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.
Coronavirus outbreak will hit Singapore's economy this year: trade minister – TheChronicleHerald.ca
SINGAPORE (Reuters) – Singapore said on Monday that the coronavirus outbreak will hurt its economy this year, as it announced new measures to tackle the disease which originated in China and has spread to the city-state and several other countries.
The Southeast Asian travel and tourism hub, which recorded its lowest growth rate in a decade last year at 0.7%, has reported four cases of the coronavirus that has killed 80 people in China so far.
“We certainly expect there to be an impact on our economy, business and consumer confidence this year especially as the situation is expected to persist for some time,” trade minister Chan Chun Sing said.
The government is considering support measures for hard-hit sectors like tourism which could include property tax, rebates and worker levy cuts, he added.
Chinese nationals make up the largest share of visitors to Singapore, one of the worst hit countries outside of China in the 2003 outbreak of Severe Acute Respiratory Syndrome (SARS) which killed 800 people globally.
Singapore is currently forecasting growth in a wide range of 0.5-2.5% this year.
Chan is part of a government taskforce set up to tackle the coronavirus spread in Singapore.
The taskforce also announced a raft of new measures on Monday to halt the spread of the virus, including urging all school students and staff with a recent travel history to China to stay at home for a fortnight. Families in Singapore, many of which are ethnically Chinese and have relatives in mainland China, are currently traveling for Lunar New Year holidays.
It also issued a new advisory for travelers to defer all non-essential travel to mainland China and said it will start temperature screening all inbound flights to Singapore.
The death toll in China from the coronavirus grew to 80 on Monday as residents of the Hubei province, where the disease originated, were banned from entering Hong Kong amid global efforts to halt the rapid spread of the outbreak.
The virus has so far spread to more than 10 countries including the United States, Japan and France.
(Reporting by Aradhana Aravindan; Writing by John Geddie; Editing by Tom Hogue & Shri Navaratnam)
Nobel Prize-winning economist Robert Shiller explains how compelling stories are what really shape our economy — from bitcoin to Trump's presidency – Business Insider UK
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How the new coronavirus could send shockwaves through the world economy – Global News
An international outbreak of respiratory illness sparked by a novel coronavirus has spread from its origins in central China to at least 11 countries, with more than 1,200 confirmed cases — including a presumed case in Canada — and over 40 deaths.
Like previous outbreaks, including the SARS virus 17 years ago, the flu-like disease poses a risk to economies around the world as fear and confusion lead to abrupt changes in behaviour, decreased economic activity and a ripple effect across sectors that threatens everything from productivity to consumer prices.
The Severe Acute Respiratory Syndrome pandemic of 2003 cost the Chinese economy up to US$20 billion, according to the Asian Development Bank, as travel warnings and transit shutdowns discouraged consumption, foreign tourists stayed away and local residents stopped going out.
Coronavirus outbreak: London’s Lunar New Year celebrations overshadowed by virus fears
“The travel and tourism sectors were most obviously hit, although that ripples through the entire economy,” said Richard Smith, a professor of health economics at the University of Exeter Medical School.
“But many effects are short-lived during an outbreak as once the panic is over people go back to business as usual.”
Chinese authorities clamped down on mass transit during the SARS outbreak, hampering commutes, shopping runs and social outings. The national securities regulatory commission closed stock and futures markets in Shanghai and Shenzhen for two weeks to prevent viral transmission. And Beijing ordered movie theatres, internet cafes and other venues to shut down temporarily while hotels, conference centres, restaurants and galleries saw visitors almost disappear completely.
China’s response to the current crisis appears to be swifter, and the disease less virulent, but the country now boasts a far more extensive high-speed rail network than it did in 2003, and its economy is six times larger, upping the risk of transmission and the repercussions of an epidemic.
“China is the engine of the global economy, churning out goods,” said German health economist Fred Roeder.
Its critical role in international shipping may be thrown into disarray as authorities begin to hold back some ships from entering the port at Wuhan, a key hub on the Yangtze River.
“If they cannot leave it creates huge delays in the supply chain and value chain of businesses all across the world,” Roeder said. “It could actually hit the latest generation of smartphone if ports are shutting down.”
Manufacturing could also feel the crunch as supply chains stall, he said.
Roeder has felt firsthand the disruptive power of a pandemic. In the summer of 2003 the teenage Berliner was eagerly gearing up for a United Nations youth conference that would take him to Taipei, but the event was cancelled a few days beforehand due to SARS.
The epidemic also sparked layoffs and time away from work. At one point Singapore Airlines asked its 6,600 cabin crew to take unpaid leave. Children stayed home from school, prompting more parents to shirk their job duties and further reducing productivity, said AltaCorp Capital analyst Chris Murray.
“I was losing guys left, right and centre as people were quarantined,” recalled Murray, based in Toronto — the epicentre of the SARS pandemic outside of Asia. The disease infected 438 Canadians in total and caused 44 deaths in the Toronto area.
How airports are screening for the coronavirus
The economic damage culminated with World Health Organization’s one-week travel advisory for the city in April 2003, costing the Canadian economy an estimated $5.25 billion that year.
The outbreak of H1N1, or swine flu, in 2009 also sparked work “dislocations,” Murray said. “It went from, `Maybe it’ll be okay,’ to sheer panic.”
Is Canada doing enough to protect Canadians from the coronavirus outbreak?
Freelancers and gig economy workers such as musicians or ride-hail drivers may feel the pinch more acutely, since they can’t rely on a steady wage when demand shrinks.
“It’s something that unfortunately has happened before in a similar way and it tends to affect areas like retail,” said Carolyn Wilkins, senior deputy governor of the Bank of Canada, said this week.
“People don’t go out, they don’t fly in planes, they don’t do as much tourism to the affected areas,” she said.
The fallout makes workers ranging from servers to wholesale bakers to non-unionized hotel staff more vulnerable. Meanwhile spending or investment plans by larger companies may have to be delayed, said Roeder.
New coronavirus’ ability to spread getting stronger say Chinese officials
It is not clear how lethal the new coronavirus is or even whether it is as dangerous as the ordinary flu, which kills about 3,500 people every year in Canada alone.
“Still, we should be extremely worried about the economic effects of this,” Roeder said, calling on Chinese authorities to work transparently with Western governments and disease control experts to mitigate the crisis.
“At the end of the day, it hits the entire economy. No one benefits from this.”
© 2020 The Canadian Press
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