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Kempen's Commentary: Have the stock markets gone wild?

12 June 2020


Have the stock markets gone wild?

As I write this, Christine Lagarde is having another press conference. The ECB has just surpassed market expectations, which doesn’t happen too often. The Pandemic Emergency Purchase Program will be expanded (from € 750 billion to € 1,350 billion) and extended (at least until July 2021). The amounts don’t even reel our heads anymore. And the profits from the purchased bonds will continue to be reinvested until at least the end of 2022.

At the same time, I’m reading all kinds of articles and comments by authors who are amazed by the strong recovery of the stock markets. Compared to the low point in March, the loss is already made up again for three quarters. All this despite the deepest recession since the 1930s and the highest unemployment rates in the US. Many commentators think that stock markets underestimate the magnitude of the economic pain and anticipate a far too bright recovery. In their opinion, markets are too positive about the rapid development of a coronavirus vaccine.

Yet there is more to it. If we take a closer look at individual stocks, we see that the stock exchange does distinguish between companies and the damage that has been done to business models. For example, the sector index of airlines is still far from recovered. Which seems right as Air France-KLM, that was worth about € 4 billion before the corona crisis, was supported with approximately € 10 billion by the French and Dutch governments. However, airlines are not very important in the well-known indices. The well-known Big Tech shares are. Northern Trust calculations show that only five stocks (Microsoft, Apple, Amazon, Alphabet and Facebook) accounted for more than 20% of the recovery of the S&P 500 index. Their business models may suffer somewhat from declining advertising revenues, but they also benefit from the enormous growth of cloud services, for example.

Low interest rates also support stock markets. Before COVID-19, interest rates were already down to zero in the eurozone, in Japan and in Switzerland. The same is happening in the United States and the United Kingdom now. Companies can borrow at even lower rates and investors are looking - even more than before - for profits. And central banks indicate that interest rates will remain at this level for years to come.

We know that stock markets are looking ahead. Assuming next year’s profitability, and at the same time correcting declining interest rates, stocks are currently not expensive. There are, of course, plenty of reasons to carefully position a portfolio now. But stock markets have certainly not gone wild.



The author

Michel Iglesias del Sol

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