A month and a half ago, we were wondering about the decline in the stock markets. Since the last lows, the Swiss index has recovered 20% and its American counterpart even 30%. Incredible. We are therefore today at the same levels as in October 2019, just before the Chinese virus emerged. The players therefore consider that the shares are worth as much as last fall, when we were still living in an era of economic, financial and health carelessness. Since then, the GDP of all nations across the planet has collapsed as it has not done since the first oil crisis of the 1970s, or even since the last world war. Unemployment is also exploding everywhere. But no, everything is fine, because Trump and his puppet Powell have brought out the big guns. They are the new superheroes of the financial world.
So today we are ready to pay the market almost as if nothing had changed since last year. This means that we are buying companies at the same price as 6 months ago, while not yet knowing the actual impact of the health crisis on their fundamentals. Thus, the valuation of the US market in relation to GDP amounts to 138%, placing it at a level that is already considerably overvalued, even though dismal financial results have yet to be published. PE Schiller Ratio stands today at 27.52, a level not far from that which prevailed before Black Tuesday in 1929.
We are now getting very close to the 200-day moving average that was breached a little less than two months ago. This will be a difficult passage to get through, as the rise has been extremely rapid and the market may need to catch its breath. This is all the more true as there is still a lot of bad news in terms of results ahead of us. The specter of the Chinese virus also continues to hang over our heads, with a risk of a rebound in infections due to the lifting of many containment measures.
That being said, I am also wary of Trump and his henchmen, who are certainly already thinking about a way to perforate this moving average in the other direction. The markets are so irrational that a few tweets with several "GREAT" about agreements with the Chinese or OPEC, combined with messianic statements from the FED, would be enough. It is downright the re-election of the simpleton on duty that is at stake at this level...
Whatever happens, I have to say that it doesn't smell very good. If the market fails to cross the moving average, it will start to fall again and certainly test the lowest point reached in March, or even go beyond it. In my opinion, this will be the lesser of two evils, because in doing so it would allow the market to get back in touch with reality and perhaps even offer us some great buying opportunities in the more or less near future. If Trump manages to manipulate the market, on the other hand, by breaking the moving average, then we risk starting a lasting cycle of outrageous speculation and we will have to wait much longer to find cheap stocks. I dare not imagine the extent of the crisis at that time...
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What is strange is that we hear more about the situation in China, whereas just a few weeks ago all the media were talking about the results and the developments...
And I'm not even talking about the various economic players who are announcing a terrible recession, one of the worst in history, but the stock markets are still rising in the (blind?) hope that Trump will find, as you say Jérôme, a new extraordinary solution to restart the machine and, of course, his re-election.
It's very difficult for me to know what to do right now. Stay invested, liquidate part of it or invest more especially if the decline doesn't come...
But with “ifs”…
In any case, the information coming from China is all false. COVID has been present there since at least October, while they reported it late in December. The cases were subsequently significantly underestimated, as were the deaths.
The only thing for me to do in this kind of situation "I don't really know what to do, the market is crazy" is to play it safe... manage the risk, even if it means maybe missing the train.
but the famous FOMO (fear of missing out) is for me the worst feeling
Fear is a bad advisor anyway, whether we panic because the market is collapsing, or we are scared of missing the train. The only thing to do is to stick to your strategy. This can be dollar cost averaging, or trend following combined with capital protection. By doing so, we avoid being dictated by our emotions.
In any case, whatever strategy is followed, it is advisable to diversify and buy at a reasonable price.
Today, I think that we are more in a market of speculators than investors. I am not a speculator and therefore abstain, because the markets are too expensive according to my criteria and there are in my opinion too many unknowns, not to mention the interventions and other declarations of central banks and certain governments that disturb the game and its proper reading.
That said, I am certain that since the beginning of March, savvy speculators (i.e. competent and above all well-informed professionals [the line with insider trading is sometimes thin], and not amateurs taking risks like in a casino) have been able to make some nice deals...
It's funny that you say that Laurent, because I was wondering who sold between February 20 and March 20 and who bought back afterwards. If we rely on the volumes and the information that some brokers were overwhelmed with requests to open accounts, I would tend to say that the institutional investors sold en masse first and that it was the small investors who pushed the market back up in low volumes afterwards... and who risk finding themselves trapped when the institutional investors start buying again. But of course, this is only a hypothesis.
According to one of the Blackrock pundits (https://www.youtube.com/watch?v=uaO2P7-NKfQ), there is so much liquidity pouring into the markets and so few alternatives that it is unlikely that we will see a repeat of previous crashes.
And that's the problem, most analysts base their scenarios on previous crashes, like generals who draw up plans based on past wars... forgetting that weaponry has evolved.
More than 500 support/recovery plans have been launched across the world.
I am always wary of the famous 'this time it's different'. Printing money does not create wealth, quite the contrary.
A little reading to meditate on while confined this weekend:
https://www.letemps.ch/economie/dix-ans-super-grande-depression-prevoit-nouriel-roubini
Some more reading:
https://edition.cnn.com/2020/05/19/investing/dow-jones-stock-market-v-shaped-recovery/index.html
On the stock market, as on the terraces of bistros, many people consider the epidemic to be over… I was still reading this weekend the boss of swissquote saying that many savers had opened accounts after the falls of March… in any case this epic, your articles, the comments, your book have really changed my way of thinking and selecting stocks. Thank you by the way!
Thanks for your comment. Yes, this rush at Swissquote reminded me of the 2000s when I started trading on the stock market, we know how that ended. For now, the indices are proving them right... Beginner's luck?
The SP500 is approaching its 200-day MA... two possibilities, either it manages to cross, thanks to the manipulations of Trump and his puppet Powell and in this case we will find ourselves in a new bull market even more expensive compared to the fundamentals than at the beginning of this year, or investors open their eyes and the market collapses again.
In Switzerland we tend to forget it because the pandemic has been very clearly stopped, but in the USA it is still progressing at a very sustained pace. And the unemployment curve is climbing even higher...
This is absolutely true, however, it changes the scale of values: It creates "asset bubbles" as we have known since after 9/11/2001 (at least for me).
However, I have the same questions as you.