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The stock market has never been this big relative to the economy, signaling it could be overvalued – CNBC

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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.

Shiller’s measure

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.

— With reporting from CNBC’s Nate Rattner and Michael Bloom.

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North Korea tells UN it will focus on economy now that it has ‘effective war deterrent’ – Global News

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An earthquake struck off the coast of Taiwan on Wednesday, swaying buildings in Taipei, the capital.

Taiwan’s Central Weather Bureau said the magnitude 5.9 quake struck at a depth of 106 kilometres (66 miles).

There were no immediate reports of damage or casualties.

An Associated Press journalist said the office building where the AP bureau is in Taipei swung slightly for about 10 to 15 seconds.






1:53
Residents survey damage after strong earthquake hits the Philippines


Residents survey damage after strong earthquake hits the Philippines

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© 2020 The Canadian Press

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U.S. housing market to remain a bright spot in a weak economy

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By Hari Kishan and Richa Rebello

BENGALURU (Reuters) – U.S. house prices will continue to surge well into next year and beyond, outpacing inflation and the overall economy, a Reuters poll of property analysts found, making it a bright spot against an otherwise gloomy economic backdrop.

In a stark reversal, the U.S. housing market – at the epicenter of the global financial crisis more than a decade ago – was expected to extend a helping hand to an economy severely battered by the coronavirus pandemic.

Buoyed by record-low interest rates and strong pent-up demand from a segment of the workforce largely unaffected by pandemic-induced job cuts, house prices will continue to rise over the next two years, the Sept. 15-29 poll of over 40 analysts showed.

U.S. house prices were predicted to rise 4.0% this year and by an average 3.5% in 2021 and 2022. That suggests the trend since 2013 of house price rises outpacing consumer inflation would continue for the next three years at least, according to current inflation expectations.

Underscoring the view that the latest data showing a surge in house prices was not just a blip, over 60% of analysts, or 24 of 39 who responded to an additional question, said that trend would continue to hold for at least another year. The remaining 15 said less than a year.

“Three factors support relatively high home prices – undersupply after a decade of underbuilding, single-family housing attractiveness in a socially distancing world, and most importantly low interest rates,” said Nathaniel Karp, chief U.S. economist at BBVA.

“However, economic uncertainty remains elevated and the recovery after the pandemic could take time, which are the risks to the current valuations.”

U.S. house prices outlook: https://fingfx.thomsonreuters.com/gfx/polling/xlbvgjmgepq/Reuters%20Poll-U.S.%20house%20prices%20outlook.PNG

Already tight inventory levels have been squeezed to record lows after construction activity came to a grinding halt because of the coronavirus pandemic, and with no policy relief expected, home buyers may outbid each other and crank up prices.

Existing home sales reached a seasonally adjusted annual rate of 6 million units in August, the highest since the tail end of the previous housing boom in 2006, and were expected to average around 5.5 million units in the coming year.

“A surge in demand has put further strain on an already tight inventory. The latest supply of existing homes dropped below three months (of inventory) for the first time since records began in 1982, and that implies sales will ease back toward the end of the year,” said Matthew Pointon, property economist at Capital Economics.

When asked to rate the affordability on a scale of 1 to 10, with 1 as extremely cheap and 10 as very expensive, the poll gave a median of 7, up from 6 in the previous poll when predictions were for house prices to rise at a slower pace than currently expected.

“U.S. home prices are not yet at a level that is concerning,” said Matthew Gardner, chief economist at Windermere Real Estate. “That said, we need significant growth in the number of new homes built to meet current demand. If more units are not provided, we could see unsustainable upward price pressure in the resale market.”

(Reporting by Hari Kishan; Additional reporting and polling by Richa Rebello and Tushar Goenka; Editing by Ross Finley and Andrea Ricci)

Source:- Reuters poll – TheChronicleHerald.ca

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Economy

U.S. housing market to remain a bright spot in a weak economy – TheChronicleHerald.ca

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By Hari Kishan and Richa Rebello

BENGALURU (Reuters) – U.S. house prices will continue to surge well into next year and beyond, outpacing inflation and the overall economy, a Reuters poll of property analysts found, making it a bright spot against an otherwise gloomy economic backdrop.

In a stark reversal, the U.S. housing market – at the epicenter of the global financial crisis more than a decade ago – was expected to extend a helping hand to an economy severely battered by the coronavirus pandemic.

Buoyed by record-low interest rates and strong pent-up demand from a segment of the workforce largely unaffected by pandemic-induced job cuts, house prices will continue to rise over the next two years, the Sept. 15-29 poll of over 40 analysts showed.

U.S. house prices were predicted to rise 4.0% this year and by an average 3.5% in 2021 and 2022. That suggests the trend since 2013 of house price rises outpacing consumer inflation would continue for the next three years at least, according to current inflation expectations. [ECILT/US]

Underscoring the view that the latest data showing a surge in house prices was not just a blip, over 60% of analysts, or 24 of 39 who responded to an additional question, said that trend would continue to hold for at least another year. The remaining 15 said less than a year.

“Three factors support relatively high home prices – undersupply after a decade of underbuilding, single-family housing attractiveness in a socially distancing world, and most importantly low interest rates,” said Nathaniel Karp, chief U.S. economist at BBVA.

“However, economic uncertainty remains elevated and the recovery after the pandemic could take time, which are the risks to the current valuations.”

U.S. house prices outlook: https://fingfx.thomsonreuters.com/gfx/polling/xlbvgjmgepq/Reuters%20Poll-U.S.%20house%20prices%20outlook.PNG

Already tight inventory levels have been squeezed to record lows after construction activity came to a grinding halt because of the coronavirus pandemic, and with no policy relief expected, home buyers may outbid each other and crank up prices.

Existing home sales reached a seasonally adjusted annual rate of 6 million units in August, the highest since the tail end of the previous housing boom in 2006, and were expected to average around 5.5 million units in the coming year.

“A surge in demand has put further strain on an already tight inventory. The latest supply of existing homes dropped below three months (of inventory) for the first time since records began in 1982, and that implies sales will ease back toward the end of the year,” said Matthew Pointon, property economist at Capital Economics.

When asked to rate the affordability on a scale of 1 to 10, with 1 as extremely cheap and 10 as very expensive, the poll gave a median of 7, up from 6 in the previous poll when predictions were for house prices to rise at a slower pace than currently expected.

“U.S. home prices are not yet at a level that is concerning,” said Matthew Gardner, chief economist at Windermere Real Estate. “That said, we need significant growth in the number of new homes built to meet current demand. If more units are not provided, we could see unsustainable upward price pressure in the resale market.”

(Reporting by Hari Kishan; Additional reporting and polling by Richa Rebello and Tushar Goenka; Editing by Ross Finley and Andrea Ricci)

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