Bloomberg: There are six reasons to believe stocks’ comeback from the recent lows is rational. Among them, ultra-low global interest rates, the disinversion of the yield curve and abundant money itching to stay invested.
• Reason 1: Wafer-thin Treasury yields call for low discount rates on stocks. In a world where U.S. debt pays well less than 1%, a diversified stock portfolio that earns several percentage points more is better value, no matter how the pandemic plays out. Ten-year notes trade at a P/E equivalent to 150 times and won’t pay a dime more than promised
• Assuming earnings per share on the S&P 500 slumps about 35% for this year to $100, current index levels would imply a P/E of approximately 28 times. While arguably richly valued, that would represent an earnings yield of 3.5%. It’s an adequate risk premium compared with Treasuries and one that comes with the promise of eventually growing coupons
• Reason 2: The January inversion in the bellwether three-month/10-year yield curve has corrected quickly, suggesting the economy may regain its poise sooner. In data going back to 1992, there have been only a handful of inversions -- and they persisted for a while. The first significant episode in 2000 lasted six months; the second in 2006-07 spanned 10 consecutive months discounting one lone month in February 2006 and then again in July 2007; the third instance last year lasted five straight months
• Reason 3: Investors believe in a V-shaped U.S. recovery. After all, the world’s largest economy was doing just fine before the pandemic struck. And unlike in the financial crisis, the impact of the coronavirus hasn’t left major banks teetering on the brink of collapse, nor are there indications that a complete overhaul of the financial system may be required
• Reason 4: A wall of money is waiting to be invested. Fund managers don’t have unlimited flexibility to hold cash except for short periods -- they’re itching to put their assets to work. And that is exactly what has happened: each time stocks have fallen by about 12%, they have rebounded with conviction
• Meanwhile, money supply has doubled since the financial crisis and a sizable chunk of the nearly $17 trillion outstanding is waiting to find a home and willing to be invested for the fear of missing out
• Reason 5: Central banks to come to the rescue. The Federal Reserve and its peers have gone from being lenders of last resort to saviors of the entire financial system at the first sign of trouble. There are already calls for Congress to allow the Fed to invest in stocks. If lawmakers allow it, a belief that the Fed would jump in to prevent a bear market would only support higher P/E ratios for the S&P
• Reason 6: The American economy stands out. It’s likely to prove more resilient than most other developed nations after the pandemic. The euro area was comparatively weaker before the crisis, and the havoc wreaked by the virus means the bloc will struggle for a long time to come
• While these reasons don’t necessarily validate the case for a bull market, they present a counterbalance to the bear argument
• Reason 1: Wafer-thin Treasury yields call for low discount rates on stocks. In a world where U.S. debt pays well less than 1%, a diversified stock portfolio that earns several percentage points more is better value, no matter how the pandemic plays out. Ten-year notes trade at a P/E equivalent to 150 times and won’t pay a dime more than promised
• Assuming earnings per share on the S&P 500 slumps about 35% for this year to $100, current index levels would imply a P/E of approximately 28 times. While arguably richly valued, that would represent an earnings yield of 3.5%. It’s an adequate risk premium compared with Treasuries and one that comes with the promise of eventually growing coupons
• Reason 2: The January inversion in the bellwether three-month/10-year yield curve has corrected quickly, suggesting the economy may regain its poise sooner. In data going back to 1992, there have been only a handful of inversions -- and they persisted for a while. The first significant episode in 2000 lasted six months; the second in 2006-07 spanned 10 consecutive months discounting one lone month in February 2006 and then again in July 2007; the third instance last year lasted five straight months
• Reason 3: Investors believe in a V-shaped U.S. recovery. After all, the world’s largest economy was doing just fine before the pandemic struck. And unlike in the financial crisis, the impact of the coronavirus hasn’t left major banks teetering on the brink of collapse, nor are there indications that a complete overhaul of the financial system may be required
• Reason 4: A wall of money is waiting to be invested. Fund managers don’t have unlimited flexibility to hold cash except for short periods -- they’re itching to put their assets to work. And that is exactly what has happened: each time stocks have fallen by about 12%, they have rebounded with conviction
• Meanwhile, money supply has doubled since the financial crisis and a sizable chunk of the nearly $17 trillion outstanding is waiting to find a home and willing to be invested for the fear of missing out
• Reason 5: Central banks to come to the rescue. The Federal Reserve and its peers have gone from being lenders of last resort to saviors of the entire financial system at the first sign of trouble. There are already calls for Congress to allow the Fed to invest in stocks. If lawmakers allow it, a belief that the Fed would jump in to prevent a bear market would only support higher P/E ratios for the S&P
• Reason 6: The American economy stands out. It’s likely to prove more resilient than most other developed nations after the pandemic. The euro area was comparatively weaker before the crisis, and the havoc wreaked by the virus means the bloc will struggle for a long time to come
• While these reasons don’t necessarily validate the case for a bull market, they present a counterbalance to the bear argument