Is it not absolutely astounding that with all that has already happened and is known to be happening just in the next three weeks economically speaking - let alone what is unknown, that the collective market price of the top 50 companies is around where it was a year ago?
The biggest economic dislocation in our lives in a tiny, open, export based economy at the end of the world... massive loss of output, contracts in question in all sectors of the economy, McDonalds and Harvey Norman talking about not paying rent...
Most households levered up to the point they are living week to week, same with most companies. Complete halt to tourism an immigration... the fact that thousands of businesses will be reluctant to take on staff for years. Working capital destroyed.
None of the numbers even out yet. Global economic and political uncertainty, no idea how long for... Massive demand shock and supply shock...
The beginning of QE never having been implemented here before as well as loads of other policies changing by the hour...
AND the market values the top 50 companies around the price they did a year ago when blue sky as far as the eye can see...
One theory... As Buffett said, if the 10 year bond yield stays where it is or goes lower for a long period of time then stocks are 'ridiculously cheap'. The reach for any yield.
You can borrow money under 3% so even high PE companies are attractive.
It's the E of the PE that can blow up that ratio though. I think the Sp500 got to A PE of 147 during the GFC... Not because of high prices but extreme drop in earnings.
Bull case: everything opens in 6 weeks. The unemployed can go back to old jobs or as true Americans, bootstrap. Economy back to normal within 6 months. 2T $ in PE dry powder, low gas prices and 0% interest rates pour fuel onto on the economy. The roaring 20’s mean the 2020's now.
Bear case: Unemployment goes to 20%+. Everything does NOT go back to normal before at least a year or two, and in the meantime, there is a huge demand shock. The effects of the lockdown on businesses as well as the oil shock create depression-like conditions.
In the Global Financial Crisis, I worried about a downward cascade of financial news, and about the implications for the economy of serial bankruptcies among financial institutions. But everyday life was unchanged from what it had been, and there was no obvious threat to life and limb. Today the range of negative outcomes seems much wider, as described above. Social isolation, disease and death, economic contraction, enormous reliance on government action, and uncertainty about the long-term effects are all with us, and the main questions surround how far they will go. Nevertheless, the market prices of assets have responded to the events and outlook (in a very micro sense, I feel last week’s bounce reflected too much optimism, but that’s me). I would say assets were priced fairly on Friday for the optimistic case but didn’t give enough scope for the possibility of worsening news. Thus my reaction to all the above is to expect asset prices to decline. You may or may not feel there’s still time to increase defensiveness ahead of potentially negative developments. But the most important thing is to be ready to respond to and take advantage of declines.
Is it not absolutely astounding that with all that has already happened and is known to be happening just in the next three weeks economically speaking - let alone what is unknown, that the collective market price of the top 50 companies is around where it was a year ago?
The biggest economic dislocation in our lives in a tiny, open, export based economy at the end of the world... massive loss of output, contracts in question in all sectors of the economy, McDonalds and Harvey Norman talking about not paying rent...
Most households levered up to the point they are living week to week, same with most companies. Complete halt to tourism an immigration... the fact that thousands of businesses will be reluctant to take on staff for years. Working capital destroyed.
None of the numbers even out yet. Global economic and political uncertainty, no idea how long for... Massive demand shock and supply shock...
The beginning of QE never having been implemented here before as well as loads of other policies changing by the hour...
AND the market values the top 50 companies around the price they did a year ago when blue sky as far as the eye can see...
What am I missing.
You have hit the nail squarely on the head. The truth is this could get so ugly it becomes so confronting to think about, many people choose not too and simply hope for the best.
Last edited by Beagle; 01-04-2020 at 06:59 PM.
Ecclesiastes 11:2: “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth.”
Ben Graham - In the short run the market is a voting machine but in the long run the market is a weighing machine
You have hit the nail squarely on the head. The truth is this could get so ugly it becomes so confronting to think about, many people choose not too and simply hope for the best.
Yeah, post of the year award for Sailorbob. Peoples still clinging to the old economic reality.
A lot of new share market investors are about to be burnt and put off for life like '87. Of course they keep telling people to not switch their kiwisavers to conservative/cash...that advice isn't going to feel so warm and fuzzy if it transpires we're at the "return to normal" blip on Peat's picture. We were over due a correction anyway, so take that, throw in a dash of common sense around what's happening here and the end result is not going to be pretty.
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