If it looks like a bubble and smells like a bubble……. It is very likely that US share markets are now in “bubble” territory. Bubble means shares are trading at historically expensive valuations. At present, many longer-term valuation measures show that S&P500 shares are trading at valuations higher than levels reached in 2000. The record high valuations in 2000 were the precursor to the “Tech Wreck” which saw the S&P500 fall by 44.70% over the next 2.1 years. S&P500 valuations stretched Source: Bloomberg, Yale/Robert Shiller, John Hussmann, John Mauldin It is easy to point to the markets and conclude we are in a bubble. The next question is: how big will this bubble get, and will it pop? As the famous economist John Maynard Keynes once said, “the market can remain irrational longer than you can remain solvent.” We are anticipating increased volatility in the US sharemarket in 2021, but are also cognisant of several possible reasons the markets will push higher: There is No Alternative (TINA). The bond and cash markets are offering investors negative returns. As shown below, […]
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Reflecting on a year to forget Remember in January 2020 when things were looking great and we were expecting a year of growth driven by fiscal support? How right we were, just not in the way we anticipated! How the year started: 4th January we started hearing about 44 cases of pneumonia in China. 11th January China releases the genome sequencing for the novel coronavirus. We believe this is a localised virus and nothing too serious to worry about. 23rd January the World Health Organisation visits Wuhan in China (a city the world knew nothing about at the time). NZ government sets up a team to monitor this development. 30th January the WHO declares a health emergency of international concern. The world watched with some interest and then changed the channel. 3rd February NZ placed 14-day self- quarantine restrictions on people who are from or travelling through China. 11th February coronavirus gets a new name – Covid-19. We hear of transmission of the virus to people who had not been to China. The world starts to get nervous. 24th February […]
The joy of low interest rates As we finish another month, we have further historical events occurring. This time it is closer to home, with 2-year & 5-year government bond yields falling into negative territory for the first time in history. In September, the 5-year NZ government bond rate went as low as -0.06%. This is down from the not so attractive 0.66% six months ago. NZ Yield Curve – 18th Sept 2020 Source: The Daily Shot This has also led to mortgage rates in New Zealand dropping, which in turn is throwing further fuel on an already overpriced NZ property market. This is great news for borrowers who can now re-fix their debt at lower interest rates, giving them some short-term breathing room. NZ Mortgage Rate Forecasts NZ Annual Property Price Forecast Source: ANZ Research Source: Westpac NZ ANZ is currently forecasting mortgage rates to drop further, with the short end below 2% in 2021, as the RBNZ potentially moves our Official Cash Rate (OCR) into negative territory for the first time ever. The RBNZ is also likely to […]
Pay attention – we are in the middle of a historically significant event There is an old proverb, “May you live in interesting times”. This is falsely attributed to an English translation of a Chinese curse. The closest Chinese comparison to this saying is, “Better to be a dog in times of tranquillity, than a human in times of chaos“. Either way, there is no arguing that we do indeed live in interesting times. Since the start of the year, the world has changed in meaningful ways. We will focus below on the market related changes. Firstly, global share markets dropped 30% in March from their previous highs, wiping off US$30 trillion (30%) in value. Markets have since recovered to be only c.9% down from the previous high, as at the end of August 2020. World vs. US share markets Source: The Daily Shot In the US, we have seen share markets recover all their losses, now trading back at their historically record high valuations. Indeed, the US sharemarkets have now priced in the very unlikely “V-shaped” economic recovery, suggesting […]
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The markets appear fully recovered, but looks can be deceiving If you are watching the S&P500 you will know that as at the end of July, it was approximately 4% off its pre-Covid mid-February highs. If we dig a bit deeper however the index starts to tell a very different story. As at late-July, 186 of the S&P500 stocks, or 37% were showing a gain. The remaining 64% were still showing a loss since the start of the year. Delving deeper still we see that 226 or almost half of the S&P500 are still down at least 10% since the start of the year. Facebook, Amazon, Apple, Netflix, Google, Alphabet, and Microsoft (the FAANGM’s) currently make up 25% of the total S&P500 market cap. Put another way, seven stocks equate to a quarter of the 500-stock index. This is up from c.8% on mid-2013. The rally we have seen in these tech stocks has had a larger impact on the index’s performance, making it appear as if the US share market has recovered. S&P Mega-cap growth vs “the rest” Mega […]
Markets continue to defy gravity As US and NZ share markets test new highs the data from around the world keeps getting worse. Later in this month’s discussion we will make a case for why share values may not be as overpriced as we all believe, but first let’s review the worsening news. US Covid cases on the rise again As President Trump continues to understate the rising risks of Covid infections in the US and States continue to attempt reopening to get some semblance of growth back in the economy, the daily new cases in the US continue to rise. Doctor Anthony Fauci met with Congress in late-June to confirm that he was seeing a “disturbing surge” in infections in some parts of the country as some Americans ignored social distancing rules and States reopened without adequate plans for testing and tracing contacts. The 7-day moving average daily new cases for the US has continued to push higher into the end of June. This is not a second wave for the US but a continuation of the first wave. […]
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