Apple, Microsoft, Google and Amazon now account for 21% of the S&P 500. Meanwhile
Berkshire Hathaway, run by Warren Buffet one of the worlds’ best ever asset managers, has a PE of 17.5 compared to Amazon’s PE is 65+. This means that if Amazon were to keep its profits at its most recently reported, it would take 65 years for Amazon to earn the equivalent money as its current stock market value, 65 years! No surprise then that with these types of valuations/PEs, that some equity market indices are approaching or have even been hitting all-time highs, despite the OECD talking about a looming recession.
Given these heady valuations, US equities account for 56% of the worlds’ equity capitalisation and the FAANGS — Facebook, Apple, Amazon, Netflix and Google make up an incredible 11% of the entire capitalisation of all the quoted equites globally. This is greater than any other country apart from the USA. To give some context Western Europe makes up 16.7% and the third biggest economy in the world Japan, its equity market accounts for 7.3% of world equity markets.
So, what is driving equity prices? New York Post story claims “a 40% hype in U.S. equity markets since its dark days in late-March due to unexperienced small investors with a huge appetite for risk”. This analysis is supported by the CEO of eToro who is predicting a stock market crash in the next three weeks. For a man that has overseen the creation of one of the fastest growing retail brokerages globally he ought to know a thing or two about the private investor and he is claiming that the current performance of equity markets is largely due to speculative trading. He said “Just to clarify, I believe we will (have) a correction since this rally seems to be fueled by speculation of retail investors. Historically these rallies end with a correction”
All this would suggest that asset managers and Wall Street professionals are being forced to chase amateurs who have bid up equity prices. Yet the three popular investor sentiment gauges in the USA are indicating that investors have no conviction as to where the stock market will go next. The Citi Panic/Euphoria Model (showing “euphoria,” after rallying from a reading of “panic” in April), the CNN Fear & Green Index (neutral), and the BofA Bull/Bear indicator (Bearish) are showing contradictory readings. The two other indicators that asset managers sometimes turn to are the Shiller ratio and the VIX, or otherwise known as the Fear index. The Shiller ratio is based on average inflation-adjusted earnings from the previous 10 years and it is now at a similar level on Black Tuesday i.e. just prior to the 1930 crash! The Fear Index — VIX — which is based expected volatility of the US stock market calculated using futures contracts on the S&P 500, is used as a barometer for how fearful and uncertain the markets are. The VIX tends to increase when the market decreases and vice versa. Currently 40 down from over almost 80 in March 2020 but a lot higher than the 10-year average of 17.7.
A possible reason for the heady valuations and general uncertainty over the immediate direction of equity markets is how quickly will economies recover post Covid-19. Then we have to factor in the huge governments handouts and as these end will we see a dramatic rise in unemployment? Will all the cash that has been pumped into the global lead to rising inflation so higher interest payments, which could decimate equity returns?
40 million Americans have filed for unemployment benefits in the last 10 weeks yet share prices rose 9 out of the 10 days when the unemployment data was released. In the UK latest unemployment figures would seem to indicate that the UK government’s policy of helicopter economics i.e. giving money way by furloughing millions of workers for now is working.
With headlines like this it is easy to see why equity prices are so high; “Stocks surge as the stimulus keeps coming, UK unemployment holds at 3.9%” and then the article goes on to discuss the possible $1 trillion road and bridges infrastructure building program that the Trump administration is now considering! This is on top of fiscal stimulus the USA have already given as they have lent $2.3 trillion to households and Business and then bought over $2 trillion of debt to drive interest rates to almost ZERO.
All in all, it looks like equity markets are headed for a roller coaster summer and it may be worth remembering the adages, always leave something on the table for the next person and sometimes cash is king!
2 min video how a handful of tech stocks are private clients are holding up stock markets — https://youtu.be/DXur0Y4d1q0
#equitymarkets #Economy #QuantativeEasing #Unemployment #recession #transparency #VIX #Apple #S&P500 #BerkshireHathaway
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