As I write, we are already currently nearing the end of July with the last six months of the ASX looking like this:
The market has taken a fairly remarkable rebound and we are sitting at a mere 15% from peak, whilst the S&P 500 is 3% from peak and NASDAQ is already 900 points above its February highs.
Since our initial lockdown in March, we have seen a gradual reopening in June and a subsequent re locking down of Melbourne due to an uptick in cases. Allegedly NSW is one month behind them and we may yet see numbers spike again across the country. America still hasn't seen much by way of respite in infection numbers and Hong Kong has also been locked down yet again.
Given what is happening around the world, I have seen numerous articles and also friends alleging that the market is detached from the fundamentals (i.e. global recession, unemployment, insolvencies, social unrest), a second crash is forthcoming and that this is the biggest bull trap in history.
I have spent the last month pondering this and trying to come up with an explanation as to why the market is still going up. Having done considerable reading and research of past historical events, I can only come to the conclusion that the stock market has almost always always ignored the economy.
In essence, the role of the stock market is to accurately quantify investors' views on the future prospects of publicly traded companies. During any of the catastrophic or more turbulent times of the past, stock market returns have largely been uncorrelated to these events.
Whether or not the market is considered overvalued (refer to my previous post) or not depends on what investors' appetite for risk and return are. Given the fact that everything else is offering meager returns, investors may be willing to pay a higher price for stocks on the promise of a higher yield. In January, the cash rate was considerably higher than it was now and having adjusted the discount rate for the massive drop in interest rates, it could be said that equity pricing is fairly reasonable.
In fact, whether or not the market is currently overvalued is merely a function of expected return and the expected return of other asset classes. Given that people are still pushing up the prices of equities simply means that they are still content with the projected return, given the current value. As such, although some people may say that the market is expensive, which is in itself a subjective measure, it would hardly seem overvalued. For those who allege that the market is detached from fundamentals, I daresay that there is hardly a time in history where the market reflected the political and social environment, all it needs to do is provide an accurate reflection investor's perspectives on future prospects, and to this point, I would think that it does its job fairly well.
by 小福
