The markets continue to soar into record territory, even in the face of grim COVID and economic news. Prices have rarely been so puffed up and beyond economic justification. That don’t mean they won’t keep rising at least for a time!
From the Wall Street Journal:
“ Rarely have investors had better reason to be optimistic. Vaccines are imminent, the economy’s doing well and money has never been cheaper. After an awful year, things are finally looking up.
The trouble is that investing involves not just predicting the future—golden!—but comparing it to what is already priced in. If everyone already expects everything to be great, and it turns out that way, there is no particular reason for asset prices to change.
And at the moment, it seems that everyone already expects everything to be really fantastic. None of this means markets are bound to fall a lot. Sentiment can always get more positive; no matter how extended prices are, they can always become more stretched. Even when optimism seemed very high in the past, its waning sometimes brought merely a period of market consolidation rather than a big fall. …But the more everyone expects really good news, the harder it becomes to beat expectations. Markets aren’t quite priced for perfection, but they are leaving little margin for safety.
Equities are now clearly demonstrating investors’ long-term horizon. In fact, that’s where the main risks to the rally now lie.”
Concerted U.S. government action this spring meant interest rates were slashed, fiscal stimulus packages were launched and credit spreads for corporate borrowing came tumbling down. Equity indexes are now above where most analysts expected them to end the year, even before the pandemic.
Unprecedented relief from the largest real-term economic shock in modern history has enabled investors to look far out into the sunlit uplands they expect to follow. With vaccine development- several now seemingly on the way—faster than was widely expected—the reasons to view 2020 as an aberration worth overlooking have only accumulated.
The gulf between price-to-earnings ratios for U.S. equities based on this year’s expected earnings and what is expected by 2022 is enormous.
At the turn of the year, the S&P 500 was priced at an already-high 18.4 times the earnings expected in 2020, and 15.5 times the earnings expected in 2022. Now, it is priced at 26.1 times the 2020 earnings forecast, and 18.6 times 2022.
So if markets are overpriced, it’s largely because expectations for the post-pandemic recovery and the earnings it will offer are now too elevated.
Stocks in developing economies, other than those in East Asia that now dominate the MSCI Emerging Markets index, are another option. The battered equity markets of countries without the ability to provide such broad policy support will take longer to return to fresh highs, but would benefit most of all from a real global recovery.
U.S. stocks’ outstanding performance this year would have been almost impossible to explain to investors in March. But they are now priced for relatively rosy outcomes for years to come—and thus more vulnerable to any subsequent disappointments.”
We still have some major roadblocks ahead of us, even with the faster than warp speed rollout of multiple, safe and effective doses of the vaccines.
From the New York Times:
“Each week, good news about vaccines or antibody treatments surfaces, offering hope that an end to the pandemic is at hand. And yet this holiday season presents a grim reckoning. The United States has reached an appalling milestone: more than one million new coronavirus cases every week. Hospitals in some states are full to bursting. The number of deaths is rising and seems on track to easily surpass the 2,200-a-day average in the spring, when the pandemic was concentrated in the New York metropolitan area.”
I am sure you have heard that CDC has told ALL Thanksgiving travelers to quarantine right quick. The incredible mobility of Americans – and disdain for the realities of the disease – will no doubt make the current, already horrible third wave much, much worse for public health. Time to batten down, kittens, and go to the mattresses. It’s going to get really, really bad out there.
Economic indicators are turning down again, as COVID shutdowns are choking commerce again.
On the upside, we are clearly turning the corner the Covid-19 vaccine cavalry is riding hard, and salvation is clearly at hand. Unfortunately, this health and economic crisis is the mother of all aircraft carriers, and will take a long time and lot of leeway to turn around. Probably most of next year. With lots of bumps and shocks along the way! I hope a pray we are out of the soup by next Christmas!
