The stock market never goes down anymore

[TheBigShort]

From bloomberg;

https://www.bloomberg.com/news/arti...etting-historic-on-eve-of-big-earnings-season

"We've completely run out of ideas to explain what is happening.We get asked a lot, are you seeing anything that could explain the rally? The answer is, no".

Between stocks, bonds, cryptos, property etc...its fairytale stuff, isnt it?

 

[Brendan Burgess]

stocks, bonds, cryptos, property etc...its fairytale stuff, isnt it?

Stocks, bonds and property may well be overvalued. But they are worth something. They produce income.

Cryptos are completely different. They are not an asset. They are worth nothing despite people being prepared to pay $14,000 for them.

Brendan

 

[odyssey06]

Let's hope so, maybe I can retire early!

I don't plan to rely on Bitcoin, but it might pay for some nice holidays

 

[TheBigShort]

If it transpires that everything is overvalued, what then? Is the global financial system caught in a deflationary trap?

 

[cremeegg]

Between stocks, bonds, cryptos, property etc...its fairytale stuff, isnt it?

Bonds are highly valued for a number of perfectly understandable reasons. Most emanating from the 2008 crash. At that time there was a fear that counterparts would default. This has left a legacy of seeking safety over return with some investors. Legislation inspired by the crash tightened capital requirements for banks and insurance companies, pushing them towards bonds. Further legislation required pension companies to more closely match their assets with their liabilities, again pushing them toward bonds.

Stocks are highly valued because interest rates are so low. Because profits are rising. Because politicians are in tax cutting mode.

Property is highly valued, in Ireland at least, because we aren't building much of it. Because over 50% of the cost is going to the government. Because the Irish planning system, does not so much plan as say no. Because the construction industry is undercapitalised. Because the construction labour force has shrunk. Because banks are unable or unwilling to lend.

If it transpires that everything is overvalued, what then? Is the global financial system caught in a deflationary trap?

I dont think so. I believe that we may be at the beginning of an resurgence of inflation. Not this year or next but after the present period of prosperity winds down.

Money is becoming more plentiful, labour markets everywhere are tight. Politically many tensions would be dissolved by a dose of inflation.

 

[TheBigShort]

This has left a legacy of seeking safety over return with some investors. Legislation inspired by the crash tightened capital requirements for banks and insurance companies, pushing them towards bonds.

Ok that explains why bond prices have risen and yields are next to zero. It doesnt explain why stock markets are rising. If some investors (a significant enough proportion to drive yields to near zero) are seeking safety over returns, where is the money for stock markets coming from?

Stocks are highly valued because interest rates are so low. Because profits are rising. Because politicians are in tax cutting mode.

I agree profits are rising, economic activity is increasing. But it hardly correlates with the record prices in US stock markets? At least I wouldnt have thought so.

Property is highly valued, in Ireland at least,

Try London, Manchester, New York, Toronto, Vancouver, Sydney, Melbourne, Hong Kong, Tokyo, Shanghai etc.

Because the construction industry is undercapitalised. Because the construction labour force has shrunk. Because banks are unable or unwilling to lend.

If banks are unable or unwilling to lend then that implies low or little increase in activity. If they are not lending to build, why are they lending to buy property?

 

[joe sod]

I agree profits are rising, economic activity is increasing. But it hardly correlates with the record prices in US stock markets? At least I wouldnt have thought so.

Well the US dollar has fallen from a high of 1 euro = $1.05 a year ago to 1 euro = $1.22 now so that is one asset that has fallen in value. If you convert the gains in US stock market back to euros its not so great. Also gold has not risen very much only recently heating up a bit. Maybe a good strategy is to to buy half gold and half US dollars, I know they are generally opposite assets

 

[TheBigShort]

Thats a fair re dollar to euro but I would have thought it also implied that there is no significant appetite from euro investors in US stocks?
Not an insignificant factor in subduing prices I would have thought?

 

[RedOnion]

Hi TBS,

You mentioned quantative easing on another thread last week. One of the expected side effects of QE is that it should create consumer demand, and kickstart price inflation. We haven't really seen that, but instead because QE is buying up all the bonds, the extra supply of money is being pushed elsewhere and driving asset price inflation instead.

There's also a school of thought that a move to passive investment is leading to stock price inflation - funds have to invest in the whole index, and therefore there is less thought going into investment decisions.

 

[TheBigShort]

One of the expected side effects of QE is that it should create consumer demand, and kickstart price inflation. We haven't really seen that, but instead because QE is buying up all the bonds, the extra supply of money is being pushed elsewhere and driving asset price inflation instead.

I dont disagree. That means either bonds are overvalued or stocks are overvalued. Or perhaps both are overvalued?

 

[Jim2007]

There's also a school of thought that a move to passive investment is leading to stock price inflation - funds have to invest in the whole index, and therefore there is less thought going into investment decisions.

But the majority trackers do not in fact invest in the whole index. Be very careful what you invest in, read all the documentation not just the factsheet and the KIID... you often find in there that they are allowed to use all kinds of synthetics as substitutes.

 

[joe sod]

the heading of this post "the stock market never goes down anymore", well we have had fairly hefty sell offs in the mean time. The ftse 100 is now back to where it was at end of 2016. Its true that we have had very little volatility since january 2016 until february this year. I think all the volatility now gets compressed into shorter time periods, therefore when there is volatility like now its fairly large swings down and smaller ones back up. Its times like now to paraphrase alex ferguson when "its squeeky bum time" for amateur investors

 

[Gordon Gekko]

The FTSE 100 isn’t a great barometer though...too much exposure to commodities, financials, and the UK domestic economy with its Brexit-related woes.

 

[joe sod]

The ftse did not perform well up to recently but it's commodities and financials exposure is definitely helping it now as it is not fallen at all this year even though the nasdaq and s&p indexes are down heavily.

Just shows you how wrong it was to be chasing the US tech stocks and even S&P500 during the covid years, the old world has returned with a bang again

 

[PGF2016]

The ftse did not perform well up to recently but it's commodities and financials exposure is definitely helping it now as it is not fallen at all this year even though the nasdaq and s&p indexes are down heavily.

Just shows you how wrong it was to be chasing the US tech stocks and even S&P500 during the covid years, the old world has returned with a bang again

A dip in the market shows "how wrong it was..."?

If you're retiring in 20/30 years surely the performance over a very short time frame is irrelevant?

 

[Steven Barrett]

The ftse did not perform well up to recently but it's commodities and financials exposure is definitely helping it now as it is not fallen at all this year even though the nasdaq and s&p indexes are down heavily.

Just shows you how wrong it was to be chasing the US tech stocks and even S&P500 during the covid years, the old world has returned with a bang again

Very short term view of things Joe. If you had invested €100 in the FTSE 100 10 years ago, you'd have €190 today. Meanwhile, I would have €402, more than double the return.

I would happily take the short term pain for the long term gain.

 

[Steven Barrett]

 

[joe sod]

Very short term view of things Joe. If you had invested €100 in the FTSE 100 10 years ago, you'd have €190 today. Meanwhile, I would have €402, more than double the return.

I would happily take the short term pain for the long term gain.

I wasn't saying that though was I ? I was saying that people should have been moving money into ftse 100 stocks during the pandemic not a decade ago. There is a big sell off in tech and growth stocks due to inflation and rising interest rates now, they seem to be now blowing off all the pandemic related excesses . It looks like a very similar theme to what happened after the dot com collapse and the big shift out of technology and growth back to old world stocks like energy and financials that make money today. Because of high inflation rates companies that make money today are being revalued upwards and vica versa

 

[Steven Barrett]

I wasn't saying that though was I ? I was saying that people should have been moving money into ftse 100 stocks during the pandemic not a decade ago. There is a big sell off in tech and growth stocks due to inflation and rising interest rates now, they seem to be now blowing off all the pandemic related excesses . It looks like a very similar theme to what happened after the dot com collapse and the big shift out of technology and growth back to old world stocks like energy and financials that make money today. Because of high inflation rates companies that make money today are being revalued upwards and vica versa

I understand your point. It wasn't clear from your original post.

That is why we advise clients to have a diversified portfolio and invest in quality companies. The S&P 500 (I know it is just US companies, so not diversified geographically), only allows profitable companies on its index. While still heavily weighted towards tech stocks, they have lots of other sectors included in the index.

I wouldn't be worried about not being heavily invested in energy either. It is a very volatile industry. It was only two years ago that the price of oil went negative. Trying to predict the future of energy prices is like trying to catching a falling knife.

Steven
www.bluewaterfp.ie

 

[Dublinbay12]

Based on the FTSE 100 and S&P500 here it would suggest the S&P is riskier than its British counterpart (greater volatility).

Generally it's said that investing in broad based multi sector indices is lower risk but I assume in the case of the S&P the dominance of tech companies is making it riskier.