There is a lot of excitement on the web at the moment, especially among those who have entered the market in recent years. When you lose almost a fifth of the value of your investments in the space of a few days, you get a hangover and it calls into question your certainties. Not long ago we were told that things had changed, that the extreme valuations of companies were justified by the very low interest rates and their intangible value that could not be determined according to the usual ratios. An old refrain that we have already heard many times in the past.
But there you have it, nature has reasserted itself. The laws of Finance too. The more you pay, the more money you lose. It's so obvious that you wonder how anyone could have forgotten this rule that even a 5-year-old child can understand. So, those who bought at a low price in recent years tell themselves that if the market has just fallen by 15% or more, it's the perfect opportunity to make up for it and buy at a good price this time. A drop like that doesn't happen every day. I'm not good at judging, that's exactly what I did several times between 2000 and 2003. Three years of big drops and each time I thought I'd make up for it. I can tell you that at the end I felt like I'd been put through a wringer spinning at 1,600 rpm.
To put things in perspective, the ratio of the US stock market to GDP is currently at 139%. It is therefore considered extremely overvalued, despite the correction of the last few days. The graph below shows us that we had even slightly exceeded the extreme valuations that were rife in 2000 last December. We can see what happened after that and where we are today.
From a Schiller PE Ratio perspective, it is not much better. We are certainly well below the peaks of 2000, but above the end of the 1960s, before the oil shocks. A few days ago, we were even above the valuation that prevailed before the infamous Black Tuesday. The median Schiller PE is 15.76 and we are still not far from double this value.
Another cause for concern is that the market has fallen below its 200-day moving average, which is a major bearish signal, confirmed by the scientific literature. The coronavirus phenomenon has been so rapid that unfortunately we do not yet have any data that indicates the extent of the economic consequences on companies. The decline in activity has been so sudden and significant that there is a good chance that the losses will be significant. The risk of recession hangs over our heads and if this happens then it is certain that the correction of the last few days will seem like a distant and almost pleasant memory.
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I'm still waiting to chase deals! I can't wait to see the real impacts in a few weeks/months.
So happy to have been on the defensive in recent years. Of course I bought several stocks at unfavorable prices and my portfolio probably took a severe hit (I didn't dare to check it though haha), but since I invest in stocks with a very distant outlook, I'm not worried at all! And I intend to take advantage of my mountain of cash to move more quickly towards financial independence. In January I had 30% in cash, 5% in gold...
In terms of vacation, I'm supposed to go to Paris for a week and Frankfurt for a week at the beginning of April...
For now I'm not doing too badly, with a "only" 7% drop (compared to 17% for the SMI or the S&P 500). Like you, I was fairly diversified in other assets, notably gold and bonds, which helped a lot (and will certainly help a lot more in the coming times...).
Well, I'm staying at home after all...
Holidays in Ticino?
I was supposed to visit friends in France and the in-laws in Germany. It will instead be hot chocolate in the countryside with my sweetheart, far from any human activity.
The stock market crash is likely to be gigantic! It's general panic!
The whole planet is freaking out. Reason is gone again. Was it ever there anyway?
First of all, thank you for this article which forces us to remain calm and rational, without rushing headlong into stocks which have lost 15% recently.
In fact, I also made some purchases thinking I was getting a good deal, but since then, the question is: will there be another fall, much deeper this time?
Given the figures given in the article, the sales seem far from over... just like the summer holidays...?
In any case, Wall Street seems to want to continue going to the cellar...
Interesting :
https://www.marianne.net/economie/malgre-la-chute-recente-la-bourse-est-toujours-surevaluee-de-20-50-sur-les-marches-la
When you talk about holding gold, is it physical gold? Or is it a security?
Thank you for your clarification.
https://www.marketwatch.com/investing/fund/gld
AUCHAH physical gold ETF
New York is on fire!
Trump must be going crazy
Thanks algo-trading 😉
Thank you for this article which puts things into perspective, but we know that markets are not models of rationality.
I've been vegetating with my cash for over 2 years (50% of my assets) and I couldn't resist yesterday, I tiptoed back in with ETFs for 5% of cash (Europe and Emerging) ... and today Trump makes his announcement and the markets fall sharply by 10%, it's still annoying :/
I had planned to subscribe to 5% every week, based on the article at the end of the comment and on the certainty that central banks will quickly pour out truckloads of liquidity to support prices (stock market) and avoid bankruptcies (real economy) ... but after reading this post, I am hesitant.
https://www.marketwatch.com/story/goldman-sachs-analyzed-bear-markets-back-to-1835-and-heres-the-bad-news-and-the-good-about-the-current-slump-2020-03-11?itm_source=parsely-api&mod=mw_more_headlines
We must not get excited and let the storm pass.
I feared a V-shaped recovery, like in 2018 when prices recovered in less than 2 weeks.
I think that this will not be the case, but I still have the impression that this stock market crisis will be short, a few months at most.
The problem is that we started from very high with huge expectations about future profits, profits that will not be realized. On the contrary, there will be many losses. 2018 was just a warning. It started to rise again thanks to Trump's manipulations. But it was just hot air. Nothing solid. The proof.
Hello everyone, before sharing my views I would like to warmly thank Jérome for the incredible quality of the site.
I'm going to risk rereading myself in the future and realizing how wrong I was...
In this kind of case it seems essential to me to focus on the fundamental mechanisms, to try not to extrapolate too much and not to forget the basic principles of investment. Basically, use our brain instead of our guts. A market of this type is already not easy but in this case coupled with a health situation that concerns us all, hello damage.
I see three fundamental dynamics at work.
1. Supply shock: China is no longer producing and the tight flow of the global economy is seriously seizing up. Good news, it seems that the Chinese are gradually returning to work.
2. Demand shock: isolation measures, more purchases, money no longer circulates, bankruptcies, job losses etc. typical recession process. Current situation in Europe and very soon in the USA. (beware of market timing)
3. Contagion shock from markets to the real economy. Given the nature of the virus (temporary impact), I had set the cursor (wrongly!!) to "limited probability". The trigger, or accelerator, was, in my opinion, the movement on oil.
I am stopping on oil because I fear that we have entered a new regime that will last a few semesters for geostrategic reasons: (even if it is in the economic interest to get a quicker price)
Basically: The Russian response is a reaction against American shale gas/oil producers ("profiteers" of the high prices maintained by OPEC + Russia) but also a response to the sanctions regime of the American President. Russia has an opportunity to bankrupt these US producers and Putin is not going to hold back. To punish Russia (which is Iran's ally... sworn enemy of the MBS regime), and to send a message to all OPEC+ members, Saudi Arabia has committed to a brutal strategy of volume and market share.
Reaction: Dislocation of markets including the bond market which is critical for the real economy and the good performance of financial markets. Intervention of central banks etc… Bingo: contagion of the market on the economies and we are entitled to the mind-blowing week which has just ended.
Let's move from fundamentals to extrapolation or speculation:
The million dollar question: Timing and how to implement purchases? I don't have a crystal ball, but here's what I think.
Two certainties: The virus is temporary! The market should therefore improve in a trend only when we reach a peak (April/May???) of contagions (or when the delta of contagions begins to decrease). In the US we have not yet entered the heart of the matter for covid, keep some ammunition warm. 2nd certainty: For those who know how to do it and have a strong stomach, it would be necessary to take advantage of the super high volatility and sell it. (put/call sale)
A doubt: how to use a valuation analysis grid when we have no idea of the impact of the current dynamics on the results of companies? It is an important decision guide but random in the short term in our situation.
A hope: We need a monetary response but above all a response and fiscal aid. It seems that this week's scale 9 earthquake was well heard in the capitals of the world. Trump is playing his election, I can see him taking out some very large checks.
Execution? Purchase in several tranches, starting now if you have a long-term horizon, but calculate your budget carefully and be prepared to do it over a period of several weeks or months. Purchase quality securities at the beginning (thanks Jérome because you help us a lot on this subject).
It doesn't seem to me that the market has capitulated yet and let's not forget that the starting point of the correction was a very expensive market. Before having a more normal valuation we can well go overboard on the undervalued side, especially with all these momentum/algo trading strategies and the lack of liquidity in the market.
In conclusion, a positive point: With interest rates very soon at zero everywhere, the relative attractiveness of shares will be reinforced.
#Wash your hands!
Thank you Bientôt for your excellent comment, the conclusions of which I largely share.
I would like to add a few points to complete this:
– The virus is temporary, but it is the detonator, like any exogenous shock. As you pointed out, it is not yet as active in the US as in Europe. Above all, it is its implications that you highlighted under “demand shock” that will impact us in the longer term, with a strong chance of recession. Budgetary and monetary interventions will help cushion the shock, but it will be very difficult, if not impossible, to avoid recession.
– As you also pointed out, the market started from a very high point. This is actually the crux of the problem. Despite the correction in recent weeks, it is still overvalued! The similarities with 2000 and 2008 are quite scary. If we follow the same path, the market could lose up to almost 50%, which means that we are only halfway through the process. When we know that in the coming months we will have: the explosion in the number of deaths in Europe, the explosion in the number of cases, then the number of deaths in the USA, the announcements of profits in free fall (or losses) and ultimately certainly the recession phase, it is still a safe bet that the decline is far from over.
– to answer your question: “how to use a valuation analysis grid when we have no idea of the impact of the current dynamics on the results of companies”. It’s very simple: VALUE, VALUE, VALUE!!! Measure what is measurable, namely not profits, sales or cash flows, but the book value. It’s not for nothing that this valuation ratio is particularly effective just after a market crash.
– execution: dollar cost averaging is a good basic principle, a piece of advice from our spiritual father B. Graham. More generally, another very valuable piece of advice in this kind of situation is that it is better to enter the market a little too late than too early.
The question is not whether we will be right or wrong in a few months. The question is not to get excited, speculate, make decisions based on emotions rather than reason. A lot of things can happen, we are not fortune tellers. Let's even admit that the entire market starts to rise sharply again like in 2018, following once again a market manipulation by Trump to get re-elected. This is purely hypothetical because the virus will still kill a lot of people in the process despite this. Well if that were to be the case it would mean that we are once again only postponing the problem: prices are too high, there are too many unreasonable expectations regarding future corporate profits, profits that they will not be able to realize. It's the snake biting its tail. The market will crash again just a little later.
The question is therefore still and always to buy at the right price. And to avoid falling knives (at the moment they are raining everywhere!).
Purchase in several tranches, of course, but I have the bad feeling that this crisis will be, at the stock market level, a matter that will be quickly resolved.
Just take a look at the rebounds this Friday, with Trump and the central banks in support intervening (too) quickly and (too) strongly.
In the USA, the amounts allocated to support the stock market will be X times higher than the unfortunate 50 billion promised by Trump to support the real economy during this crisis.
This Friday, March 13, 2020: +9% S&P500, +10% Nasdaq100, it doesn't look like a technical rebound caused by short buybacks... even the EuroStoxx indices which only ended at +1.6% have a candle that rose by almost 10% before falling back at the end of the session.
Anyone who waits for "fair" valuations risks having a white beard before entering the market.
This is no longer a market where you have to enter low and sell high, no, you have to buy high and sell even higher!
We will see at the beginning of the week how the prices evolve, but small, hard-working investors like us who were waiting for a solid correction may well be disappointed with a recovery in the shape of a capital V... in short, I am disgusted, the very notion of a "stock market" no longer exists, it is nothing more than a gigantic money vacuum cleaner :/
The beauty of the stock market is that nothing is impossible, even the scenario you mentioned. Who would have bet three months ago that the health, economic and financial world would be in such a state today? Not many people, as the euphoria was at its peak. So yes, a V-shaped recovery is possible. Trump has many flaws, but we must admit that in the manipulative genre he reaches new heights. He is capable of hiding shit from the cat and putting magic powder on his country to get re-elected. It is not impossible, but it will be very difficult, much more than what he did in 2018 by manipulating the stock market with his budgetary policy and his tweets.
The problem is that the drop in activity caused by Covid is major and international. Avoiding a recession is an impossible mission. Those who paid 50 times earnings at the end of last year will find themselves at 100, 200, 300 times earnings compared to their purchase or even with losses.
Yes, the market rebounded very strongly on Friday, but that was predictable given the sharp and rapid decline in recent days. This is typical of bear markets, as we experienced between 2002 and 2003 and in 2008.
Regardless, even if, as you say, the rebound is V-shaped, the basic problem remains the same: the market remains too high. Trump can push back the deadline, perhaps. But sooner or later stocks will have to return to some normality.
Below is a very interesting link on the evolution of Covid:
https://www.scienzainrete.it/articolo/levoluzione-dellepidemia-europa/fabio-miletto-granozio/2020-03-13
It's in Italian but it translates very well with Google.
Big mesh here are the conclusions:
– The frequency of doubling of cases is slightly decreasing in Italy following social distancing measures. The slope is still upward, but less worse.
– The situation in the rest of Europe is quite similar, with a slight advantage over Italy (they had a few more days to prepare and take measures), thanks to their southern neighbor.
– On the other hand, Spain and the USA are lagging far behind and the scenario there could be even worse than in Italy.
If this is true, I dare not imagine what it will mean for the markets...
Fed Panics: Powell Cuts Rates To Zero, Announces $700BN QE5, Unveils Enhanced Global Swap Lines
=> https://www.zerohedge.com/markets/fed-panics-powell-cuts-rates-zero-announces-700bn-qe5-unveils-enhanced-global-swap-lines
Confirmation of my post… remains to be seen how the markets react this week?
For now, US futures are going down the tubes. We'll have to see when the stock markets open.
This famous ratio you are talking about is it the P/E?
At this time, how much do you recommend this ratio to be around to buy?
I think it will drop again severely this week. I will start my purchases right away. I plan to spend 50% of my cash, if it drops. The other 50% we will see how it evolves! I don't want to miss out on purchasing opportunities. If it drops again, so much the better, I will continue to buy. In any case I will be a winner in the long term.
The PE Schiller Ratio uses 10-year average earnings. It is known to be reliable in assessing a market as a whole and predicting future returns. The median is 15 and today it is still at 25. So too high.
I would say that when it starts to get closer to 15 it will be interesting. But above all the market must stabilize before entering it massively. It's a jungle at the moment. You of course start to come back to it little by little.
I would like to add a small caveat: the Price/Earnings ratio is not a standard benchmark. It has historically varied depending on the stock exchanges (for example, US stock exchanges have historically had a higher P/E than the global average) and on the sectors (the P/E of the insurance or automobile sector is significantly lower than the P/E of tech growth stocks).
Ideally, one should track the evolution of the P/E by stock exchange/region and by sector.
Ultimately, these big drops or karachs are opportunities to acquire quality companies with a stable dividend, or better, a growing one, and an ability to maintain this dividend despite the crisis. So, with the fall in prices, the dividend yield becomes wonderful and forever compared to our low purchase price. SwissRe for example, or UBS if they manage to maintain their policy…
Yes, as you say, if they arrive.
Beware of yield traps.
European indices are taking a tumble this morning, Monday March 16, recession is inevitable.
It remains to be seen this afternoon whether the American indices will follow the FED and its B52s which will pour out billions of dollars in liquidity?
SPY ETF explodes in premarket
Today, an investor with cash should say to himself "it is urgent to wait".
The S&P500 opens at minus 10% … I note this remark “”The brokers are in shock, saying to themselves +if they are doing all this, it must be because the situation is really horrible+”, comments Christopher Low, economist at FTN Financial. “And the situation is really bad. You only have to look at the Chinese economic data to be convinced of that. Or the number of deaths in Italy”
In short, I thought that central bankers were going to confiscate our correction when in fact, they are only fueling it! We are living in a historic moment!
They have mostly burned all their cartridges!
What... the American central bank would have no more ammunition??? And boom, UNLIMITED QE mouhahaha, I cover all the debts and I buy the whole market!!! Super-FED is here, the new superhero of the American stock market!!
I don't even dare to imagine what would happen IF Trump was not reelected... by the way, does anyone know how much it costs to create all these dollars?? Not to mention deflation... it's the taxpayer again who will pay to run the printing press which suddenly makes them "poorer"? Make America Great Again, but poor...
Well, in nominal terms it costs next to nothing. In real terms, however, it's something else... look at the following graph, especially since the post-war period:
https://loringward.com/wp-content/uploads/2017/03/blog_gold_graph-5.jpg
Deflation, I don't think so with all the liquidity they're sending... the risk is more long term inflation.
Here we are not even talking about ammunition anymore, but artillery, associated with an armada of monetary helicopters. I look forward to seeing the next market manipulation they will send when the consequences of the Chinese virus are effective on the economy. More than unlimited, what does that make? "Dad, infinity plus infinity, how much does that make? 🙂"
Interesting little recap, comparison between the evolution of the Stoxx600 Europe and the S&P500 USA since January 2014:
Stoxx600 – Europe
1/1/2014 : 326
1/1/2020: 420 or an increase of 29%
3/25/2020: 304, a drop of -28% compared to 1/1/2020
S&P500 – USA
1/1/2014 : 1845
1/1/2020: 3244 or an increase of 76%
3/25/2020: 2450, a drop of -24% compared to 1/1/2020
As much as the US market was clearly overvalued (American analysts seem to be reaching a consensus for an S&P500 around 200-2100?)
As much as the European, Latin American and even Asian markets seem to me to have corrected sufficiently to gradually return?
“Buy at the sound of the cannon and sell at the sound of the bugle”… and cannons, have we been hearing them for a few weeks?
The American market is still too expensive. The others are more interesting indeed. That being said, be careful how you value... The reality of 2019 no longer exists in 2020, at least for money flows, sales, profits and dividends...
The sound of the cannon? Maybe we've just had a few firecrackers for now... It remains to be seen what will happen when the unemployment figures come out and the profit or loss announcements are made. Maybe we'll also get the sound of the cannon in the literal sense, like in 2003.
An interesting article (in English):
https://seekingalpha.com/article/4334374-you-one-week-to-decide
I agree with Jerome, I think we've only seen firecrackers so far.
When companies start to release negative figures and we learn that one or another is on the verge of bankruptcy, it could cause quite a stir down there!
But if you want to make sure you don't miss the boat, do like me and start investing a certain percentage of your cash.
On the other hand, the stock market has recovered this week, but I think it's only temporary. Spring and summer are likely to be red red red well before fall!!
As I wrote elsewhere, I am entering the market at a rate of 5% per week, only on Europe and Emerging ETFs, because the levels of decline are already quite significant.
I am avoiding the US for now, if the S&P falls back towards 2100, it will be a buy signal.
I'm usually the kind of guy who sees the glass half full. However, there are a lot of things that bother me and worry me about the markets right now. We could talk about valuations that are still high despite the correction, we could talk about the Chinese virus and its predicted impact on unemployment and the economy, we could also mention the economic depression that is looming. That's already a lot of things. But what worries me most in the end is the number of people who are still bullish right now. I want to prove it by the recent strong correction movement over the last 3 days. I also want to talk about the comments that I can read everywhere on social networks. I also think about the fact that Swissquote has recorded a massive influx of new clients who wanted to benefit from the current crash. It reminds me of the 2000s with all those amateur stock marketers (me first) who threw themselves into anything and everything. All of this does not bode well. Maybe I'm wrong, and in some ways I even hope so, but history has very often proven that the market hits rock bottom when irrational fear has completely taken over the market, when people panic, when catastrophic stock market results make headlines, in short when there is no longer anyone who hopes for anything at all from the markets. Indeed, they say to buy at the sound of the cannon. I really don't feel like I've heard it yet. And even if I had, I rather have the feeling right now that Trump is already sounding the bugle.
The S&P500 at 2,630 seems crazy to me.
On the other hand, Latin America at the 2009 level and Europe at the 2014 level, that interests me.
I am a long-term investor
Having placed 10 or 20% of your cash during the last 2 weeks, that doesn't seem unreasonable to me. It allows you to be in the market in case the rebound is sustainable and to keep a lot of ammunition for the future.
We are reaching the end of the month/quarter and the funds will rebalance their portfolios to meet their contractual obligations, so this rebound does not surprise me.
We will be able to better assess the trend of operators at the beginning of April, which will also coincide with the peak of the epidemic.
The unemployment rate is exploding all over the planet (drastic decrease in profits to be expected for companies it seems to me) and conversely the stock market is rising like it has never done before in such a short time! Go figure out the logic!
I'm not a buyer anymore! Whether the stock market goes down or up again, I'm happy I bought last week.
Many experts are making their predictions, are present on the media and networks, some saying that it's back to a bull market, others that the bear is here for a while. I read carefully the article that you offered us yesterday Jérôme and I must say that this article speaks to me a lot. Indeed, the economy is not turning, unlike finance at the moment, but at some point it will be necessary to announce that sales and therefore money coming in are not happening. And the growing number of unemployed people is not going to help the economy turn, at least not as a whole.
For my part, I cut 2 positions this week and kept some cash. I was rather telling myself that the time was right to get in but…
By reading the news and other analyses, I realize that there is a major investor who is making very little noise at the moment and who has a mountain of cash… Warren Buffet. I don’t know if he is shopping at the moment or not. In any case, he has been announcing for several months that he wants to make a big acquisition. My question: what is stopping him from doing so at the moment? If he makes a big move, it will be in the press. So, I don’t imagine him having yet entered the market with his ton of cash.
What do you think? Is he once again a visionary and feels that this whole story is far from over?
No idea what he's doing. I just hope he and Charlie are wearing the mask!
Some more reading:
https://www.smh.com.au/business/markets/is-the-sharemarket-surge-a-trap-for-bears-or-bulls-20200331-p54fkh.html
But still:
https://seekingalpha.com/article/4335387-is-way-too-early-to-buy-dip?source=intbrokers_regular
* consensus for S&P500 around 2000 – 2100
Hi Jerome,
Do you have the references for the graphics used in your article?
It seems to me that there is a problem connecting to the forum. I have not been able to log in for a few days...
Good day
https://www.multpl.com/shiller-pe
https://www.gurufocus.com/stock-market-valuations.php
What exactly is the problem with the forum? Do you have an error message?
I would like to add this site which contains a lot of macro-stock market information:
https://www.starcapital.de/en/research/stock-market-valuation/
Thanks for the links.
Did you receive my messages (sent via the direct contact form) describing the problem with the forum?
No, nothing. I'll contact you privately.