Google and Facebook have completely changed the advertising business”; streaming services such as Netflix “are shaking up the pay-TV landscape, and even Disney’s ESPN is facing pricing pressure”.
The “Amazon effect” has “been devastating to traditional retailing”, putting many of the big physical chain stores on the brink of bankruptcy. Weitz warns that pricing pressures in the retail industry “will find their way back upstream to producers of all types of products”.
Another factor to consider is geopolitical risk: “famines, shooting wars, threatened nuclear war with North Korea, secession movements, and less-than-reassuring political leadership”. In the long run Weitz still expects the US to “be fine”. However, “in the shorter run… we wouldn’t be surprised if some of these headlines created some downticks in the stockmarket”. He recommends investors hold up to 25% of assets in cash, and create a list of stocks “to buy on short notice should they become available at an attractive price”.