04.08.2020 – Special Report. New week, new warning: The stock market is overvalued. Specifically, the performance of high-tech stocks is a cause for concern. The bulls are shrugging their shoulders in the face of constant reminders from crash prophets – after all, even a broken clock shows the right time twice a day. In fact, we may be living in a logical world right now – in times of worthless cash, or dollar debasement, it all has to be like this.
Stock market decouples itself from the real world
Last week confirmed the now familiar dichotomy between the stock market and the real world: the indices are holding near their all-time highs. And the US real economy collapsed in the second quarter by a historic 33 percent on an annualized basis. At the same time, the warnings of rent losses are becoming louder and louder. According to Bloomberg, 33 percent of tenants were unable to pay in the first week of July. And now worse is looming on the horizon: this means that 12 million tenants in the USA could be on the street in the next four months.
Shooting Star Apple
The stock market doesn’t care about any of this. Sven Henrich of NorthmanTrader.com looked back last Friday at market performance at the end of July. And he focused on some worrying alarm signals: Apple alone gained 170 billion dollars in market cap last Friday. The ratio in the valuation of tech stocks to GDP is now higher than in the tech bubble of 2000, and in fact Apple’s rapid rise was more than Oracle’s market cap and greater than Hungary’s GDP. Friday’s gain alone would have been the 33rd largest share in the S&P 500.
17 factors point to an overvaluation
Also on Friday last week, Bank of America’s Savita Subramanian wrote that the S&P 500’s P/E estimate had risen from 21.5 in June to 21.8 in July. The current multiple is two standard deviations above the average of 15.4 measured since 1986 – we have now reached the highest value since the tech bubble. According to Bank of America, stocks are now trading above average in 17 out of 20 categories. Particularly worrying: According to this study, the price/book value ratio of growth versus value stocks is moving in the stratosphere. Due to the permanent intervention of the Federal Reserve, growth stocks are particularly sought after outside of any valuation.
This must be so
Investor Louis-Vincent Gave gave a stunning analysis of the situation on Evergreen Gavekal’s blog: First, he had explained the record-breaking recovery on the stock market since the Corona low with the hope of an economic rebound. Then he had considered the possibility that investors had lost their minds. Now the turnaround: It is possible that investors have no choice but to go in. Because the dollar is going through such a rapid debasement – in other words, such a devaluation – that it would be pure madness to sit on cash for a while.
And so, in the second quarter, the global equity markets delivered their best performance in two decades. In fact, the US M2 money supply had risen by around 25 percent year-on-year. The assumption that cash will soon become worthless is not a misconception. The printing press is running faster than ever before in the history of the US or any other G7 economy.
Four goals for the bulls
According to Gave, the raging bull has mainly fled into four asset classes: 1 – Big Tech. 2- Green investments. 3 – Precious metals. 4 – Chinese equities. The analyst dismissed the flight into alternative energies as a political misallocation, known as the Cantillon effect: Those who sit close to the source of money see the prices of their goods rise rapidly – no matter what they sell. For example, the investor Richard Cantillon pointed out that the prices of everything the Spanish court bought in the 16th and 17th centuries rose rapidly with the massive silver mining in Latin America. And now challenger Joe Biden has promised 2 trillion dollars for a Green New Deal.
The performance of asset class number 4 has been fueled by Beijing’s decision to decouple from the dollar as a reserve currency – another reason why more greenbacks are now roaming the globe. In addition, there is the monetary policy of the central banks, from which precious metals have also benefited – especially mining stocks.
Competitive Advantage USA
And the rise of FAAMG – the aforementioned asset class 1: Facebook, Amazon, Apple, Microsoft and Google – is also due to the fact that the underlying currency is becoming less and less valuable. Indeed, in a world with an abundance of dollars, only those industries in which the US has a competitive advantage would perform well. And that is the world we are experiencing today.
From the summer dip to the new top
Michael Hartnett, Chief Investment Officer of Bank of America, also addressed the issue of dollar debasement. And gave two forecasts in his weekly flow show: First, a summer dip in the S&P 500 with a possible low of 3050 points.
Then the stock market is likely to move to a new top somewhere between 3,330 and 3,600 points between August and January – probably due to the introduction of a corona vaccination, which will lead to a capitulation of the bears; before the bull market is stopped with higher interest rates.
As always, we keep an eye on these exciting topics for you – the Bernstein Bank wishes successful trades and investments!
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