The size of the stock market relative to the size of the economy is at its highest level ever, raising concerns that the market’s recent all-time highs are detached from reality.
The likes of legendary investors Warren Buffett and Paul Tudor Jones have measured the stock market in this, or similar ways in the past to determine if it is overvalued or undervalued.
While some valuation measures are based on fickle analyst estimates, the equity market cap-to-GDP ratio is based on concrete and simple data. The same goes for Buffett’s reportedly preferred gauge, equity market cap-to-gross national product, and the cyclically adjusted price-to-earnings ratio, created by Nobel Prize winner Robert Shiller. CAPE, the ratio of the stock market to historical earnings, is near the highest since the dot-com bubble.
These big picture looks at economic health are basically showing investors are unrealistically valuing future growth.
The equity market cap-to-GDP ratio is at an all-time high, above 200%, Goldman Sachs noted to clients last week. With the S&P 500 up more than 1% in 2020, following a near 30% rally last year, stocks are more expensive by historical standards. The ratio measures the value of all public companies and divides it by U.S. GDP.
The chart is similar to one Buffett said he watches as a key measure of valuation, calling it in a Fortune magazine article in 2001 “probably the best single measure of where valuations stand at any given moment.” The Oracle of Omaha said he likes the market cap-to-GNP ratio to be around 70% to 80% — it sits around 187%, by CNBC’s calculations.
Hedge fund manager Jones also reportedly watches a variant of the Buffett gauge. In 2017, Jones said the market’s value relative to the economy should be “terrifying” to the Janet Yellen-led Federal Reserve due to low interest rates. The Fed later hiked rates three times in 2017, two times after Jones’ comments. Ultimately the central bank got the warning and reversed itself, cutting rates three times last year helping the economy to catch up.
CAPE is near the highest since the 2000 dot-com bubble, when internet stocks rose and eventually collapsed, shedding nearly 80% of value within seven months. The CAPE ratio is a measure that compares stock valuations from different eras by averaging earnings over 10 years, eliminating some of the short-term volatility of each market cycle.
Currently, CAPE sits around 28, in the 90th percentile, which Shiller called “significant” in a New York Times article this year. To be sure, it was slightly higher in September 2018, a period that preceded a significant market sell-off.
High valuations, low earnings growth
Such remarkable gains in 2019 have left U.S. stocks expensive — in the 10th decile, meaning equities have been cheaper at least 90% of the time.
“Such elevated valuations in past periods have weighed on equity returns over the subsequent five years and lowered the odds of positive outcomes,” Goldman Sachs Investment Strategy Group CIO Sharmin Mossavar-Rahmani said in the group’s 2020 outlook. “That the bulk of last year’s returns came from higher valuations, and not growth in earnings, only compounds investors’ concerns.”
Low rates make it OK?
Some economists and traders contend low interest rates instituted by central bankers around the world are the cause of the high valuations and maintain they should allow for higher PEs without big cause for concern. However, Shiller noted interest rate levels historically do not correlate with the CAPE ratio.
Stocks continue to climb to record highs and seem to disregard geopolitical pressures. Shiller attributes the gains to “animal spirits,” a sense of optimism and inclination toward risk.
“High animal spirits in the stock market are often associated with the disparagement of traditional authority and expert opinion,” Shiller wrote, which he said is being inspired by President Donald Trump’s “Make America Great Again” narrative.
“The rise of an explicit belief in irrationality like this one is troubling on many levels,” Shiller wrote in The New York Times.
To be sure, some investors will argue a shift away from more capital-intensive businesses in the U.S., like railroads, utilities and manufactures, could have contributed to the disconnect between stocks and the economy. Some of the biggest companies in the world were built through the use of very little capital and software, but have led the largest expansion in U.S. history.
Spooked consumers suggest economic impact of Australia bushfires to grow – National Post
SYDNEY — Australians are beginning to tighten their purse strings because of the country’s deadly bushfires, according to a survey released on Wednesday, a sign that the economic impact of the crisis is likely to deepen.
As authorities warned that a days-long respite from high fire danger was coming to an end, economists said the cost to Australia’s A$1.95 trillion ($1.33 trillion) economy could be as high as A$5 billion ($3.4 billion).
That would shave around 0.25 points off gross domestic product in the December and March quarters, a development that some economists said could prompt the country’s central bank to cut rates as early as February and lower its growth projections.
Consumer sentiment in January was a hefty 6.2% lower than a year earlier, according to the Melbourne Institute and Westpac Bank survey released on Wednesday. Consumer sentiment data is considered a leading indicator, running ahead of actual spending data.
“The risk is that as economic loss from the bushfires materializes, consumers could still become more cautious in February,” said Citi economist Josh Williamson.
The huge bushfires have cut through the country’s east coast during the peak summer months when many businesses usually rake in earnings from both domestic and foreign tourists. Agricultural sectors, particularly the dairy industry, have also been hard hit.
The deepening financial woes intensify pressure on Prime Minister Scott Morrison, who has faced criticism over his handling of the crisis and his conservative government’s stance on climate change.
Australia is one of the world’s largest carbon emitters per capita due to its reliance on coal-fired power plants, and the bushfires have become a global talking point with regard to climate change politics. Morrison has repeatedly rejected calls for Australia to increase its carbon emission reduction targets, insisting such a step would it would do too much damage to the country’s economy.
Late on Tuesday, Morrison reiterated his view that preemptive burning of bushland to remove flammable vegetation was as important as reducing emissions to prevent bushfires, a position that has been rejected by fire services chiefs.
Temperatures in New South Wales and Victoria states began to rise on Wednesday after several days of cool weather, leading authorities to renew “extreme fire danger” warnings in some areas where existing fires could be intensified or new blazes sparked into life.
Here are today’s key events in the bushfire crisis: * The wildfires have killed 29 people, destroyed more than 2,500 homes and razed 11 million hectares (27 million acres) of wilderness – an area one-third the size of Germany – since September.
* Scores of fires were burning in New South Wales and Victoria states on Wednesday. Temperatures in Victoria were expected to top 32 degrees Celsius (89.6 Fahrenheit) on Wednesday, leading officials to declare “extreme fire danger” in some areas. Temperatures in NSW were forecast to hit 40 degrees C (104 F) on Thursday.
* A Reuters analysis shows that Australian animals living in specific habitats, such as mountain lizards, leaf-tailed geckos and pear-shaped frogs, are battling the threat of extinction after fierce bushfires razed large areas of their homes.
* The air in Sydney is expected to again reach hazardous pollution levels on Thursday as smoke drifts over the city, the NSW state government said. Sydney, Melbourne and Canberra have all been periodically blanketed in smoke over the past several weeks, giving all three some of the worst air quality ratings in the world.
* Players at the Australian Open tennis tournament continued to make pledges of financial assistance. Among the latest were the seventh seed, German Alexander Zverev, who said he would donate A$10,000 for each match he wins and pledged his entire prize money of A$4.12 million if he wins the tournament. American John Isner has pledged 25% of all his prize money and A$100 for every ace he serves.
($1 = 1.4620 Australian dollars) (Reporting by Colin Packham and Swati Pandey in Sydney; editing by Jane Wardell)
China virus outbreak may wallop economy, financial markets – CTV News
News that a new virus that has afflicted hundreds of people in central China can spread between humans has rattled financial markets and raised concern it might wallop the economy just as it might be regaining momentum.
Health authorities across Asia have been stepping up surveillance and other precautions to prevent a repeat of the disruptions and deaths during the 2003 SARS crisis, which caused $40 billion-$50 billion in losses from reduced travel and spending.
The first cases of what has been identified as a novel coronavirus were linked to a seafood market in Wuhan, suggesting animal-to-human transmission, but it now is also thought to be spread between people. As of Wednesday, some 440 people were confirmed infected and nine had died from the illness, which can cause pneumonia and other severe respiratory symptoms.
A retreat in financial markets on Tuesday was followed by a rebound on Wednesday, as investors snapped up bargains. Share benchmarks were mostly higher, with Hong Kong’s Hang Seng gaining 1.1% and the Shanghai Composite index advancing 0.4%. Japan’s Nikkei 225 jumped 0.7%.
While the new virus appears much less dangerous than SARS, “the most significant Asia risk could lie ahead as the regional peak travel season takes hold, which could multiply the disease diffusion,” said Stephen Innes, chief Asian strategist for AxiCorp. “So, while the risk is returning to the market, the lights might not turn green until we move through the Lunar New Year travel season to better gauge the coronavirus dispersion.”
The 2003 outbreak of Severe Acute Respiratory Syndrome in China, along with cases of a deadly form of bird flu, resulted in widespread quarantine measures in many Chinese cities and in Hong Kong. More than 8,000 people fell sick and just under 800 people died, a mortality rate of under 10%.
While the ordinary flu kills hundreds of thousands of people each year, such new diseases raise alarm due to the uncertainties over how deadly they might be and how they might spread. That’s especially true during the annual mass travel of the Lunar New Year festival, which begins this week.
“The cost to the global economy can be quite staggering in negative GDP terms if this outbreak reaches epidemic proportions as until this week, the market was underestimating the potential of the flu spreading,” Innes said in a report.
In China, health officials stepped up screening for fevers. “We ask the public to avoid crowds and minimize the public gatherings to reduce the possibility of cross infection,” Li Bin, deputy director of the National Health Commission, said Wednesday.
Just as with SARS, though, the impact of the disease is likely to fall heaviest on specific industries, such as hotels and airlines, railways, casinos and other leisure businesses and retailers, analysts said. Most declined Tuesday but rebounded on Wednesday as investors locked in profits ahead of the Lunar New Year holiday. The outbreak is a boon, meanwhile, for pharmaceutical companies and makers of protective masks and other medical gear.
“If the pneumonia couldn’t be contained in the short term, we expect China’s retail sales, tourism, hotel & catering, travel activities likely to be hit, especially in the first and second quarters,” said Ning Zhang of UBS. Government efforts to offset the shock would help, but growth will likely rebound less than earlier forecast, Zhang said.
As of Jan. 17, the World Health Organization had not recommended any international restrictions on travel but urged local authorities to work with the travel industry to help prevent the disease from spreading while warning travellers who fall ill to seek medical attention.
The illness is yet another blow for Hong Kong, whose economy is reeling from months of often violent anti-government protests. The wider concern is China, where the economy grew at a 30-year low 6.1% annual pace in 2019. An interim trade pact between Beijing and Washington had raised hopes that some pressure from tensions between the two biggest economies might ease, and the latest data have showed signs of improved demand for exports.
The virus outbreak raises the risk such optimism might be premature.
“According to our analysis of the spread of the SARS virus, which so far appears very similar to 2019-nCoV (the new virus), we expect increased downward pressure on China’s growth, particularly in the services sector,” Ting Lu and other analysts at Nomura in Hong Kong said in a commentary.
The growing number of global travellers has contributed to the spread of various diseases in recent years, including Middle East respiratory syndrome, the Ebola and Zika viruses, the plague, measles and other highly contagious illnesses.
The World Economic Forum estimates that pandemics — cross-border outbreaks like the flu that killed 50 million people a century ago — have the potential to cause an $570 billion in annual economic losses.
The 2014-16 Ebola virus epidemic caused losses amounting to over $2.2 billion, according to the World Bank. That includes a 40% decrease in the number of working Liberians at the height of the crisis, lower exports and harvests, and costs for combating the disease.
Apart from the human tragedy, such crises gobble up resources needed for other government spending, exacting a harsh toll on the poorest economies. In Africa, the loss of health care workers to Ebola resulted in thousands more deaths of mothers and babies, hindered work on other diseases such as preventing and treating malaria, HIV/AIDS and tuberculosis, reduced vaccination rates and fewer surgeries, the World Bank said in a report.
Many survivors, meanwhile, suffer from lingering effects of the illnesses and the powerful drugs used to save their lives, becoming more vulnerable to hunger and other risks.
At the same time, increasingly sophisticated tools for collecting data and analyzing are aiding efforts to prepare for and cope with severe disease outbreaks.
In 2016, the World Bank set up a $500 million rapid response insurance fund, working with the WHO and insurance companies, to combat pandemics in developing countries. The fund uses “cat bonds,” or catastrophe bonds, whose principal will be lost if the funds are needed to help deal with an outbreak. Private insurers have followed with products of their own meant to hedge against risks from such disasters.
South Korea's economy grew at decade-low pace in 2019 – Aljazeera.com
Sagging exports and global trade tensions pulled South Korea’s annual growth rate last year to its lowest level since 2009, but a surge in government spending may have given the economy a boost in the last three months of 2019.
The slowdown comes as President Moon Jae-in’s administration increases fiscal spending and as the Bank of Korea (BOK) considers further stimulus to shield the economy from a global slowdown.
The gross domestic product (GDP) increased by a seasonally adjusted 1.2 percent in the fourth quarter of 2019 compared with the previous three months, the BOK said on Wednesday.
It was the fastest expansion since the third quarter of 2017 and outperformed the median estimate of 0.8 percent in a survey by Reuters news agency.
“Government spending definitely was a boost as exports was a drag,” said Park Chong-hoon, an economist at Standard Chartered Bank in Seoul. “The prospect for exports is better this year with the US-China signing of the trade deal, and as China continues with its expansionary fiscal policies.”
Robust government spending on public infrastructure combined with better private consumption improved growth in the fourth quarter, but that did little to help exports, which made no contribution to the 1.2 percent expansion.
In the fourth quarter, private consumption increased 0.7 percent from three months earlier while construction investment jumped 6.3 percent.
Exports declined 0.1 percent in volume terms, reflecting the extended slump in shipments, which declined for a 13th consecutive month through December in year-on-year terms.
For the whole of 2019, the economy grew by 2 percent, the slowest pace in 10 years and matching the central bank’s projection.
“Of the 2 percent, the net government contribution to growth came to 1.5 percentage points, the biggest portion since 2009 but that didn’t change the fact that it was a hard year for Korea in terms of exports,” a central bank official said.
In a press briefing held after the GDP data release, another BOK official said the outbreak of a virus from central China has emerged as a fresh risk that could hurt consumer spending.
“With the case of the Middle East Respiratory Syndrome (MERS), people didn’t go out much and travelled less, so spreading of the new virus may shrink consumption in that regard,” Park Yang-su, a director general at the BOK, said in response to a question about the virus.
South Korea in 2015 drew up a supplementary budget to help the economy cope with the effects of the outbreak of the MERS.
The virus in China, originating in the central city of Wuhan at the end of last year, has spread to Beijing, Shanghai and elsewhere, with cases also confirmed in the United States, Thailand, South Korea, Japan and Taiwan.
Nine deaths and 440 cases had been reported as at Wednesday morning in Asia.
Reuters news agency
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