In case you missed it, the International Monetary Fund (IMF) recently warned for a sharp adjustment (read: downward correction) in the financial markets. And the IMF is not alone, several organizations have indicated that the party (on Wall Street) might be over soon. And they might have a point. Financial assets have soared significantly over the past ±10 years. Don’t believe me? Just look up any US Tech stock and you’ll see a near exponential graph.
Furthermore, brokers have seen their client base grow significantly (yes, BUX too!). In the Netherlands, the number of households investing has increased by 17% to 1.75 million in 2020 compared to the year before (FD 2020). The improved accessibility to the financial markets seems to push stock prices up and increase price volatility. This, together with the increased willingness to take risks by retail investors, has pushed markets to record-high levels. Software firm Yodlee even observed that in the US, a significant part of the social checks that are part of the government’s Covid-19 support for households is injected straight into the stock market. More importantly, Central Banks, most notably the ECB and the FED, are buying bonds (public+private) and ETF’s on a mass-scale, to keep the economy from sliding into a depression. Meanwhile, Rating agencies like Moody’s, Fitch, and Standard and Poor’s have adjusted their ratings on several companies in the S&P 500 downwards. As a result, it is harder for companies to attract new credit, potentially hurting their business.
At the same time, interest levels are at historic lows and public and private debts are rising around the world. The markets seem to disconnect more and more from the real economy. Apart from most tech stocks the pandemic has hurt many companies significantly. This leads to the question of whether the current stock prices are justified. Is it a logical consequence of the enormous increase in the money supply and government spending? Investors do not seem to care at the moment. Stock and housing prices are approaching all-time highs. The big question is whether these levels are sustainable.
Or is it just a matter that the economy post corona is already priced in and enormous growth is to be expected? Let us know what you think!