It behooves the investor to wonder how, amid a global pandemic, racial strife and political upheaval, that SPY can rally to pre-COVID levels. It’s down right illogical how many companies are filing for bankruptcy protection, yet the stock market continues on higher. The irony is, SPY is within sight of record levels. My model says we may well reach that in mid August.
This has happened before, in 1968 to be specific. Dispassionate computers that run on algorithms and investors who are always looking ahead, tend to gaze beyond the news of the moment, driving prices.
Added to this a handful of stocks that have been enjoying record highs… MSFT, GOOG, NTFX, FB, AAPL, AMZN and TSLA (not in the S&P 500) have all broker previous records. Understandably so, many people are at home watching television, surfing the net and buying on line. Combined, these companies represent an influential amount of the S&P 500. Much quantitative easing money also flows into U.S. markets from around the world. One issue that is of concern is that some of these companies are many times their capitalization, meaning that there really is not the substance to support their valuations.
I use the analogy to house prices; a small, run down two bedroom home just is not worth $1,000,000, even if it is just outside Manhattan. But the agent will tell you, it’s not what you pay for it but what you will get a year or so down the line for it. Today, it’s expensive. Two years from now, someone will offer you $1,300,000 or more for the same dump. Go figure.
For me, I fear that some of these companies may reach their peak and snap back, possibly causing a ripple effect. I fear that once the true economic fallout from COVID is tabulated, the Feds cut off spending, the Feds continue spending, or any other factor could trigger a massive recession unlike we’ve ever witnessed. Consider the total national debt is about $25 trillion. The U.S. government is now talking about stimulus packages of $1 trillion and more, a good chunk of the national debt. Who pays for that? It is impossible to meet even the interest obligations for such debt.
For that reason, I like to enter a market looking only for small, regular gains. I would rather not be invested when the push over the edge occurs, whatever sparks it.
– Head Trader Hugh Grossman