October 7, 2020

Financial media has come up with all sorts of headlines these days to justify the rally that broad-market indexes like the S&P 500 and the Nasdaq 100 have seen since their March lows with “hopes” and “optimism” being mentioned as the primary divers of this seemingly unjustified jump.

According to business consultant Jasdeep Singh, these headlines mask the true element that is pushing equity valuations higher, which is trillions in liquidity injected by central banks around the world to keep financial markets on artificial respiration as the pandemic ravages the global economy.

Sure, the rally has been quite marvelous as investors have seen their retirement accounts being lifted and traders who foretold the extent to which the Fed would step up to save the day have probably take a windfall in the past few months.

READ MORE:  Show off With Poi Balls at Your Next Rave

However, this inorganic liquidity is also creating an environment in which the market feels pretty confident that things will keep moving higher despite the growing number of risks that are plaguing the global business landscape.

This sense of ease is bullish in the short-term but things can turn upside down quickly if, at some point, the artificial stability that has been provided by these financial lifelines starts to falter, or worst, if the very fabric of the economy and the society in which the markets are built upon starts to fall apart – triggered by something like a heavily contested US election that ends up dragging the country into a whirlwind of social unrest in the midst of a pandemic.

READ MORE:  Why Canopy Tents Are a Must for Your Next Outdoor Promotional Event

Is the outlook for stocks as gloomy as the introduction of this article? Mr. Singh thinks it might be and here are some of the risks factors he currently sees to support that thesis.

Potential Social Unrest Amid a Contested US Election

The first element that I could cite in this long list of risks is perhaps the most recent, which is the possibility of a contested outcome in the US presidential election with President Donald Trump already declaring himself the winner while making allegations of a rigged election if his contestant, Joe Biden, were to be declared the victor.

The markets, quite ironically, have rallied furiously despite President Trump’s willingness to take things to the courts in every single state he loses, which could drag the process of declaring a winner for weeks.

READ MORE:  Pros and Cons of MetaTrader 4

Record-level Virus Cases in the US and the Reintroduction of lockdowns in Europe

The United States just reported the highest number of virus cases in a single day just a few days ago, with almost 190,000 Americans testing positive for COVID-19 while deaths remain above 1,000 per day – according to virus tracking website Worldometers.

Although President Trump has repeatedly refused to put the country on lockdown, state governors have already moved to impose some restrictions, which is not good for the economy or for publicly-traded companies for that matter.

Sky-high Equity Valuations

Are stocks pricy right now? Yes. In fact, according to the so-called Buffet indicator, a metric that tracks the value of the US stock market in relation to the country’s gross domestic product, is currently sitting at its highest levels in history at no less than 165%.

READ MORE:  Bill Erbey is Still Ahead of the Game

Just to provide some context to that number, in 2000, at the peak of the dot-com bubble, that number was 140%. Meanwhile, in 2007, at the peak of the housing boom that preceded the financial crisis, the indicator sat at 106%.

Depressed Corporate Earnings

The latest estimates from FactSet indicated that companies within the S&P 500 were going to report an average 21.8% drop in earnings during the third quarter of 2020, with that percentage being the largest year-on-year decline in corporate earnings reported by the index since Q2 2009 (-26.9%).

Back then, stocks climbed progressively off their early 2009 lows as the Federal Reserve – who else – stepped up to assist the financial system after banks fell apart and the whole economy was nearing a total collapse.

READ MORE:  The Benefits of Investing in Material Handling Equipment for Your Business

Most people call this the forward-looking nature of financial markets. However, one would argue that the situation would have been much different – and that continues to be the case – if the Fed ever pulls their “toolbox”, as they call the trillions of dollars in their balance sheet, from under the market’s feet.

Sure, nobody expects a rate hike at this point, but that is a ticking time bomb that will eventually explode once the consequences of near-zero interest rates and massive injections of inorganic liquidity start to kick in.

Sustaining all-time highs right now seems hard

Does the market have any strong positive catalyst to support another push to new all-time highs? Besides the limited benefits of a government “gridlock” and a rushed vaccine, what else is there?

READ MORE:  Basic things you need to consider if you want to be a successful Italian Chief

The Fed has not made any changes to their already significantly accommodative policies, corporate earnings will remain depressed for what remains of the year as the virus situation and other elements – some cited above – keep driving economic activity down, and the path to more fiscal stimulus at this point seems to be as tricky as ever.

Upside, in this context, could be significantly capped, while the downside is huge, according to Mr. Singh.

A final word

So far this year has been one in which financial analysts have struggled to make sense out of what is happening in the markets given the unprecedented level of government intervention amid the pandemic.

READ MORE:  Reasons You Should Incorporate AI Into Your Gaming Business

No analysis can hold up if the Fed keeps jumping in every time things get shaky, which is why forecasting a short-term downturn is something not many people dare to do these days.

However, in the long-run, the only element that is weighing positively on the outlook for stocks is the possibility of more and more money thrown by politicians and regulators – which is an unsustainable path to growth.

Without that, the markets face a huge number of risks that – if not properly managed – could expose your portfolio to severe losses if market players start to feel at some point that the floor beneath their feet is loosening.

READ MORE:  How To Reduce Backpain on Your Next Business Trip
{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}