THE GREAT DECOUPLING CONTINUES
It has been 10 weeks since we started keeping track of the market downturn (You can read the previous updates from the links bottom of the post). Over thirty million unemployment claims have been filed in the past six weeks. And there are those who could not file because the system is overwhelmed. Even so, the S&P 500 index gained 12.6% in April. April was the best month since January 1987 for this index. Some large tech companies are continuing with their stock buybacks as if nothing happened.
In short, the great disconnect continues. The disconnect is puzzling many market researchers. 
Both the economy and the stock market exist for the people. Without consumers, no company regardless of how big, can survive.
Federal Reserve is acting fast and acting aggressively. This is good. But I wonder when inflation will become a concern again with this much money printing. The FED’s balance sheet grew from $4.2 trillion in January to $6.7 trillion last week, . Essentially Fed is issuing bonds in order to generate the funds required to execute the stimulus package. It will also have to buy certain troubled assets to keep the banks solvent. Ballooning the balance sheet without the corresponding economic activity will eventually create inflationary pressures. So far, the FED is able to keep the target interest rate at 0%, a commendable feat.
The graph below shows the value of a $10,000 portfolio during the two most severe downturns in the past 80 years.
The real pressure on the stock market will come from earnings. The price to earnings ratio (PE ratio) is still near its historical highs at around 20.5, . The long-run historical average of this ratio is 15.7, . What this means is that compared to an average year in the past 100 years, the prices are too high today. And we certainly are not fairing as well as an “average” economy right now.
What is the justification for the stock prices being so high?
- COVID-19 has not disappeared in the US, the death toll reached 68,000 according to W.H.O.
- No vaccine is in sight for the near term
- Economy can open in a limited fashion, but crodws are unlikely to come and help it
- Valuation ratios are still hovering around historical highs, indicating an overpriced market
We recommend caution for the investor in this market. More volatility is likely to come.
Please share your thoughts in the comments section.
Check out previous posts here:
- Update 1: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis
- Update 2: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis-first-update
- Update 3: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis-second-update
- Update 4: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis-third-update
- Update 5: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis-fourth-update
- Update 6: https://www.altadata.io/blog/markets-in-the-corona-virus-crisis-fifth-update