Becoming more bearish

NedS

Am I the only one becoming more bearish?

We all know stock markets are often dissociated from the economy, but prices are starting to look like real bubble territory to me. I can not see how valuations now can be significantly higher than they were at the start of the year, before Covid. That means, either valuations were cheap a year ago which I don't believe, or they are inflated now and in bubble territory.

What do others think? Do you have cash on the sidelines? What would be required for you to deploy that cash?

I'm increasingly thinking the Covid crash was the pre-crash to the main event. As Mr Buffett said, be fearful when others are greedy. For the moment I'm riding the gravy train higher but I'm starting to get pretty fearful. Maybe it's time to keep a close eye on the stop losses, especially as bonds no longer seem to be negatively correlated with equities nor offer much protection in a crash.

Prism

Or something has changed. The interest rate being much lower changes the future picture quite a bit. When the interest rates begin to rise again maybe then we will see some of the results of al of this cheap money.

masonic

An EPS bounce back is fairly well assured as the Covid crisis recedes... assuming it doesn't take another twist, such as the UK messing with vaccination schedules creating a vaccine resistant strain.

On the basis of valuation, some regions look more expensive than others - USA CAPE is ~30, while the UK is ~12, with other major markets falling somewhere in between. If you drill down into individual companies, I'm sure you'll find examples that don't appear overvalued in all markets.

Thrugelmir

NedS said:

We all know stock markets are often dissociated from the economy, but prices are starting to look like real bubble territory to me. I can not see how valuations now can be significantly higher than they were at the start of the year, before Covid. That means, either valuations were cheap a year ago which I don't believe, or they are inflated now and in bubble territory.

Which prices? Which market?  Drill down and there's been all sorts of anomolies in the past months. Still remain some. What's certainly increased is the broader risk factor. There remains plenty of uncertainies. Come the summer the enthusiasm may well wane. As the realities finally sink in. 

itwasntme001

It is what happens when you have 0% interest rates, massive fiscal and monetary stimulus in many major economies and human nature driven by greed.

The interesting question is why did we not do all this in previous recessions like 2008 or early 90s?  I think the answer is inflation and the political will to unleash it.  Now it seems inflation is not a concern so they have more room for stimulus.  So every trade is essentially a view on inflation and no one can forecast inflation well at all.

m_c_s

Worth noting that the next 4 yrs may see the largest ever US internal investment programme (infrastructure, clean energy etc). Biden now has control of both houses so his initial promise of up to $4 Trillion will probably double. Add to this additional COVID support likely to be another $2 Trillion. The impacts may not be seen immediately but markets are forward looking.  

NedS

masonic said:

An EPS bounce back is fairly well assured as the Covid crisis recedes... assuming it doesn't take another twist, such as the UK messing with vaccination schedules creating a vaccine resistant strain.

On the basis of valuation, some regions look more expensive than others - USA CAPE is ~30, while the UK is ~12, with other major markets falling somewhere in between. If you drill down into individual companies, I'm sure you'll find examples that don't appear overvalued in all markets.

Agreed, and I have a sizable chunk currently invested in UK equities as I'm less concerned about valuations there, but globally, the UK market only represents around 4% of market capitalisation (as I'm sure you know)...

Thrugelmir said:

NedS said:

We all know stock markets are often dissociated from the economy, but prices are starting to look like real bubble territory to me. I can not see how valuations now can be significantly higher than they were at the start of the year, before Covid. That means, either valuations were cheap a year ago which I don't believe, or they are inflated now and in bubble territory.

Which prices? Which market?  Drill down and there's been all sorts of anomolies in the past months. Still remain some. What's certainly increased is the broader risk factor. There remains plenty of uncertainies. Come the summer the enthusiasm may well wane. As the realities finally sink in. 

US equities, and global to the extent that the US equity market represents ~60% of the global market, and even though the UK looks cheap, if the US market were to drop 50% I do not doubt for a minute that every other equity market will follow downwards. Sure there will be defensive stocks that lose less, and maybe some winners too, but I wouldn't back myself to be able to successfully identify them.

masonic

NedS said:

masonic said:

An EPS bounce back is fairly well assured as the Covid crisis recedes... assuming it doesn't take another twist, such as the UK messing with vaccination schedules creating a vaccine resistant strain.

On the basis of valuation, some regions look more expensive than others - USA CAPE is ~30, while the UK is ~12, with other major markets falling somewhere in between. If you drill down into individual companies, I'm sure you'll find examples that don't appear overvalued in all markets.

Agreed, and I have a sizable chunk currently invested in UK equities as I'm less concerned about valuations there, but globally, the UK market only represents around 4% of market capitalisation (as I'm sure you know)...

Indeed I do, and historically I've avoided having significant home bias, however I am beginning to warm to the idea.

barnstar2077

Personally, I think once this covid malarkey is out of the way that people will want to get out and see all the people and places that they weren't able to before (and do all the things that they haven't been able to do, which will involve spending money.)  How many people do you know that have had to put plans on hold?  Yes, a lot of people have lost their jobs, but when things start back up again the unemployed numbers will go down as current businesses reopen, and entrepreneurs will see new opportunities which will fuel further growth.  I am predicting that things will be looking up soon, certainly by this time next year.  I don't think we have seen the last of the economic fallout, but at the same time I think the economy will recover pretty quickly.

BananaRepublic

itwasntme001 said:

It is what happens when you have 0% interest rates, massive fiscal and monetary stimulus in many major economies and human nature driven by greed.

The interesting question is why did we not do all this in previous recessions like 2008 or early 90s?  I think the answer is inflation and the political will to unleash it.  Now it seems inflation is not a concern so they have more room for stimulus.  So every trade is essentially a view on inflation and no one can forecast inflation well at all.

The covid recession is fundamentally differerent from the GFC. Back then credit dried up, people couldn’t borrow, it hit the economy quite widely. This recession is hitting some parts of the economy badly, others not at all. Cafes and restaurant jobs will bounce back quickly, even though some businesses will go under staff will be rehired by new owners. There are many people working from home or on furlough, spending less than usual. Trades have been busier than usual, DIY is booming, people are having house extensions, loft conversions etc. 

We have as a nation run up huge debt, and somehow we will have to pay for that. Some say a wealth tax is coming. Whatever happens, spending on public services may be squeezed. 

itwasntme001

BananaRepublic said:

itwasntme001 said:

It is what happens when you have 0% interest rates, massive fiscal and monetary stimulus in many major economies and human nature driven by greed.

The interesting question is why did we not do all this in previous recessions like 2008 or early 90s?  I think the answer is inflation and the political will to unleash it.  Now it seems inflation is not a concern so they have more room for stimulus.  So every trade is essentially a view on inflation and no one can forecast inflation well at all.

The covid recession is fundamentally differerent from the GFC. Back then credit dried up, people couldn’t borrow, it hit the economy quite widely. This recession is hitting some parts of the economy badly, others not at all. Cafes and restaurant jobs will bounce back quickly, even though some businesses will go under staff will be rehired by new owners. There are many people working from home or on furlough, spending less than usual. Trades have been busier than usual, DIY is booming, people are having house extensions, loft conversions etc. 

We have as a nation run up huge debt, and somehow we will have to pay for that. Some say a wealth tax is coming. Whatever happens, spending on public services may be squeezed. 

That is because 2008 was a financial crisis and everything was done to recapitalise banks (and QE was seen as a way to kick start the economy).  But my point was that why wasn't any fiscal stimulus done back then to encourage growth - it seems it was only monetary (QE) and even that was not nearly as forthcoming as we saw last March?  Now you have huge fiscal stimulus after 10 years of austerity in the UK and 5-6 years in the US (until Trump cut corporate taxes).

To me it seems like policy makers are becoming less and less concerned about inflation because they saw QE did not generate any, so why not push ahead with fiscal.