Last night the S&P 500 closed up 1.23% and futures are up another 0.6% this morning. The leading American index has thus gained 37% since its low of March 22. This morning it slightly exceeded its 200-day moving average, which means that it would return to the bullish zone, just 3 months after leaving it by collapsing 35% in the space of a month. GREAT, as Trump would say.
They say that the market is always right. We will have to see in the coming days if the crossing of the moving average is confirmed or if it is just a false signal. In any case, if compared to what is happening in relation to the fundamentals, there is really reason to wonder.
The Schiller PE Ratio thus stands at 28.12, almost double the historical average. Meanwhile, the mUS arché is valued at 141% of GDP, which puts it in the "extremely overvalued" category. Apart from a few times in 2019 and early 2020, it has never been so high relative to the real economy.
The US unemployment rate has exploded from full employment to nearly 15% in just two months. It has never risen this high and this fast, except during the Great Depression of the 1930s.
With all his records, it feels like we're reading R. Federer's statistics. However, while the global lockdown allows the Swiss tennis player to stay ahead of his competitors, it is much less favorable to the real economy.
So of course, the hyperactivity of central banks, particularly the FED, explains this dichotomy between Wall Street and Main Street. If the trend continues in the coming days, the Chinese virus episode will be a brief and distant memory, at least for the markets. Traders will be able to collect their bonuses, institutions will be able to brag again and our pension funds will also have the excuse of reducing the minimum rate to 0.5%. In addition, Trump will be able to highlight his INCREDIBLE economic record to get re-elected. In short, almost only positive for all these people who live in a parallel dimension...
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It is true that this is a very worrying phenomenon. I almost only do trading or day trading anymore because it is becoming impossible to think in terms of an investor!
That said, the gap between lessons and reality ALWAYS ends up being closed, in one direction or the other!
Good luck ;o)
PS: I'm glad to see that your site is still running at full speed. Few people last long in blogging (as in the stock market, by the way!)
Hey, who's this, a very old acquaintance 😉
It's a pleasure to read you again, fellow jouster! And also a pleasure to see that you are also one of the surviving dinosaurs.
I still don't trade but I have very little exposure to stocks at the moment. If the trend is confirmed as becoming positive again, I will return to certain stocks but sparingly, only in low-valued markets, that is to say in any case not in the USA and Switzerland.
I admit that it is very scary. I have some marbles in European car companies, I am thinking of getting out while they are back in the green.
I see many companies with colossal debts and state loans to support them, but this can only last for a while, and who today thinks of buying cars or consuming like before? Without customers or with far fewer customers, how can we support the debt that only increases?
You put your finger on the crux of the problem: debt. As long as rates are low, no problem. On the other hand, when central banks are forced to raise them, it risks causing the slightest disturbance.
What could force central banks to raise rates?
I think they have lost some of their independence (especially the Fed and the ECB).
But the States that influence them now cannot afford to raise rates, because of their debt, which was often already high (this varies from one State to another) and which is exploding today. As for the companies that are heavily indebted or are in the process of becoming so, while they certainly cannot influence the central banks, they still represent a bomb because their bankruptcies in large numbers would be a catastrophe, with unemployment, a drop in tax revenue, etc.
How will it all end? (How many billions of billions question?)
There is one thing that will definitely push rates up: inflation. Obviously, it won't happen in the coming months, "thanks" to the plummeting prices of raw materials, particularly oil, caused by a massive drop in demand. The stratospheric unemployment rate also protects the economy from rising prices. For now. That being said, demand will return quickly and very strongly, because investments left pending by companies and individuals will have to be caught up in the medium term. This phenomenon will be further increased by massive injections of liquidity by central banks and governments. In short, we will see a catch-up phenomenon in the real economy, which will have to pedal twice as fast to try to catch up. This is partly what the market is currently anticipating. The problem is that to produce a lot and quickly, especially when we no longer trust the Chinese and we give in to protectionist sirens, it costs a lot. There is a risk of overheating of the system in the coming years. Investors have forgotten what inflationary risk is because it has practically disappeared from Western economies since the 1980s. We had also forgotten what a pandemic was and we have seen what that has led to…
In other words, it might be wise to look into gold or other precious materials at this time.
But it already seems so high…
It's bubbling everywhere.
Gold is always an ally during phases of uncertainty and monetary easing.
Yes, it's my cantankerous (dinosaur) side. Low exposure to stocks seems like a good strategy to me. I pulled back heavily on the peaks between December and February, which was a good thing, even if the rest is red. Although I did give up a bit of ground on the current rebound.
In all likelihood, the March lows will eventually be tested.
Of course, in all likelihood, central banks will continue to throw trillions, so I could be wrong and miss a window of opportunity. But that said, if the situation stabilizes in 2 years, there will be other opportunities. There are always opportunities!
Well, time will tell!
As they say, it is better to return to the market too late than too early... Well, that's usually the case, but with this market more corrupt than Trump, Bolsonaro and Putin combined, anything is possible.
I feel like I'm seeing "Tesla indices": it goes up, up, up, but it doesn't make "balls"... and, for many companies, it happens while increasing debt! In skiing, when each ski moves away from the skier, we know the ski is coming: it ends in a split, then... the fall happens!
Do central banks have the power to change the rules of gravity?? I doubt it…
They can't change the rules of gravity, but they fight them, with their monetary helicopter 😉
The markets are anticipating the "optimistic" scenario (no 2nd wave, no re-containment, high catch-up effect) and if the scenario turns out to be less optimistic than expected, States and central banks will fill the gap via monetary injections in various forms.
As I said elsewhere, it is no longer a question of buying low and selling high, but of buying high and selling even higher!!
Trump swapped CQFD for CFCD – This Time It’s Different
The current bullish power is simply incredible! Even an eternal optimist like me is amazed to see higher prices every day. This week I started to sell several positions bought in March and April because the gains are so insolent, and all this is not going to last forever. I especially find that most banks and insurance companies have recovered much too quickly, like Julius Baer or Zurich. Beware, beware...
If it continues at this rate, by the summer holidays, the indices will have wiped out all their losses. We will close the semester at zero while companies will complete six catastrophic first months. I am used to keeping a cool head but I must say that this rise is dizzying. Rarely has the stock market been so uncertain because there are so many political and geostrategic parameters at the moment that all the dice are loaded.
Congratulations on your moves in March and April. For my part, I was bragging during this same period because I was only losing about ten percent and now I find myself lagging behind because the market has already caught up with me. As they say, Mr. Market is always right… Still, we still have the damn impression that he has lost his mind!
Personally, at the moment I am selling… almost every day I take my profits on stocks that I had bought for the long term. The market is so disconnected from reality that I no longer understand the logic of the thing, and when I don't understand I prefer to get out 🙂 I may be making a mistake, it may last or even never go down again to align with the catastrophic situation of the world economy, but at least I know why I am getting out and I will know why I am getting back in if one day the opportunity arises
New record for the Nasdaq!
The market is climbing on better than expected US job creation and therefore better than expected unemployment… at 13.3% all the same! Very strong…
It is true that this decoupling between economic reality and indices is mind-boggling. Of course, the printing presses are running at full speed… But I hope that the necessary correction will be gentle…
Since I don't really understand what's going on, I only trade. At the slightest correction, I just buy on any support and wait. Even with fairly tight stop losses, it works on (almost) all stocks.
This is normal in a strong bullish phase… But it is not normal if it lasts too long…
In short, you have to be careful what you do...
Uh... we can change the title to "who are the idiots..." because there are a lot of them who have their foot heavy on the accelerator at the moment or maybe "the third dimension"... or the fourth!
Finally I feel like I'm living in a parallel world... the V in the market doesn't seem to be really in sync with the real economy.
Since when do central banks have the power to cancel Earth's gravity and economic cycles? Or is this the new norm? We treat results at 18/20 because stocks are the only asset that gives us a return?? We forget 2020 and get ahead of 2021?
This is all going to be interesting but a little frustrating for those who have cash… right now cash is trash!
It is worth noting the record opening of new brokerage accounts by individuals while the big names remain withdrawn from the market for the moment.
That's right. I had also noted this and it recalls the end of certain bullish cycles like that of the 1920s, 1990s or 1980s in Japan where the rise was maintained by individuals, on low volumes, and totally uncorrelated with the real economy.
Big hands? Is this argument supported? I am interested in facts, news and very curious please
I'll let gg detail exactly who he has in mind when he talks about big hands.
If I look at Warren Buffett, he is currently sitting on 137 billion in cash, which represents nearly 30% of BRK's capitalization. If there is one guy who swears by stocks and who usually doesn't like cash, it's him...
https://www.google.com/amp/s/markets.businessinsider.com/amp/news/why-warren-buffett-unhappy-berkshire-hathaway-record-137-billion-cash-2020-4-1029181516
Good evening Jerome, thanks for this article, I did some research but apart from Buffet I don't see any major market players who stayed by and didn't take advantage of this mini crash. But maybe I missed something GG?
Countless businesses and individuals are currently living on life support – financially, not medically, but still because of covid – clinging to the breasts of governments like starving babies.
If there is a second wave, what do you think will happen? When I think about it, I tell myself that I like having 20% of my portfolio in cash right now! And I think Buffet also prefers to be safe in case of another market crash, than to make high yields. Many of these companies have been hit hard by the lockdown, by the way. I trust Buffet more, who has 60 years of experience behind him, than young wolves eager for quick profits.
Glad I bought some stocks during the dip, but also glad I didn't sell anything and kept some cash! When I buy a stock, I usually aim for a 20-year horizon.
In the US, their Paycheck Protection Program, a federal subsidy given to companies that hire back their employees. Basically, it's just a flash in the pan! Once the bonus is received and companies still have losses, will jobs be lost again? I'd bet an Amazon stock that they will!
Flash in the pan, that's the term, like Trump's hair. The following article seems to want to award you an Amazon share for your bet:
https://seekingalpha.com/article/4352855-dont-be-fooled-jobs-report
@Bardamu: In this video https://www.youtube.com/watch?v=bVZ0KDo-68M
Thanks GG I didn't know this youtuber. Very interesting and reasoned thank you!
Interesting video indeed which confirms several points already noted:
– mass opening of new brokerage accounts during COVID (Swissquote reported records in this area)
– very strong volumes on the March decline and very weak on the subsequent rise (to put things into perspective, however, volumes are historically much stronger on declines than on rises)
– purchases by individuals who focus on stocks that have fallen very sharply (such as airlines) or those in a bubble situation, such as technology. This is very reminiscent of the beginning of this millennium, with the case Swissair or the dotcom bubble. Thousands of novice individuals had been properly ripped off, me first and foremost.
– It should also be noted that the current market rally is mainly due to the FAANGs, which represent a significant share of the stock market in terms of capitalization. These companies have clearly been boosted by the Chinese virus, even though they were already the major reason for the rise in the markets for several semesters before COVID. Read on this subject the recent report by Yardeni Research (https://www.yardeni.com/pub/yardenifangoverview.pdf) which nevertheless only focuses on the “FANGs”, with one less A (Apple, which is not the least).
What can we conclude from this? The fact that institutional investors are not present does not necessarily mean that novice individuals are wrong. Nevertheless, it is the institutional investors who represent the market and they are the ones who will dictate the tempo. Depending on their decisions, the significant increase initiated by the small investors could be swept aside with a wave of the hand.
"the significant increase initiated by the small ones could be swept aside with a wave of the hand." or conversely boosted ^^ In this case all the "cautious" (like me) will more or less miss the train 😀
Yes, but in this case the institutions would be playing Russian roulette, or the airplane game. Not sure they want to do that. In any case, they will have to have strong financial backing and take responsibility.
To stick with the train analogy, I prefer to take the next regional train rather than the TGV which arrives at the station without brakes and with a damaged axle.
An interesting comment from Deutsche Bank: "High valuation multiples (price-to-earnings ratios) are certainly not justified by any strength in earnings, but the prospect of ultra-low interest rates for a prolonged period and abundant central bank liquidity are likely to keep them at structurally higher levels than in the past. For example, we expect the S&P 500 index to reach a price-to-earnings ratio of over 20 going forward."
Yes… As long as there is no return of inflation in the medium term.
Or a second wave of the virus…
The market has become manic depressive…
depressive? I would say rather manic-optimistic…
I don't know about the market, but I know a little more every day.
depressed or optimistic?
'Possible symptoms of manic episodes include high energy, loss of sleep, and loss of contact with reality.'
We're right in the middle of it!
I highly recommend you to read this article even if it is a bit long and in English:
https://realinvestmentadvice.com/macroview-value-is-dead-long-live-value-investing/
Excellent!
Thank you Jerome, very interesting and it puts the framework back into perspective as they say... when everything goes up regularly we tend to let ourselves be carried away by fear of FOMO and do irrational things...
As for the language of the article, I read the information on "google" and I can set the reading language to have a translation of the pages in French, whether they are in English, German or others at the start. It is very practical even if there are sometimes some translation errors.
Yes, it's a practical option on Saturday or Sunday mornings when your brain is foggy 😉
An idea that comes to me and that I share here:
1) Since 2008, central banks have poured colossal liquidity into the system (with another layer this year with Covid) and interest rates have fallen to unprecedented levels (even negative!).
2) Despite this, inflation has been more or less under control overall, in the sense that the cost of living has not exploded (wages have not increased in an inflationary manner either).
3) So where did this money supply go? I think it ultimately went into investments, particularly in the stock market, creating a bubble, as the valuation of securities is often disconnected from economic reality. This phenomenon is also encouraged by negative rates, pushing people to get rid of cash and invest it, even if it doesn't bring in any money.
4) States are in debt and this has not improved.
5) With a shaken economy and state debt, it is difficult to imagine a drastic increase in taxes (even if they increase gradually...) and an increase in rates, without penalizing consumption and therefore economic activity and without putting states in difficulty.
In view of the above, I have the impression that a stock market crash will be able to wipe out part of the money supply injected into the system since 2008 and in some way clean up the situation. It is the people, companies, institutions, etc. (we all are, even if only indirectly through pension funds for example) invested at the time of the crash who will pay the bill.
And then? Will the central banks open the floodgates even more? That's likely. Will the states get into even more debt? That's also likely. But I think rates will remain low or negative in the long term.
In 2008, we undoubtedly entered a new economic world in many respects.
Indeed, you are right when you say that the money injected by the central banks did not enter the real economy and that it was directly invested. This explains why there was no inflation and therefore no increase in rates.
The problem with this is that you don't create wealth just by printing money. The stock market can only go up in the long term if its fundamentals are strong, namely the real economy.
As you pointed out, the easy money policy encourages States, but also companies and individuals to get into debt. It is the regime of mediocrity: rather than questioning our way of functioning, we get into debt, it is easier and faster.
The problem is that we are only postponing the problem until later, making it even more difficult to solve.
The stock market will have to realign with the real economy and a sudden or slow and lasting decline seems inexorable. COVID has not managed to make it falter for the moment. Maybe if it lasts a little longer it will succeed. I am not sure that our economies will withstand a second wave. I do not believe in perpetual low rates. They are harmful in the long term, particularly for our financial system, our banks and our pension funds. States and central banks have also learned from their mistakes and are now looking for other ways to get the machine going again (fiscal policies, monetary helicopter, etc.). If rates go up, it will hurt certain growth companies that were only relying on loans to grow excessively. The same goes for individuals who became homeowners when they did not have the means to do so. In short, opportunities in sight.
Good morning,
For my part and in a simple way, here is how I see it:
If Powell's message yesterday is anything to go by, rates will remain low for a long time, even a very long time. No one, at least not many people, have an interest in seeing the stock market fall. Traditional people are being pushed to put their money into stocks, or even real estate (no interest on savings accounts, little interest on bonds).
If I come back to the table of VAN K. THARP published in his book (message that I had put on this blog a few months ago), it seems that the bull market is not over (to be confirmed in the coming months).
In conclusion, even if Warren is accumulating cash, that many people are going to or have lost their jobs with this Corona and that stocks are uncorrelated with the real economy, I remain optimistic and think that the upward trend is not over. So I continue to invest regularly in stocks. Note however that I am a very long-term investor and that a drop of 30 or 40% does not scare me.
Bull Market Approximate Dates Number of years
Good feelings 1815 – 1835 20
Railroad boom 1843 – 1853 10
Civil War and beyond 1861 – 1881 20
Pre-World War I 1896 – 1906 10
Roaring Twenties 1921 – 1929 8
Post-World War II boom 1949 – 1966 17
High-tech boom 1982 – 2000 18
? 2009 – present ?
Average 14.7