Wall Street appears to have belatedly realised that the foundations of the extraordinary stockmarket surge since March are increasingly illusionary.
On Monday the market had its worst day in nearly two months, with the S&P 500 down almost two per cent, the Dow Jones Index falling 2.3 per cent and the technology-laden Nasdaq market sliding 1.6 per cent.
In the past fortnight the US market has lost nearly four per cent of its capitalisation, with Monday’s losses at odds with the historical experience of share prices almost always rising in the last week of an election campaign.
Since the plunge in February that ended in the final days of March the market has almost entirely ignored the coronavirus and its economic impacts, pricing in a rapid V-shaped recovery and an early distribution of a vaccine.
Financial markets might not be the economy and might be forward-looking but the view that the pandemic was a fleeting phenomenon whose economic impacts would be short-lived always appeared at odds with the lived experience, albeit not with Donald Trump’s desperately optimistic predictions.
Investors now appear to be having second thoughts as a new wave of the virus sweeps across America.
Iis obvious that the pillars for their previous optimism are wobbling rather violently
The US is experiencing a resurgence in COVID infections and deaths, with the seven-day average at its highest level since the onset of the pandemic. About 8.6 million Americans have now been infected an the death toll – more than 225,000 – keeps rising even as Trump claims the US is “rounding the turn.”
“Even without the vaccines we’re rounding the turn,” he said at a rally this week.
That’s at odds with the rather chilling assessment of his chief of staff, Mark Meadows, who said at the weekend that the administration is “not going to control the pandemic.”
The data from Europe, which after largely bringing the virus under control is now experiencing a savage surge in infections and a new round of lockdowns, adds to the sense that the US experience, where mitigation efforts have been highly politicised, could be calamitous.
The markets had factored in a massive new round of COVID-driven fiscal stimulus to replace the $US2 trillion ($2.8 trillion) package Congress approved in March. That included US versions of our Jobkeeper and Jobseeker programs as well as mortgage and student loans forbearance, rent assistance and moratoria on evictions.
Some of those programs have already expired and the rest will be largely gone by the end of the year.
Expectations of a new round of stimulus haven’t been borne out. The Democrat-controlled House passed a $US2.2 trillion plan at the start of this month ($US1.2 trillion less than an earlier version passed in May) but the Republicans in the Senate are showing no interest in supporting it, instead pushing for a much smaller amount.
When the US GDP numbers come out later this week they are expected to show a very big rebound in activity in the September quarter – annualised it might be more than 30 per cent – from the depths experienced in the June quarter when the economy contracted 32 per cent.
Even the more optimistic analysts, however, now believe it will take until 2022 for the US economy to return to its pre-COVID size – and that’s without another virus-induced spate of lockdowns and collapses in activity.
The surge in infections and the absence of further stimulus – and the reality that the US Federal Reserve Board has done just about everything it could do in its unprecedented monetary policy responses — appears to have, and should have, investors questioning their previous optimism.
Late last week, writing in the New York Times, Nobel Prize-winning economist Robert Shiller said his Crash Confidence Index – which measures sentiment about the safety of the market and is based on asking the respondents about the probability of a catastrophic stockmarket crash like that in 1929 – had hit a record low in August and remain extremely low in September.
An overwhelming number of investors had said there was a greater than 10 per cent probability of an imminent crash, which he described as a “remarkable indicator that people are quite worried.”
A question about valuations elicited a similarly concerned response, with only 38 per cent of investors thinking the market wasn’t too highly priced.
Shiller said that his proprietary measure of stock valuations, the “Cyclically Adjusted Price Earnings,” or CAPE ratio, was at a level only surpassed in two periods – the lead up to the Great Depression and in early 2000, just before the dot-com bubble imploded.
More conventional price-earnings metrics show the US market is trading on PE ratios in the mid-30 times earnings against an historical average over just under 20 times.
While it is possible to rationalise high valuations in an environment where bond yields and interest rate more generally are at historical lows – even 10-year bonds are yielding less than one per cent – the price investors have been paying for earnings appears excessive and would be impossible to justify if the resurgence of the virus and the absence of Congressional financial safety nets tore a new hole in America’s economy.
Since the market rebound began in March – even after the sell-off in the past two weeks the market is up 52 per cent from its lows – investors have discounted and looked through the impacts of the pandemic, been confident of the imminence of a vaccine and priced in more stimulus to tide the economy through to a return to solid growth.
With the White House now conceding it has lost control, if it ever had it, of the virus, the prospect of a new fiscal response ahead of the election now negligible and the vaccine that Trump promised for month would be available in weeks unlikely to be submitted for approval by the federal health authorities until late November at the earliest, it is obvious that the pillars for their previous optimism are wobbling rather violently.
Source: Thanks smh.com