As red flags about the economy's depressed fundamentals pile up, stocks keep moving higher. Has the U.S. stock market become crash-proof?
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. Watch the video below for more information:
The following charts also highlight why equities have become crash-proof.
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.
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.
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.
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.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com. Unless otherwise noted, the author holds no investment position in the above-mentioned securities.
Last modified: September 23, 2020 2:24 PM