The End of The S&P as We Know It?
US Equities are up almost 30% from their lows set in March. As other monkeys have rightly pointed out, the S&P is down only 16.5% since its pre-Covid high, and is higher than it was in June 2019- just 9 months ago! Let me take this as an opportunity to express my concern.
Since the turn of the 20th century, the Dow Jones and S&P (pick your index) have been the tried-and-true reflections of the markets as a whole. When asked, Americans have always had the ability to point to the stock market as a gauge for the economy. I don't need to elaborate further, but my point is that we have built up a considerable amount of trust in US Equities as not only a source of reliable long-term returns, but also as a testament to the fairness, transparency, and efficacy of our free-market economy.
**I believe that US equities are now at risk of losing this special role. ** For better or for worse, there is now a player (the fed) that has completely changed the way investors view American equities. Just two months ago, just about anyone could tell you with full conviction that 'stocks reflect fair value blah blah blah'. Now, it appears beyond doubt that US Equity indexes do not reflect fair value (nor are they playing their traditional role as a leading indicator). Almost every investor out there can agree that the fed is the only thing keeping equities as high as they are.
I am not making a case for or against the actions of the fed or the federal government. It's clear that a stimulus of unprecedented proportions was necessary. My concern is in the long term case for US equities- will the S&P lose its role as the thermometer for the US economy? will it cease to provide outsized returns for investors near and far? My impression is that most people hold my same views, but I'd like to hear what more fellas on this forum think.
*By the way, I am not 'cheering' for another leg of this bear market, I simply find it unnerving when public companies are clearly not priced at their fair values.
So a couple of points on this section in particular:
Truthfully, I think you have way too romantic of a view of the market. People were saying the same exact thing back in 2008, and things turned out all right then. No one knows what the future holds, but the S&P isn't going to collapse because of QE or anything like that.
Bro get back in your bunker!! ahhh were all gonna die!
On a more serious note- yes its a leading indicator, the market dropped at first (based off of algo trading and margin calls that created forced selling plus obvious future deterioration in economy)- then people realized it wasnt the end of civilization as we know it and most companies will actually be fine (those with big balance sheets- walmart, P&G, etc.) so those stocks recovered somewhat. However, some havent recovered as much yet (Real estate, some banks, cruise lines, airlines, etc.)- why? Because they are leading indicators of poor future performance to come (remember there is more than one stock in the S&P 500- some go up and some go down and all you see is the avg weighted by market cap-so its biased towards those with large balance sheets that will be fine).
The value plays right now are all in the group of stocks that are getting punished- if youre a good investor who can read financial statements then you can pick the "winners"- you know, what Peter Lynch, Warren Buffet, and Ben Graham have based their lives off of. However, if you think this is the end of the economy you should buy gold and put your tinfoil hat on in the bunker
Always remember this: there is no Intrinsic Value Police that will prevent a stock from going higher, even though some key metrics do not merit such an appreciation.
What I've noticed is that there are a group of stocks that investors "want" to own, regardless of earniings or other metrics, and that the investors will bid these stocks up whenever there is any whiff of good or promising news. I'm talking MSFT, ROKU, AMZN, LULU... these are all stocks that take hits, but you just KNOW based on their product/service/brand that -- after they take a big hit -- at SOME POINT, unless there is a monumental change in their fundqmentals or competitive landscape, they are simply going to go back up... in some sense, the market has become a bit of a popularity contest (to some degree -- of course, in the end, it is the future potential earnings stream of a company that matter... or should I say, the future potential revenue streams... SNAP, ROKU? No earnings there, just great brands that -- once these stocks get hammered -- seem like they will automatically go back up once there is an iota of good news.
I have a friend who's an intrinsic value guy at a hedge fund who would never touch a SNAP or a ROKU... and that's his philosophy, I get it. But what he won't get is that 30 day 100% increase in ROKU or SNAP because investors -- for whatever reason -- just want to own these freaking stocks.
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