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Market is in a ‘euphoric period’ amid earnings season: Cambria ETFs CIO

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Cambria ETFs CIO Meb Faber joins Yahoo Finance Live to discuss the latest market action amid earnings season.

Video Transcript

AKIKO FUJITA: And with nearly 90% of S&P 500 firms out with their quarterly results so far, 86% have beat on earnings, according to FactSet. That is the highest number we have seen since 2008. And we've got a busy week yet again this week, with a lot of the newcomers reporting, including Airbnb, Bumble, as well as Roblox. Let's bring in Meb Faber, Cambria ETFs CIO. Meb, it's good to talk to you on this Monday. We're looking at another record here on the Dow, today up about 272 points. What's catching your eye in terms of the market dynamics right now?

MEB FABER: Well, great to be back, guys. Hope everyone had a happy Mother's Day. I think that's probably a great jumping off point. Like many holidays, the topic du jour yesterday was investing, which I think often is not really the case. And it goes to show where we are in the cycle. I don't think my mom quite has a Bitcoin charm bracelet yet. But everyone was talking about crypto.

And if you look at the lay of the land, I think there's no question we're in a pretty euphoric period, particularly with stocks. As you go down the bear checklist, certainly in the number one is valuations. You know, the 10-year PE ratio in US stocks is ticking up to around 37, 38, which is pretty darn near the highest it's ever been, which is late '90s when it hit 45. Now a reminder, it first hit, I think, high of 30s in '98. So you still had a ways to go after it got to there.

But historically speaking, we went and did a study last week on Twitter where we looked at all the instances in history where stock countries ended a year at a level of 35 or above. And historically speaking, there were about 50, but a lot of those were Japan in the '80s, which went totally crazy. But historically speaking, it's not a good entry point. 10 years from now, in history, the average real return was zero.

Now, about a third of them were still positive. They had positive returns, so it's not totally impossible or implausible that you could still end up OK. But on average, returns were not great. And usually, you had some pretty big drawdowns. So, a lot of caution I think is warranted as you talk about valuations in general. Now there is, of course, good news with that. I mean, if you look at all the other indicators, you got unrealistic expectations, lots of new supply through IPOs and SPACs.

Short interest is low. People are allocating a lot. A lot of people are trading risky assets that probably aren't or shouldn't be trading them. And then you have the two potentials-- interest rates going up, taxes going up. That leads to the possibilities of what to do and where to go. And I think that value is certainly a trade that has absolutely stomped the US stock market this year. But I think there's probably a lot more way to go as well.

ZACK GUZMAN: Yeah, let's talk about that, too, though, because when we talk about inflation fears, we've seen growth take it on the chin before when yields started to rise. We're going to be getting some updates on the Fed thinking in just a second here on the show. But when we talk about the value side of the equation, we've been hearing about issues around wages potentially going up and the shortage in workers there. So which kind of pieces of the value trade are you keying in on that seem to be able to spread that and not necessarily get hit as much by maybe the cost of labor going up?

MEB FABER: There's two parts. If you go back to the 1920s 100 years ago, and you say, OK, I want to compare the value factor, so cheap stocks versus expensive stocks, the single worst-- and value has worked for the better part of a century. The single worst year for that strategy was 1999. But then the single best year was in 2000, right? Right after the bubble popped, you had an amazing resurgence for value. And by the way, it didn't just last one quarter. It lasted years-- until 2020. 2020 is now worse for the value factor than 1999.

And then already, in 2021, you're seeing this value resurgence. And it's funny because we have conversations with a lot of investors, not just retail, but also institutional, that say the trades already happened one quarter in. And I kind of laugh because you look at it on a chart, and you have a long way potentially for that to go, not just in months or quarters, but in terms of years. That's within the US.

And if you want to be a little more enterprising, the valuations outside of the US-- the US has been a leader in vaccines and reopening certainly versus a lot of the developed and emerging markets. As that trade potentially rotates around the world, foreign developed and particularly emerging markets value stocks are even cheaper. So you get some pretty screaming deals around the world. So anyway, my takeaway on all this is, you can certainly look within the US, but outside the US is even more interesting as well.

AKIKO FUJITA: Meb Faber, Cambria ETFs CIO, it's good to talk to you on this Monday. Some good takeaways there. Thanks so much for your time.