BOOM - DOW up 900 -27180 and S&P up 90 - 3200
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BOOM - DOW up 900 -27180 and S&P up 90 - 3200
The disconnect between the underlying economy and the sharemarket is getting really bizarre.
I will not join in the madness so will stick with stocks that are sensible value and have a clearly defined pathway through the effects of Covid 19 without being seriously affected.
Yes Bizarre..
Being investing over 40 years and I can not understand what is happening..It goes against everything I've been taught..
This time is different?..When a grow an extra arm or leg I will believe it.
Forget this zero interest + awash with cash as the total cause. Think what drives the Sharemarket ..
There are 4 primary drivers and many other secondary and tertiary drivers..
The 4 primary drivers are...Inflation, Interest rates, Dividend (yields), Earnings...
My understanding is 2 primary drivers are being hit, dividend (yield) and earnings. The market is not yet reacting to 2 of it's primary drivers..I consider this a warning.. a Market disconnect.
Some possible factors that might explain only a small portion of some of the apparent irrationality. None of this makes sense according to investment analysis text books I have read and I have never seen anything like it in my 35+ years investing so how about we try and make some new rules up and see if that explains anything ?
In Ben Graham's day 10 year interest rates were 4% and he postulated that v = e x (8.5 + 2G), where e = last years eps and g = the estimated sustainable growth rate for the next 7-10 years.
Behind the 8.5 no growth PE (11.8% earnings yield) lies the assumption that the market per se deserves a 6% risk premium, add the risk free rate of 4% and some stock or sector risk premium of on average 1.8% = 11.8% required earnings yield for a no growth stock = PE of 8.5.
Perhaps were we have got to now is 4% market risk premium + 1% sector or stock risk premium and 1% long term risk free interest rate = fair market earnings yield of 6% = no growth PE of 16.7 ? Perhaps 200 year low interest rates has implications for the 2G part of the equation as well ? Perhaps 2.5G or 3G is appropriate ?
Inflation - Perhaps we are currently in a period of deflation ?...but with all this infinite quantitative easing its not difficult to imagine many economies going into huge oversteer as we transition around the bend from recessionary conditions to recovery leading to possible very strong inflation.
Other random thoughts. Fear and Greed. Massive fear that peaked on 23 March appears to have given way to FOMO and Greed.
At the end of the day if you don't understand something, its best to avoid it. I like cash at present. Its still my favourite asset class.
Momentum and sentiment. How many investors these days are pure sentiment and momentum investors and TA and FA simply doesn't even come into it ?