Is Stock Market become Invincible ?
(Thu, 20 Aug 2020). As red flags about the economy`s depressed fundamentals pile up, stocks keep moving higher. Has the U.S. stock market become crash-proof? The U.S. stock market continues to defy gravity amid the recession. The eye-popping gains have completely ignored fundamentals, raising red flags about valuation risks.
The S&P 500 made an all-time high on Tuesday. The rally occurred after several important indicators flashed red. The U.S. stock market should have undergone another crash, but it looks like stocks only go up. Back in March, the U.S. stock market plummeted after the novel coronavirus brought the world economy to its knees. On Tuesday, the S&P 500 continued its baffling rally and logged in an all-time intraday high at 3,395.06, rising more than 50% since March crash.
After the March crash, the U.S. stock market’s rally has wholly decoupled from the fundamentals. Markets should have declined to reflect the actual situation on the ground. It looks like the Federal Reserve has made the stock market crash-proof with the help of loose monetary policy.
GDP and Stock Values Have a Major Disconnect
When the value of all stocks listed exceeds that of the entire GDP, the market is officially in bubble territory. According to this chart, the stocks in the U.S. are worth 177.8% of the U.S. GDP. This so-called ‘Buffet indicator,’ named after famed investor Warren Buffett, has gone off the handle. During the 2008 financial crisis, all it took was for this indicator to hit 100% for investors to run for the exits.
S&P 500’s Forward P/E Has Sky Rocketed Back to 2000 Levels
Earnings of companies listed in the S&P 500 haven’t followed the rising stock prices. The steep rise of the index has piggybacked off earnings expected in the years to come, just like what happened in 2000. Rather than reflect current earnings, the S&P 500 reflects what investors think companies will earn in the future (and they’re expecting tremendous growth). If this isn’t a bubble, I don’t know what is.
Healthcare and Technology Now Make up 50% of the S&P 500
Amid the exuberance over a coronavirus vaccine, healthcare stocks have climbed dramatically. Meanwhile, technology stocks have shot up as the lockdown forced people to rely on technology for work, communication, and shopping. When a few sectors lead the charge, along with a certain stock going parabolic, investors get wary because of narrowing market breadth. This should have induced a bit of profit booking, leading to a pullback. But it looks like investors have a new-found confidence in the stock market’s rally.
S&P 500’s Real Earnings Yield Breaks Ten-Year Low
While the S&P 500 hovers around record highs, the index’s real earnings yield has broken a ten-year low. The average return since 1952 is 3.5%, and severely depressed fundamentals have pushed it down to 2%. Stocks keep rising amid depressed fundamentals, a clear sign that investors remain optimistic about the market. At the same time, a barrage of dumb money has made its way into the market thanks to trading apps like Robinhood. Even with a hoard of red flags like the ones mentioned above, stocks keep going up. It looks like the Fed’s liquidity bubble only keeps getting bigger. In the short term, it looks like the stock market has become crash-proof. Only time will tell whether these sorts of gains are sustainable.
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