Welcome to the most expensive American stock market in two decades


It is common for Wall Street to anticipate a recovery long before Main Street feels it. The stock market is not economics, after all. Investors are looking to the future for three to six months.

However, the risk is that the stock sling will leave investors ill prepared for the health and economic challenges that lie ahead.

“The market is setting a price as a smooth to perfect recovery. But we shouldn’t expect it to happen because the virus is generic, “said Brian Nick, chief investment strategist at Nuveen, which manages more than $ 1. trillion.

Welcome to the most expensive stock market of 18 years

It’s not just that US stocks have come back to life, catapulting 30% from the March 23 low. It’s that market valuations have become much more expensive, suggesting that stocks are priced to perfection. The S&P 500 is now trading at 21.7 times expected profit, the highest level since May 2002, according to Refinitiv.

“We don’t expect the market to continue to melt,” said Nick.

White House economist: unemployment could reach 20% by June

Part of this merger was brought about by the relief of Washington’s fierce reaction to the crisis, which reduced the risk of economic depression. Congress and the White House have promulgated a $ 2 trillion stimulus package that includes repayable small business loans, direct payments to families, and $ 500 billion in distressed business loans.

The Federal Reserve is working to prevent a financial crisis by lending to cash-strapped businesses at an unprecedented rate, buying billions of dollars in bonds and fixing broken markets.

“The central banks, led by the Fed, have made extraordinary efforts to support the financial system and consolidate the asset markets,” Jonas Goltermann, senior economist at Capital Economics, wrote on Thursday.

This is why Goltermann said that even if “the worst is yet to come in terms of economic data, we do not think that this will necessarily prevent risky assets from rallying.”

A second “inevitable” wave is looming

Investors are undoubtedly relieved that the rate of coronavirus infections has slowed enough to allow states like Georgia and Texas to start reopening their economies. Even New York and New Jersey, states at the epicenter of the crisis, have plans to open their own progressive reopenings.

But Dr. Anthony Fauci, the country’s foremost infectious disease expert, warned that it was “inevitable” that the United States would face a second wave of coronavirus infections in the fall.

“When that happens, how we handle it will determine our fate,” Fauci said Tuesday in an interview with the Economic Club.

This is why the Federal Reserve said on Wednesday that the health crisis “poses considerable risks to the medium term outlook”, a period that Fed chief Jerome Powell has defined as “next year”.

“How long will it take to master it?” Will there be additional outbreaks? Will there be drugs that can treat it or some vaccine? Powell asked at a press conference. “All of this is very uncertain. “

Progress in the fight against the coronavirus is also relieved.

Fauci said Thursday at CNN city hall that “if everything falls into place properly”, there could be a vaccine by January, although he also warned that there are “a number of situations that could go wrong. “

Markets recovered this week after Fauci announced promising results for remdesivir, an experimental treatment for coronaviruses manufactured by Gilead Sciences ((BROWN). However, medical experts and Wall Street analysts have warned that remdesivir is far from a cure for the pandemic.

And yet, the stock market is on fire. The Nasdaq recorded its best month since June 2000.

“In the past few weeks, a path to our bullish scenario, in which we see a sustainable return to normalcy starting in June, has emerged,” wrote Mark Haefele, chief investment officer at UBS Global Wealth Management, in a report to customers.

Profound changes in consumer behavior

He added that if a combination of testing, monitoring and treatment resulted in a “lasting end to the bottlenecks”, the central bank and the fiscal stimulus packages could trigger a resumption of pre-crisis economic output by the end of 2021.

But the real question is: if the governors reopen, will consumers come? Until a coronavirus vaccine is available, Americans will likely remain reluctant to visit crowded sports venues, restaurants, conferences and airports.

Americans accumulate money: savings rate reaches its highest level since 1981

“We are not going to resume a normal life,” said Laura Veldkamp, ​​professor at Columbia Business School. “I learned that I enjoy attending university conferences from home. I like not hanging around through LaGuardia and O’Hare. “

Such a change in consumer behavior will have a profound impact on large swathes of the US economy, from hotels and airlines to Uber and Lyft.

Veldkamp is co-author of a study which found that unprecedented events like the pandemic can lead to “belief scars” – lasting and negative changes in consumer confidence. The persistence of these scars, the study concluded, will dictate the trajectory of eventual recovery.

“The market is pricing in the sense that all of this will be resolved within the next 18 months, that there will be a very painful short term and that business will then return to normal,” said Veldkamp. “I think it’s too rosy. “

Cash, deflation risks

The optimism on Wall Street got a little successful on Thursday. The Dow Jones lost 288 points, or 1.2%, after new reports detailing the damage to the economy.

The Department of Labor revealed that 3.8 million Americans filed for unemployment in the week ending April 25.

“The worst of the unemployment crisis is yet to come,” writes Joe Brusuelas, chief economist at RSM, in a report. “The distance between promise and reality for the working class of the economy has never been so hard or painful. “

The Bureau of Economic Analysis reported that the savings rate in the United States had reached 13.1% in March – the highest level since November 1981. The hoarding reflects deep nervousness about the economy.

Consumer spending, the main driver of growth, plunged 7.5% in March. This is the biggest drop in records since 1959.

The dismal numbers have led some economists to warn of a disastrous deflationary spiral, a situation much more difficult to overcome than inflation.

“Prolonged deflation can wreak havoc on an economy, causing consumers and businesses to defer spending because they think prices will be lower in the future, which will weigh on asset prices,” wrote Gus Faucher, chief economist at PNC, in a note to clients.

Add that to the long list of risks that markets will face in the months to come.


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