The stock market has continued to rally on expectations that the pandemic would be a costly, but temporary interruption to economic growth.
But valuations are nearly stretched again like they were at the beginning of 2020. And there are the same clues that a lot of the price action is frothy.
For instance, the preponderance of “zombie” companies deeply in debt and just barely able to cover the interest on their debt, and unable to pay down the principal. Liz Ann Sonders, a chief investment strategist for Charles Schwab & Co, ridiculed the stock market rally in early May. She pointed to how much of the S&P 500 rally was in zombies.
Taking Wall Street’s zombie apocalypse of 2020 to the next level, Hertz stock (NYSE:HTZ) rallied over 100% in intraday trading Friday. Hertz filed for bankruptcy two weeks ago.
Under U.S. bankruptcy law, shareholders are near the end of the line to start getting any profit they might make.
And as Bloomberg, citing Jefferies analyst Hamzah Mazari, reports:
Buyers of Hertz shares likely are betting on the cheap that the rapid recovery of used-car prices will preserve the value of the rental company’s fleet and leave some money left over for equity holders.
That makes the Hertz stock frenzy twice risky.
It’s a bet against Tesla (NASDAQ:TSLA). That is, it’s a bet against electric vehicles and self-driving cars. There’s no telling for sure how Hertz comes out of an electric self-driving car fleet war. But it could go the way of Blockbuster in the wake of Netflix.
It’s also a bet against Toyota and other manufacturers doing what they’ve consistently done for decades. That is continuously delivering better, more quality, durable, reliable cars, with more safety features, convenience features, and better performance for the money. And they keep improving manufacturing efficiency along the way.
Manufacturers are conscious of the secondary market value of their vehicles, but rapid improvements to manufacturing and intense competition might start leaving used cars in the dust soon.
The Federal Reserve’s $3 trillion balance sheet expansion since February could have something to do with the zombie rally. One could imagine how the tidal wave of liquidity unleashed through financial channels might stir up some foam.
Now that everyone got tired of being afraid of the coronavirus, the stock market thinks it’s safe to get crazy with valuations again. We’re nearly on a collision course now with Jan-Feb 2020 all time record highs.
But with corporate debt, household debt, government debt, and equity value fundamentals like corporate multiples all stretched to historic levels too. And with investors piling into risky, speculative bets, the market looks more like one in the euphoria of a peak than one cautiously bouncing back from a bottom.
Disclaimer: The opinions expressed in this article do not necessarily reflect the views of CCN.com. The above should not be considered investment advice from CCN.com. The author holds no investment position in the stocks mentioned at the time of writing.