RPT-COLUMN-Boom or Wall Street bubble? Don’t Blame It All On The Fed: Jamie McGeever

[ad_1]

(Repeat to a larger audience without modifying the text)

Aug 26 (Reuters) – Wall Street hits new all-time high, just as Fed symposium in Jackson Hole set to tackle wealth inequality and central bank role in asset price inflation is again under scrutiny.

There’s no denying that trillions of dollars in asset purchases and years of official zero- and 10-year bond interest rates just above 1% have inflated stock prices.

But the importance of the Fed’s actions is overstated.

The tech makeup of Wall Street, which benefits more from low interest rates and stronger economic growth, is fueling the surge in US stocks. And the significant expansion of the Fed’s balance sheet is nowhere near comparable to that of the European Central Bank or the Bank of Japan.

Look no further than Wall Street: The S&P 500 has more than doubled from its COVID low in March last year, hitting 51 records this year.

According to Ryan Detrick, chief market strategist at LPL Financial in Charlotte, North Carolina, only 1964 and 1995 had recorded more than 50 new highs by the end of August. He estimates that the S&P 500 could reach 78 new highs this year, eclipsing the all-time high of 77 set in 1995.

Based on a 12-month earnings assessment, the S&P 500 earlier this year was its most expensive since 1999, just before the tech bubble burst. This price / earnings ratio has since declined. But he’s still above 20, which is uncharted territory for most of the past two decades.

Official interest rates and ultra-low benchmark bond yields make investing in profitable, cash-generating companies an attractive proposition. For some investors desperate for yield, riskier stocks are a given.

Many argue that there is a natural consequence of the doubling of the size of its balance sheet to $ 8.3 trillion since the pandemic outbreak.

As a percentage of GDP, it is now around 40%.

With stocks and other financial assets mostly in the hands of better-off corporations, critics say U.S. monetary policy is widening the gap between rich and poor and directly exacerbating wealth inequalities.

The world’s second and third largest central banks, meanwhile, have also stepped up their purchases of pandemic-fighting assets. Their balance sheets, as a percentage of GDP, are much larger than those of the Fed. Yet the stock markets and valuations of the euro zone and Japan are nowhere near as high.

The common narrative centers on the Fed, and if everyone believes it, then it’s self-reinforcing, said Meb Faber, co-founder and chief investment officer at Cambria Investments in El Segundo, Calif.

But there is a limit to how far you can extrapolate that.

The ECB has raised its balance sheet to $ 9.5 trillion since the start of the pandemic. The ECB’s balance sheet now represents more than 60% of the euro area’s GDP.

Likewise, the Bank of Japan has increased its balance sheet by $ 1.4 trillion since March 2020 to $ 6.6 trillion, or about 120 percent of GDP.

Still, the Euro Stoxx 50 has only risen about 65% from the COVID low, and is still 23% below its March 2000 record high. 12 months of euro stock is around 16.

Japans Topix is ​​up 55% from COVID low and has a forward multiple of around 13.

Both numbers, again, are significantly lower than their US counterparts, suggesting that factors other than central bank largesse are behind the Wall Street push.

On the one hand, the US stock market is much more technological and digital than its global peers.

A zero interest rate world disproportionately benefits tech companies, as a low discount rate inflates future cash flows for companies where cutting edge innovation is likely to fuel faster growth. By all accounts, FAANG’s big five tech stocks – Facebook, Amazon, Apple, Netflix, and Google – dominate Wall Street. They have risen more than three times the S&P 500 in the past five years, and their market capitalization of $ 7 trillion represents 21% of the overall index.

Another is good old-fashioned economic growth.

Some of the more optimistic US forecasts have been revised down recently, but the International Monetary Fund expects GDP growth of 7.0% in the United States this year, 4.6% in the euro area and only 2.8% in Japan.

On top of that, Corporate America is doing well.

LPL Financials Detrick notes that about 85% of S&P 500 companies posted higher profits in the second quarter. And consensus estimates for 2021 earnings per share are a 43% jump from a year ago.

The Fed’s safety net helps explain why people are willing to pay higher multiples. But higher incomes are higher incomes, and that justifies a lot. Investors always see better opportunities in the United States and are prepared to pay that premium, he said.

By Jamie McGeever; Editing by Edward Tobin

[ad_2]