Can We Trust Mr. Market’s Booming Economic Outlook?

Economic, Can We Trust Mr. Market’s Booming Economic Outlook?

Let that sink in. After an assumed 30% growth rate in 2021, the market assumes earnings will grow 2.5% faster than in the seven years before COVID.

Who Is Lying?

Is the market correct in pricing in more robust economic growth than was witnessed during the last expansion?

Should investors consider historical data showing that economic growth will likely be slower than during the prior expansion?

Might Mr. Market be lying?

The problem in answering the question is there are many other factors affecting stock prices. Below are a few influencers that cloud reality and potentially provide fodder for even more precious equity valuations and higher prices.

  • Continuation of unprecedented monetary and fiscal policy
  • Potential for the Fed to buy stocks (they buy corporate debt already)
  • Passive investors do not care about fundamentals or valuations.

Summary

**PRESIDENT TRUMP SAID U.S. IS IN MIDST OF AN ECONOMIC BOOM, LOOK AT NASDAQ

Yes, Mr. President, the NASDAQ implies the economy should be booming. Facts, however, tell us something vastly different.

Further, and often disregarded, is the fact that the economy was not organically strong before the pandemic hit. Swift monetary and fiscal actions boosted economic activity and provided significant liquidity to markets. Yet, at the same time, they handicap future economic activity.

As a result of factors other than earnings and the economy, stock prices are at record highs. The implication is that the basis for owning stocks, earnings, have failed to keep up with stock prices. Worse, it is highly unlikely earnings will meet the market’s lofty implied expectations.  

Should we believe Tony? Or should we ask the right questions like his daughter Meadow?

In February and March, the 34% selloff offered a painful reminder and glimpse of the consequences for ignoring the truth.

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