Stock Markets Following US with All-Time High

Again markets are at all time high and everybody is celebrating how smart they were for buying at the low in March and so on...A short summary of the markets and why they keep on rising all the time. Below is displayed Dow Jones Industrial Average, NASDAQ Composite and S&P 500 index development since 1992. As we can see they have risen signifikantly since 2009.

Rest of the Worlds stock markets are following the U.S. with all-time highs or highs for a really long time. The development is supported by vaccine news and belief of recovery from Corona virus as well as Government stimulus packages in U.S.A. as well as Free Trade Agreement between Britain and EU. At the moment Shiller P/E ratio is at 34 which is a lot higher than the media of 15.81 and mean of 16.77, can we say that markets are overvalued? Not directly as the high PE-ratio is supported by Quantitative Easing which in turns mean really low to negative interest rates.

 Nikkei index (Japanese stock index) reached its all-time high of 27 568 points after the index gained 2,6%. This is the highest value for the index in 30 years.

In India NSE Nifty 50 was at 13 953 point, +0,6%, reaching its all-time high. Back in 1999 the index was at 891 points.

In Hong Kong the Hang Seng index increased by 1% driven by Alibaba which has this fall been under investigation and was fined 500 thousand yuan ($76,463) for not properly declaring past acquisitions. 

Yesterday DAX index (30 largest German companies traded on Frankfurt stock exchange) reached 13 790 points, the highest recorded level since 1988. In September 2021, DAX is expected to expand to 40 companies (link to de40 news). As you can see from the graph DAX Performance Index reached new highs and apparently it is expected to rise even further. We also see that FTSE100 has followed closely the same pattern yet has not fully recovered from the March COVID-19 set back and worries around BREXIT impact on economies. Overall the European markets seem to expect good growth just as in USA yet question will be what happens if there is enough inflation and interest rates start to rise.

 

Following the stock and bond markets closely is also another topic, Bitcoin which also reached all-time high last week of $27,000, back in 2017 it reached $20,000. All indexes, values of all assets are rising at a mind blowing speed, but the economy is lagging far behind. 

Question is therefore why indexes are so high, why assets value has increased so much since 2009? 

Easy answer is quantitative easing practiced by Central Banks that is pushing liquidity to other asset classes then bonds and money markets where you don't get any interest on invested capital. This has also supported home buyers in many countries and investors of most assets' classes. Would argue that this practice of easing should not continue all to long as it removes risks from investors and transfers it directly to taxpayers and Central Banks (bailouts, quantitative easing and other supporting programs). What I do find successful is the way U.S. has handled Corona caused economic issues, by increasing the social security payments. This is a practice most European countries do not have as our social system is different and more supported by Unions which pay additional support to unemployed or partially laid off people. The European system in many countries also has a major issue of it being more beneficial to stay unemployed then to take a job paying them less then they had before or to move to another city where there would be suitable work for them.

Based on how markets are moving and current high values with long payback periods I will personally not invest in index funds. I might look at East Europe and Russia as markets are a bit lower valued there. I will invest and have invested in a few individual stocks that are more reasonable priced, more to come in January when I publish changes made to portfolio.

 

The charts are based on weekly data from yahoo finance so the highest point might not show up in displayed graphs, however I assume everyone gets the point I am presenting. Markets have risen to highs I do not fully understand nor am I able to find fundamental justification, other than what we read in media about expectations and hope or faith. 

My Thoughts On Market Status, Corona virus and Shiller P/E

 

     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