Global stockmarkets had a very good day yesterday. Hope for a vaccine helped, as a candidate from US biotech Moderna showed great promise. Signs that most economies are now slowly coming out of lockdown also helped. And news that the Federal Reserve will keep doing what it takes, and that Europe is getting somewhere with agreeing on some sort of recovery funds, also all contributed to the good mood.
Given that we are still in the midst of the most drastic shutdown in economic activity in the post-war era, some of you might well be asking… has everyone lost their minds?
Lots of famous, smart investors think the market is overvalued
Stanley Druckenmiller, one of the world’s most successful investors, reckons that the market is a bit overvalued.
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In fact, last week he told Scott Bessent, in an interview for the New York Economic Club, that “the risk reward for stocks is as bad as I have ever seen it in my career.”
He’s not the only big name investor to think that. David Tepper, another big name hedge fund manager agrees, while Howard Marks of Oaktree Capital – an excellent writer as well as money manager – reckons that “stocks and bonds are selling at prices they wouldn’t sell at if the [Federal Reserve] were not the dominant force.”
I have a lot of sympathy for the views of these investors. Some of you might do too (I know from various interactions on Twitter that these markets astonish a fair few of you).
But I’m not sure that the market reaction has been particularly wrong-headed. And I think that anyone expecting another major downturn as a direct result of coronavirus is probably going to be disappointed.
The key to wrapping your head around this is to try to remember your view of the market before coronavirus. Self-knowledge is vital if you want to ever have any hope of being a half-decent investor. If you can at least understand your own biases, you will be better equipped to offset them.
(The alternative is simply to not worry about it, save regularly into a mix of assets that is broadly suitable for your time horizon, use cheap passive funds where you can, and consult a decent financial adviser – preferably at an hourly rate – when you feel the need for help. Print that paragraph off and give it to your pals who aren’t interested in investing, it’ll save them a lot of time).
Anyway – my point is that if you were bearish, and staring gobsmacked at ever-rising stocks, then you have to acknowledge that you were primed to believe that coronavirus must surely have been the pin to burst that bubble.
And yet, is that outcome really inevitable?
If you think markets are propped up by the Fed – well, what’s changed?
On the one hand, yes, we have seen an extraordinary halt in economic activity across the globe. This is, to use everyone’s new favourite word, unprecedented. We’re talking 1930s-level here.
On the other hand, it’s temporary. Some countries are already moving into their “new normal”. Others are tentatively getting there. And, generally, while people might profess support for lockdowns when put on the spot by a pollster, the streets and roads are getting a lot busier in my neck of the woods, and I suspect you’ve noticed the same.
And bear in mind another thing – if you thought that US stocks were overvalued, say, and only being supported by a very forgiving Federal Reserve, then my question to you would be: well, what’s changed?
US stocks are still overvalued, yes. But the Fed is still propping them up. So why should we now embark on an epoch-defining bear market?
In fact, unless we have a massive second wave of the virus, then I think it’s very likely that we’ve already seen the low for this market slump. A second wave is of course a possibility. But should the market be pricing it in more aggressively than it is today? I’m not sure that it should.
As for individual stocks – when you look at it, the market has battered the sectors that are going to suffer the most. Leisure, energy, travel – they’re all still well off their lows. Instead, it’s the stocks that have been leading this bull market throughout – the Amazons, the Netflixes, the Microsofts – that are in the lead.
And no wonder. This is a growth bull market, and those are the growth stocks. This is a bull market in long duration assets, and they are long duration stocks (ie, “jam tomorrow” stocks – ones where you spend big now and you get your money back later).
Now, I entirely agree that US stocks specifically were overvalued before this crisis kicked in. And I entirely agree with the luminaries mentioned above that it’s largely the Fed that is keeping this thing afloat.
But do you know what? The Fed can do that for as long as it likes (and, to be fair, most of the star investors named above also go on to acknowledge that).
And make no mistake, the Fed will continue to prop up markets. It is going to have to start printing lots of money very soon in order to absorb all of the debt being pumped out by the US government. And that is exactly what it’s going to do. Fed boss Jerome Powell has no qualms whatsoever about doing it.
This is why (as I’ve said before) the one thing that will bring an end to this bull market in duration is inflation. That’s the only problem that the Fed cannot solve with money printing. That will be an epochal change when it happens, and it’s one very good reason to own gold right now (yes, even at these levels).
(It’s also an excellent reason to subscribe to MoneyWeek – get your first six issues free, right here.)
But until it does happen, there is no reason to believe that the market can’t continue to brazen this out with the backing of a central bank that is 100% committed to preventing any sort of turbulence in financial markets.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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