Is the U.S. stock market overvalued? Since the March mayhem, the Federal Reserve has been injecting trillions of dollars into the financial markets, resulting in the Nasdaq Composite Index and the S&P 500 touching record highs. Despite millions of people still out of work and the Coronavirus pandemic continuing to impact the world's largest economy, the stock market is booming. Is it justified?
The Buffett Indicator
One of Warren Buffet's favorite measurements of the U.S. stock market valuation suggests it is overvalued. Would you say now is the time to panic?
The Buffett Indicator uses the Wilshire 5000 Index (the total stock market) and divides it by the annual gross domestic product. It has a ratio of 1.7, meaning that the market is 71% overvalued. This is the highest level since before the dot-com crash 20 years ago when the ratio was 1.71.
This does not necessarily mean that the New York Stock Exchange will turn into a blood bath. The market is entirely different from what it was in 2000. For one thing, the U.S. central bank did not have interest rates at historical lows and did not pump trillions of dollars into the equities arena in just a few months. It should also be pointed out that the titans of tech, such as Apple and Amazon, are reporting strong earnings and commendable balance sheets, unlike a Pets.com or Kozmo.
Still, should the Fed tighten its balance sheet and unscrew the training wheels, the market would suffer an enormous crash. Thankfully for investors everywhere, Jerome Powell and Associates will continue to prop up The Street with infusions of easy money, as well as anything else Wall Street executives desire. Perhaps a drink of Tommy Tune with a slice of meringue?
Brother, Can You Spare A Job?
Last week, the number of Americans filing for first-time unemployment benefits fell below one million. This was the lowest reading since the Coronavirus crisis started. The celebrations were short-lived, however, as initial jobless claims moved back above the one million mark.
According to the Department of Labor, initial jobless claims clocked in at 1.106 million in the week ending August 15. The market had forecast about 925,000. Continuing jobless claims hit 14.844 million, and the four-week average, which removes the week-to-week volatility, was around 1.176 million.
Most states reported jumps in unadjusted new claims. California experienced the biggest number of new filings, with more than 200,000. New Jersey witnessed the highest increase, with approximately 11,000. Texas also had a spike of more than 9,000.
All eyes will be on the jobless claims report over the next month or so. Why? The Small Business Association's (SBA) Paycheck Protection Program (PPP) stopped accepting applications on August 8. The PPP initiative has been crucial for small businesses attempting to keep their workers on the payroll through the shutdowns. Without the program, it is unclear if these companies can maintain staffing levels in this economy.
The report comes as the Internal Revenue Service (IRS) forecast that lower levels of employment could persist for many years. The tax-collecting agency predicted that there would be approximately 230 million employee-classified jobs next year, a little more than 37 million fewer than it had projected last year before the public health crisis decimated the robust labor market.
Liquefying Complete?
The hemorrhaging in the financial markets has stopped, investors' risk appetite is fierce, and the central banks are running their printing presses around the clock. When considering these factors, it makes sense that the demand for U.S. dollars has abated in recent weeks, prompting the Federal Reserve to reduce its greenback liquidity operations.
According to the European Central Bank (ECB), the Fed will reduce its currency swap agreements with several major central banks next month. The ECB confirmed that the Eccles Building would slash the number of seven-day swap operations with many of its counterparts, effective September 1, from three per week to one.
It was reported that Fed Chair Jerome Powell would keep the schedule for 84-day tenders at once a week with ECB, Bank of England (BoE), the Bank of Japan (BoJ), and the Swiss National Bank (SNB).
One of the reasons why the U.S. dollar was skyrocketing at the height of the market meltdown was due to soaring global demand for the buck. The problem was that there was not enough supply of the dollar in economies around the world, sending the currency's exchange rate to the moon. The Fed had to reinstate swap lines for the first time since the Great Recession, and now with enough dollar liquidity in the system, investors are calm. But the central banks say they are ready to adapt to market conditions at a moment's notice.
Since the peak in March, the U.S. dollar has cratered roughly 12% against a trade-weighted basket of currencies. Today, the greenback has fallen to its lowest level against the euro since 2018.
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Read more from Andrew Moran.
