A Big Market Bull Just Turned Cautious | Ed Yardeni

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Ed Yardeni (0:56)

We're moving the 8400 for the S&P 500 at the end of this year into the middle of next year. Just think it's going to take a bit longer here. There are kind of more short term issues that have been out there that are just becoming a little bit more intense that will lead me to be somewhat more cautious.

Adam Taggart (1:25)

Welcome to Thoughtful Money. I'm Thoughtful Money founder and your host, Adam Taggart. Welcome you here for a discussion with Ed Yardeni. Ed is known as being one of the more bullish guys on Wall Street.

He is starting to, and forgive me for using this terminology, Ed, but slow his role a little bit. Some of your recent writings have suggested, not that you're becoming bearish, but that you're becoming maybe just a little bit less bullish. And I believe you have walked down a little bit your end of your target for the S&P. So if all that is true, I'd love to hear the reasons why.

Ed Yardeni (2:00)

Yeah, it's all true. The way I would frame it is, we're moving the 8400 for the S&P 500 at the end of this year into the middle of next year. I just think it's going to take a bit longer here. There are kind of more short-term issues that have been out there that are just becoming a little bit more intense, that lead me to be somewhat more cautious and think that while the market will continue to be driven by what I call FIMO, Fabulous Earnings and Momentum, that FOMO, namely the PE, might shrink a little bit more, which is what's been going on all year. We've had tremendous growth in earnings, and yet the valuation multiple has actually declined. We'd be a lot higher if it wasn't for that. But what that shows is that analysts remain very optimistic, exuberant about earnings, but investors, not so much.

They say, well, those are great numbers, but they're unbelievably strong, and we don't know that we want to pay what we had been paying in multiples. So that's where we've been at. And I think on the near-term basis, my main concern has been the geopolitical front. We've seen the re-escalation of the war in the Middle East. I think we're going to be in this for a while, and I think that'll continue to create problems in the oil market. So I'm looking at higher for longer oil prices as a result of that. And that in turn means that inflationary pressures from the oil market will have more time to seep into the inflation rate, excluding energy. You know, like diesel prices as energy, but that gets into transportation costs and gets into agricultural costs and so on.

That's the way it is working and would work. And that in turn has caused the Fed to go into a tightening cycle. I think everybody has concluded it's not going to be one and done, but there could be two more rate hikes this year. And then last but not least, the Bank of Japan has been the focus of our work.

You know, Japan had these amazingly abnormal interest rates, zero negative interest rates for many, many years. And Hedges, hedge funds, played the yen carry trade game. They went and borrowed in Japan, converted the yens into other currencies, and then bought bonds and other kind of assets all around the world. Great trade, but it really requires the Japanese rates stay near zero, which they're not. The Bank of Japan has already raised rates to 1% in terms of their official rate. And they're on the verge, as we're speaking, they will be raising the rate by at least a quarter point. The yen also needs to be weak for the yen carry trade to be working, and it looks as though the yen may be actually bottoming out. I would say that one of the best explanations for why bond yields have gone up around the world in the past couple of years is because the yen carry trade has been unwinding as the Bank of Japan has been moving towards raising rates, and as the yen has basically in a volatile fashion formed a bottom.