The world is licking its wounds after the first wave of the pandemic and fears the second wave. Meanwhile, US stocks are at an all-time high. Does it make sense?
Stock growth is driven by technology and, in addition, only a handful of stocks. The top five include the Alphabet, Amazon, Apple, Facebook and Microsoft, which together make up almost a quarter of the S & P500 index and pulls it higher and higher. On the contrary, most stocks from the index are in a significant minus this year and in many cases they are very cheap. For the investor, this means two possible directions. Either ride the trend of expensive big stocks and believe that it can jump out in time. Or buy what’s cheap and wait for it to grow. The second scenario means less gambling in any case.
The world has not yet known a crisis of this type. Does this not mean that investors should also put the current rules of the stock exchange behind their heads and start behaving differently?
It is said about every two to three years that the fundamentals do not matter, that there is a new normal, that everything that has been true so far needs to be forgotten and that things need to be looked at differently. But over and over again it turns out to be naive and wrong. For example, the elders remember how Microsoft’s stock fell 60 percent during 2000, even though the company’s business was booming. Investors have realized that paying 40 times more for shares is too much. The problem is that today’s investors were not in the markets in the 1990s and they think that some abnormal things are normal and that they will continue to last.
What needs to happen for investors to open their eyes? Is there a trigger for rationality?
You can’t say that in advance. At the beginning of 2000, when the dot.com bubble peaked, some large investors, including Soros and Robertson of Tiger Funds, threw all their approaches so far and jumped into the current trend. And then they saw the Nasdaq Composite index fall by almost 80 percent.
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You bet on worse times at the beginning of the year, when the covid was still joked.
Last year, the US market went up by a quarter, while corporate profits did not go up at all, so the market rose by a quarter. From that level at the beginning of the year, it became even more expensive this year, and it seemed that there was no major problem on the horizon after a long time. Then everything changed from day to day. But the market is distorted by the large representation of the largest companies.
Even the big five can not grow indefinitely. Will there be a turning point that will sweep away these stocks?