…but I’m afraid of investors. I’m afraid of the current complacency and of the disconnection between fundamentals and stock prices. I’m not buying into this bubble as there’s no vaccine, cases are still rising and the global economy is depressed.
It seems that Moderna (NASDAQ:MRNA) is showing a breakthrough in terms of a vaccine for the new corona virus. However, there’s still a long path towards the immunisation of the global population, as there a few more stages to surpass on the development of the potential vaccine and one needs to produce billions of it. So, while the stock market has mostly reverted year losses, I foresee a rough path until we find the shine.
As of today, there are 13.6 bn covid-19 cases reported globally, with 3.6 bn having occurred in US soil. In Europe the worst is now well behind (at least for a first phase of the disease) while in the US cases reported are still on the rise. Yesterday, 14 July, there were more than 65,000 cases reported in the US, which led a few states to retreat in terms of deconfinement measures. While this happens, the German Dax is up 53% since its year low. The Nasdaq is also up 53% since its year low and the Dow and the S&P 500 are both up 44%. The FTSE is a little behind, up 26% since its low, but the British index has since always been a lot more conservative than the others!
While stocks suffered heavy losses due to the start of the pandemics, they also recovered heavily during the last 80 days. In fact, such a recovery seems a little out of bounds, if we take into consideration that unemployment rates shot up, GDP is declining and profits are nowhere to be seen. Still, investors seem very enthusiastic with the prospects of a vaccine separating our life from the virus forever. However, we do know that employment takes time to recover and it’s very unlikely that profits return to pre-crisis levels any time soon. There are a few tech companies for which the crisis has played well. That’s certainly the case for online retailers and companies that can deliver their products and services in any digital form. But for most other parts of the economy, the virus led to heavy financial losses.
There is a reason for the market to recover from year lows, but the current enthusiasm seems in complect disconnection from reality. We don’t know when a vaccine will be available, not even if it will be available. In the meantime severe losses may accumulate. While this happens, both the Dax and the S&P 500 are mostly flat for the year, as if nothing had happened in between.
While I understand why the Nasdaq is growing faster than the FTSE 100 and the S&P 500, a rise of 22% year-to-date is certainly the beginning of a bubble. It’s tough to find stocks worth buying at this point. Just look at Tesla (NASDAQ:TSLA), for example. Shares rose 270% this year, but the company has not shown any profits until today. The ROCE has been negative since the very beginning.
In my view, we are still in the middle of the pandemic and in the middle of a huge economic depression. But, with massive central bank intervention, investors are no longer afraid of the risk as they believe central banks will always save them. I don’t blame them as this has been the case at least since the 2007-2009 crisis. But central banks’ ammunition is running low and markets will suffer setbacks due to their disconnection to reality.