Despite near term volatility, a record number of coronavirus cases being reported in the U.S., and most of the world’s major economies in a recession, the stock market continues to surprise to the upside.
As of this writing, the S&P 500 is just 2% away from a record high. That lofty level has led to stocks being seriously overvalued and some predicting we’re heading for the worst bear market in nearly 80 years.
Why Are Stocks Doing So Well Despite the Global Recession?
After the September sell-off, global stocks mounted a comeback in October. That momentum was cobbled though by uncertainty around the outcome of the U.S. election. In the days following the U.S. election, stocks surged as investors digested the notion that even if Democrats do take the White House (it hasn’t been determined yet) chances are good they will not control the Senate.
This is seen as a big positive. Without a majority in Congress, even if Joe Biden wins, he will not be able to hammer through his previously announced plans for higher taxes on capital gains and stiffer regulations. Investors are certainly optimistic, but that optimism has resulted in stocks with even higher nosebleed valuations.
A little context might help. Back in December 2015, then Presidential hopeful Donald Trump said that the stock market under President Obama was in a “big fat bubble” and could soon burst. During the fourth quarter of 2015, the S&P 500 was close to record levels, near 2,080. According to the Case Schiller CAPE/PE Ratio, the S&P 500 was overvalued at the time by around 62.3%.
Fast forward to November 2020. The world economy continues to be hammered by COVID-19 but the S&P 500 is closing in on record levels. According to the Case Schiller CAPE/PE Ratio, the S&P 500 is now overvalued by 101%.
If the stock market was in a big fat bubble in December 2015, when the economy wasn’t doing too badly, it’s in more of a bubble now.
Stocks might be experiencing a short-term burst because of the way things are shaping up in Washington, D.C., but the real reason why stocks are soaring is because central banks are keeping interest rates artificially low and flooding the markets with cheap money.
History shows this never ends well.
During bear markets, companies with low debt are the ones that emerge unscathed, because there’s little to no worry that they will go bankrupt.
That said, companies with strong market share will most likely also emerge from the next bear market unscathed, unless of course, they too are highly leveraged.
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