Markets are divided at the moment as investors weight how Corona is spreading, what is the impact on the economy and when we can expect a recovery?
Europe is struggling with BREXIT as No Deal seems to be an option and US elections with Trump first claiming a hoax only to go silent.
This is what we can read in news papers and what is talked and debated. Here is how I look at the market and what are my thoughts about COVID-19 including the cocona tracker I follow to judge market status.
Corona status
The virus has hit new highs in many countries and the situation does not look better than it was in Spring based on news and the corona tracker. Number of new confirmed cases has risen and is very high. With vaccine still far beyond reach for most of us, while markets seem to be in a hurry to undermine how long it might take to get back to the good old days. It will take time to make vaccines to all of us and at some point we will get them, patience will be the key componen here. So please do not ruin my day by going out to bars spreading the virus and postponing my plans of leisure and travel. Better to do what it requires once instead of chasing your tail all the time like a dog. The Corona staus does look different in countries and there are some delays in data, overall the situation does not look good at the moment but based on history humanity will survive this as well. It will take time and rrequire us to stay at home and be more careful when we are grocery shopping, that is a low price considering the alternative of a severe virus.
If
interested in following the Corona virus development then Johns Hopkins
University of Medicine has a good tracker, snapshot of it below. It is a good toll to see changes and I use it to base a scenario of how long it will take for societies to recover.
Link to source: JHU Corona tracker
Has the
economy changed forever due to COVID-19?
My view is that the economy will most likely not change, it requires more for the economy to change (industrial revolution did not happen over one night, nor did the IT bubble pop in one day in 2000). Most likely people will slowly go back to same travelling during vacations, companies might limit business travelling, however a few years after this most will have forgotten all about it and then back to times before corona. The main reason here is human behaviour driven by herd mentality, when we get scared we usually stop thinking rationally and start following the herd. Once the herd belevies the danger is over it goes back to what it did before and that is why I do not see any major changes to market structures in the long run. Interest rates might change the situation when unprofitable companies might have difficulties finding funding, yet that is no new news.
My Thoughts On Market Status
S&P 500 is the highest it has been, mainly driven by tech and retail stocks as well as Tesla (don't foget Central banks Qantitative Easining). Question is are ”oil” stocks and travel stock a bargain now?
Based on
Warren Buffetts actions retailers and medical companies will benefit from this
situation. Surprisingly banking seems to be out based on the dumping of these
stocks this year. He does howevver remain a owner of Chevron which is categorized as a oil company.
Travel/ leisure stocks might have potential yet depends on their balance sheet and possibility to adjust to the current difficulties. One example is Norwegian (European airline company) that is really struggling at the moment. It filed some of its subsidiaries for bankruptcy and also its Irish subsidiary. Burning cash will not keep the company alive for long especially as the Norwegian Government seemed to not grant any more loans, yet that might change in the future.
Oil companies have taken a hit from already low rawoil prices as well as less demand for gasoline when people are staying more at home. Same principals apply here, how long can the company stand afloat without external financing and does cash flow from operations finance the company?
Tech companies like Amazon, Google and Facebook as well as Tesla are benefiting from current market and trend. Tesla mainly from investment trends however also from gaining investors trust. The rest see current economic situation as supporting their business model when people stay more at home and need some entertainment and ways to keep in touch with friends and family, this also supports their advertising income.
Where can value be found now?
To get on track we need to identify businesses that will not see major changes in business models in the future. Retailers, food and beverage industry, telecom, entertainment and most likely wealth management. In many cases boring industries with high entry costs supported by a known brand will most likely prevail.
Shiller P/E
Shiller
P/E is used to evaluate how the Price Earnings ratio looks like, mainly as
historical comparison to see if the market is "over valued" or under
"under valued" to historical standards. It gives some indications of
markets sentiment. At current level of 33 it would mean that a 1$ or 1€
investment today would take 33 years to get back in real terms (inflation
adjusted and given no major changes to the total market return). 33 years is a long
time to wait and we see that the ratio wasn't even this high in 2007 when the
subprime bubble burst.
Part of the high P/E ratio can be explained by Central Banks actions of printing money (low interest rates) which channels the money to places where we can get at least a small profit.
As the mean has been 16,76, median 15,81 we see a big difference between the current level and what has historically been a "normal" level.
link to source:Shiller P/E
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