How the (US) stock markets forgot about the economic reality
share prices are down since the start of the year, but the recent rises have confused experts . . .
Stock Markets are Forward-looking
Successful investing is about finding inefficiencies and errors in markets and waiting for them to correct – and there could be one staring investors in the face right now.
There is a growing divide between how markets are performing and the economic data, which points to a recession of historic proportions.
A weak economy leads to less profit, an idea that should be dragging markets lower.
Yes, share prices are down since the start of the year, but the recent rises have confused experts. I am among the fund managers and economists that remain incredibly pessimistic.
Let’s try to analyse what seems so confusing quickly.
There are two ways to approach the question of why the stock market has seemed so impervious to the state of the real world.
The first is to focus on technical reasons. The stock markets are forward-looking (so prices reflect what investors think will happen in the future, rather than right now), investors are overly optimistic of a coronavirus vaccine and exhibiting the flaws in the efficient markets theory. The stock market is pricing in a massive injection of free money from the FED, raising expectations of a soft buffer to take the edge off of the catastrophe.
In fact it’s hard to agree on this one…
And the second (and more useful) way to understand the bizarrely healthy stock market: as the result of a political choice. This political choice is also a moral choice. It is a choice of whether to value fairness. Either the incentives of everyone in society are aligned, or they are not. In America, probably they are not. They are the opposite: the motives of Wall Street are opposed to the incentives of most of the people, whose existence is reduced to nothing more than labor income to be minimized as much as possible. We can think of this as a dam. That dam is protecting Wall Street from what is happening under the assumption that protecting the financial markets equals safeguard the people.
I believe the bull trap has reached unsustainable levels and that sooner or later, the dam will break washing away the ones thinking the FED (and the other Central Banks) can buy whatever it takes.
Signs are there and must be read, and the investor should be more patient than ever in taking risks in a moment in which stocks are more expensive than ever.
The consequences of CoVid19 are there to be seen and measured and are there to be lived in our personal lives, and in our new attitudes and behavioral choices and corporate profits globally will be hammered down on average due to stricter regulations and higher taxes and lower risk propensity of the average consumer.
Leon Cooperman detailed at least 11 reasons why he is concerned about the long-term implications of the coronavirus outbreak and I can only agree with him:
• The unprecedented recent government stimulus and protections may have permanently increased the role government plays in the market, potentially increasing its regulatory oversight.
• The US is shifting to the left on the political spectrum, a trend that will likely result in higher taxes.
• Low-interest rates are a sign of an unhealthy economy, not a bullish stock market indicator.
• US debt is growing much faster than the economy, so a higher percentage of our national income will need to be devoted to debt servicing.
• US demand will likely be slow to recover, given Americans will need some form of vaccination and/or proof of immunity to gain access to sporting events, concerts, and other gatherings.
• Businesses will need to shoulder substantial compliance costs to ensure worker safety.
• Companies will need to issue a substantial amount of equity to replace lost capital.
• Stock buybacks, and the support they provided to EPS, are mostly over.
• US profit margins were at a historic high in January, and they have historically reverted to their long-term mean over time.
• Credit is cheaper than stocks, with high-yield bonds (excluding the energy sector) yielding 7.25% or about 14 times earnings.
• If Warren Buffett, the “greatest investor in my generation,” can’t find stocks to buy on the dip, “who am I to be bold?”
Investments: Oliver Camponovo suggests
I am not suggesting not to invest in stocks. I recommend and advise, however, to evaluate risks before return and single companies you like before indices.
I am currently amongst those not afraid of missing out because I know there will be much more to be taken very soon.
And by the way, have you realized that:
• many other indexes are at their lowest levels over the last 20 years?
• Asia equities are cheaper than the US ones?
• Europe equities are cheaper than the US ones?
• Silver has not increased in value since the Covid depression started?