Soft Economy and Record Share Market - Any Relationship ?

I can't understand the relationship between the economy and the share market at all. Could someone please explain it to me ? Thanks. Maybe there is no relationship at all !!!

It seems that the interest rate is going down, wages don't grow much at all, unemployment is going up, how can the companies make high profit for the record high share market ?

I don't know if my questions make sense, but thanks in advance for the reply

 

IMHO, the idea that the stock market closely reflects what is happening in the real economy is somewhat flawed.

The days when the market represented a chance to share in and finance the growth of companies are long gone.

These days stock prices basically reflect the actions of groups of people taking a punt on what they think may happen in the hope that other people will take similar (or dissimilar) punts and they can collect.

The underlying health of the company or economy is immaterial.

It’s gambling.

Take the recent Uber float.

Yes, the price dropped after the listing. But this is a company that admits to having no path to profitability, and which is burning through billions.

Its shares should be worth nothing.

In Austalia, and the US, the economy is doing well.

But as well as the markets would have us believe?

No.

In a few months or years the market will plunge. Not because the economy has failed, but becUse their bets haven’t paid off.

Look what happened during the ‘GFC’. The problem wasn’t economies going bad, it was greedy gamblers getting too greedy.

And then getting bailed out.

 

Have a read of Big ERN's blog about the stock market and the economy.

How much of a Random Walk is the Stock Market?

Joined at the hip: The Macroeconomy and the Stock Market

 

It's markets within markets and some companies are just very good at making money. ASX200 components in particular. From chart below 81% of the ASX200 are in a Satisfactory to Healthy position.

( does anyone have figures on what proportion of the ASX200 is as a % of the overall ASX...? )

Source: The ASX sectors that are set for the biggest growth, in charts - Lincoln Indicators






It's not so much gambling if you are investing on sound prospects of earnings growth, particularly in companies in ASX200 and above.

The trick is finding the companies that will continue to grow their earnings at a sustainable rate, because what you ideally want is earnings compunding at a rate that beats inflation. Income-focused LICs and some ETFs make that a bit easier because you don't need to do the stock-picking for yourself. If you can then have dividend income compounding at a rate that beats inflation then you are onto a winner.

 

Companies don't magically just produce instant income. Some high yielding companies might. But savvy investors invest with a longer time frame minimum 5 years current economic conditions are irrelevant. Economies always will and always have fluctuated a down turn is a good time to invest to capitalize on the good times. Products that improve efficiency competitiveness and cut costs such as computer software or even RWC pipe fittings should do even better in tough times. Investing in sound well ran companies is not gambling, not taking positions is a sure way to miss out and gambling on whether you have enough income to meet you wants and needs.

 

I been in the market for a while, only 2 things affect the market the most that is interest rate and inflation, when market expect lower interest rate environment it boom, and when it expect high inflation that mean higher rate in the pipe line it declines.

Also interest rate is one of the key bench mark to share valuation.

Watch the market takes off as we approach zero rate

Little known facts, bull market born in recession and end in a boom
so when US rate start to kick in again US market bull will be over and end in boom time
until then the bull will rage on, the lower the rate the longer the bull stay around.
Did you see the market reaction last December when the Fed hikes rate for the second time, kaboom crashed, then they have to come out in Jan and assure the market no we ain't raising any more rate, the next rate we touch is more likely down and the market love it and they party on.

Even Buffett himself admit if rate staying at zero share market still cheap, that because the man use risk free rate as his bench mark for calculation of stock valuation.
A business earning some money is hell a lot cheaper than cash sit in the banks earns no money

I am fully invest in the market as off 2 months ago expecting lower rate driving the bull market, I shall exist when rate direction change for the worse until then people with money don't have much choice but to put money in the market for yield

 

PS: Market bake in RBA to cut rate next Tuesday, if they do that send the market the confirmation signal it need to power on with lower rate and get onboard, if RBA doesn't cut rate oh dear, the party will be cut short

 

Spot on PandS!
Money always finds its way towards yield. Higher the yield higher the risk. With cash yields at historic lows, conservative money is going into bonds and aggressive money into stocks. Both are at all time highs. Low interest rates are here to stay - they say. Interesting times ahead!

 

I have also been quite mystified by this over the last 6 months or so... I'm old enough to remember the early 90's bank crash. By all rights we should be close to a similar situation, yet share prices are not representative.

For instance I work for a company that has near 80x P/E ratio, and while forecasts are good, they are nowhere that good.. every single duck would have to align over the next few years to justify those valuations.

We are very close to being in a recession, yet share prices do not reflect this. Unemployment is supposedly low,.but I don't think those figures really represent the modern workforce.

My only concession is that there are now too many below the age of 50 making the day to day trades that have little idea of past conditions vs spotting past conditions in present circumstances. Also dividend yield is very attractive compared with bank returns, so it seems, f the growth, just as long the dividends remain high?

Based on forward looking estimates, we reached the bottom a few months ago and good times are immediately ahead... I am very much not convinced.

May you live in interesting times!

 

Aren’t the top company’s in the asx P/E ratios loaded. Do they keep rising cause people have no where else to put their money?
Eg syd airport is at a pe of 42, tcl P/E ratio of 71 and so on and so on.

 

Thats right, the rise is simply due to lack of other avenues. Retail money hardly has the power to change market direction - they just either play along or scalp a few pips. Its mostly the institutional money that defines the direction and they are the ones who call the top. Until then markets will keep heading in the direction they feel will provide best results for them.

Personally, I think the markets have a long way to go up. The last decade has been fuelled by QE and I dont see tightening being possible in the short term. QT will be the turning point. Credit is the game.

Just for fun, my prediction is for All Ords touching 7350 at least!

 

I cant argue the market is cheap but you cant argue that people need to get yield for a living so what do they do? some will do nothing and find safety in deposit other will put money in the market and professional cant sit on the side line with low rate because they all know low rate drive the market so they pilled in

All the time I am in the market that what I know, market response to rate and inflation very strongly other factors play a part of course the economy and individual company
but a strong market usually lift all boats so the bad companies wont be hit as bad and the good one get more reward, speculating companies with rosiest promise and outlook get even crazier.

you can go back a few weeks and look at when RBA minutes said they are dovish on rate and look at the market just after the notes, it took off. Market takes that as a cue for rate cut, they need next Tuesday confirmation for the next leg

You can say the same for the US market no one argue it cheap, but if the rate next move is lower it will power the DOW to 28000 and S&P to 2900 purely due to cheap money.

Trades and Tariff will briefly interrupt the party and the market will adjust and price in for tariff but it always resume when rate are at record low, only thing that can permanently dent it is higher rate.

Here is one of the great investors tell you what cheap rate do to the market.
Imagine what 1 or zero rate is like instead of 3%
And Warren Buffett the biggest beast of them all said the same a few weeks ago in the US

Warren Buffett says stocks are 'ridiculously cheap' if interest rates stay at these levels

"If long-term risk-free rates are at 3 per cent, then you could run that through financial models, and most models would say equities will be higher than they are today," Mr Douglass told the annual Morningstar investment conference in Sydney on Thursday.

“However, if rates revert back to historic levels of 5 per cent, then equity markets are overvalued at the moment. The most likely answer is somewhere in between. It’s a very important question,”

Using current levels of interest rates, equity markets looked very cheap, he said. However, “because [risk-free rates] are so distorted by monetary policy around the world at the moment, then you can’t use them as the reference rate [now]".

Low rates an untrustworthy markets gauge: Douglass

so all in all you just have to go with the flow cos doing nothing can be costly in a low rate environment.

Also PE is not a good way to measure a business valuation, it is a good glance but there are more accurate way to judge business valuation and risk-free rate is one key component

 

This weak economy stuff is a beat up imho. What we are seeing is a useful rebase in property prices which had run far too hard.

Unemployment is at 5.2% in May, was 4.9% in February which was the lowest in 8 years!
Inflation is low, wages growth matching inflation, interest rates are low.

Business conditions are quite good, best I have seen in a long time and seeing more activity on the purchasing side post election. We are still recruiting locally and good candidates are not in sufficient supply.

Put that aside a countries stock market is not a good proxy for its economic growth, just a piece of the picture.

With regards to recession / stock market some may find this interesting ;

Stock Performance Before, During & After Recessions - A Wealth of Common Sense

 

Curious how you reconcile this view with your investing style? Active trading strategies affect prices at the margin, but fundamentals drive markets imho. If this was not the case indexing would not work, as stock investing would be zero sum.

I’ll see your Uber and raise you Poseidon. This sort of punting is human nature and has always been there.

 

@sfdoddsy short term the market is a voting Machine, long term it is a weighting machine
Famous word from Ben Graham so many decades ago and still hold true today and into the future.

Long term stock price will always reflect in its fundamental business, the higher the business can generate the return for its capital the more valuable it becomes long term and the market will price it correctly, that the weighting machine

Short term, greed, fears, emotions also play out in the price of the business and that is the function of the voting machine but this will reverse to weighting machine over a longer period of time.

Take CBA for instance it float around $5-$6 bucks, it go through period of low high over price
But its earning each year tick up and its price reflect that new based price for the business and never go back to the old price unless its earning doesn’t grow or went backward, if it keep its return above its peers and its earning keep growing every year the share will go higher and stay high in the next clip of the price range.

Obviously during that time it can run hard and way over price compared to its fundamental due to fears and greed or it can go a lot lower but eventually it resume a normal course and track reflecting its under lying earning.

Another classic Telstra it floats in various trench from 2ish to 5ish and it run hard during dot com
All the way to $9 bucks but its fundamental doesn’t reflect that it worth $9 bucks and over the year price decline to reflect its value and again it go through period of low and high.

Same for CSL it never trades at its float price and now many times over it float price and it for good reason it has strong fundamental great earning power, it will never ever go back to that Price doesn’t matter what happen on the planet because the business he becomes a super business and can’t never shrink or that size again.

Woolies a great business but there was a time in its life time it gone kaput and required recapitalisation, in stock market that mean you gone dead and got resurrected.
Existing shareholder pretty much close to get wipe out new set of owner with new capital came in, new management in place and it went on to becomes one of our great business and even greater than before, never trades at recap price ever again and keep moving onward and upward due to incredible earning power.


Ubers the like it all short term voting Machines and people still believe its prospect of
Making a profit and dominate the market
Give it 5 or 10 years and it keeps bleeding money the weighting machine will applied to it.

Amazon losing money for years and kaboom it discovered its mojo in cloud computing and becomes one of the world largest business
Luck or good planning who knows but price now reflects its earning power.

Apple near dead and with the help of Microsoft 150m injections turn it into one of be world most valuable companies can it go back to sub $10 before Microsoft injection? Not a chance in hell because price now reflect its fundamentals

I can give another 100 examples

Long term weighting machine at work

 

I agree with the voting and weighing concept, but to simplify the market that much is like saying the four fundamental laws of physics can be united with the statement, apples fall down from trees.

The market has many forces in play, which are too complex to model. As soon as someone does model it and act the market will change again.

Never say never.

 

Welcome to a week in of cheap money and the rise and rise of the ASX