How US stocks could continue to climb
IAND THE “Société du spectacle”, published in the 1960s, Guy Debord, one of the main theorists of a group of provocateurs known as the Situationists, portrays a culture under the sway of mass media where appearance is more important than facts and representation is preferred over reality. This is a disturbing book and not one that finance guys normally reach for. But after a strange year, the idea of markets as a spectacle has an appealing logic. A Debordian could say that their primary role is no longer the allocation of capital, or even enrichment, but entertainment. How else do you make sense of stock prices being out of whack by social media crowds or celebrities selling stocks in shell companies?
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An account seems due. And as 2021 draws to a close, the markets appear nervous. Speculative assets, such as bitcoin, are down from their highs. Even the usual bulls agree that 2022 will be difficult. On December 15, the Federal Reserve came out strongly on inflation and signaled that it would end its asset purchases by mid-March and then start raising rates.
Yet, there is an even more troubling possibility: that investors get on their nerves and offer even higher stock prices. The US stock market has been surprisingly resilient. The economy has had a record year, fueled by a $ 1.9 billion fiscal stimulus package and a lenient Fed. the S&P the leading companies index rose 25% in the year ending December 15. It’s about 40% higher than it was before the pandemic took hold in February 2020 – and few thought then that stock prices were unduly low.
The bull market continued despite some big challenges. The backlash from Chinese technology and the problems in the housing market seem to have only increased the desire to own US stocks. And while inflation in America is at its highest level in decades, it hasn’t hurt the profits of large, publicly traded companies. Indeed, windfall profits helped push up stock prices in 2021.
Take a longer view, however, and the stocks seem terribly expensive. A valuation measure popularized by Robert Shiller of Yale University puts the U.S. stock market at nearly 40 times its cycle-adjusted earnings. Cryptocurrencies have moved from the fringes of investing to the general public. America has seen a wave of initial public offerings, often a signal that a bull market is coming to an end. The same is true of the growing presence of retail investors. New smartphone apps and low-cost exchange-traded funds and brokerage firms that cater to small investors have opened up access to financial markets, including derivatives, which small investors are using in large numbers to bet on rising stocks.
Maybe investors are sobering up. Already, the craze for blank check companies has waned, with less sparkling prices and a slower launch pace. Speculative stocks have also taken a hit: witnessing the 40% drop in the value of ARKThe flagship exchange-traded fund of, which invests in emerging technology companies.
And yet, despite all of this, it’s easy to imagine the bull market that will kick in until 2022 with renewed vigor. One of the reasons is that risk-free interest rates remain close to their historic lows. The yield on an inflation-protected 10-year Treasury bill is around -1%, roughly where it started in 2021. Negative real yields on bonds and cash are helping investors turn around towards riskier assets, such as equities and private market vehicles, including buy-out-of-funds, direct loans and venture capital. Perhaps the Fed will raise interest rates significantly in the years to come. But nothing like that is built into the bond markets.
A second accessory for bulls is the downward buying reflex that has become part of the markets. Experience has taught investors to see a fall in price as a chance to buy more assets at a better price. In February-March 2020 the S&P 500 fell by a third in a few weeks; he then suddenly recovered and continued to climb. The Fed’s swift action helped keep the financial flow to businesses going at the start of the pandemic. But by doing so, he reinforced the idea that he would always put a floor below asset prices.
Big tests await us. It’s easy to forget the massive sales of 1998-99 as the dot-com bubble swelled. Likewise, the coming months could see market declines that seem to spell disaster, only for a recovery to push prices up to even more worrying levels. Market performance has its own logic. “Real life is materially invaded by the contemplation of the spectacle and ends up absorbing it and aligning itself with it”, writes Debord. Well, absolutely. As weird as things are now, they could get weirder. ■
This article appeared in the Leaders section of the print edition under the title “Normal Situation: All Bidding”