Ezequiel Burgo
08/03/2020 - 7:20
- Clarín.com
- Economy
The two main headlines on the cover of The Wall Street Journal last Friday were, on the one hand, the biggest setback for the US economy since 1921 and, on the other, Amazon's $ 5.2 billion profit and increase in Apple's sales of 11%. The collapse of the US economy and the technology boom occurred at the same time: second quarter of the year. Bubble or one of those trains that runs every hundred years? In the 1920s, Americans' savings went to stocks of startups like Radio America Corporation and General Motors, creating financial wealth and dragging the rest of Wall Street. Is it the same today? Only on Friday Apple capitalized $ 172 billion, a value that exceeds what Nike or Mc Donald's are worth . Nothing more than in one day.
Nobel laureates in economics like Paul Krugman or Robert Shiller wonder if a bubble like the 2008 subprime or the 2000 dotcom is not hatching . Even that Wall Street story of the 1920s did not end well: the appreciation of the dollar made productive investment more expensive and strangled the economy. Shares collapsed and many went bankrupt. It was the worst financial crash of capitalism.
On Friday, the S&P 500 , the most representative index of the real market situation in the United States, recorded a 5.5% gain in July and thus recorded a four-month rhythm of consecutive increases as it had not been recorded since 1998. “The market seems to defy logic, ” Shiller recently wrote. "Every day that passes I convince myself: there is something crazy in this market ," Krugman said Thursday.
Below are reasons why what happens on Wall Street is not a bubble and, others, who think that it is.
In favor
The divorce between the US macro and the market is not such a thing when analyzing what happens in two channels: macroeconomic and microeconomic .
Regarding the first, the Federal Reserve announced in March a drop in rates and then not increase them and thus stimulate the market - the S&P 500 had plummeted 34% between February 19 and March 23. With bond yields close to zero and the dollar globally devaluing, stock prices rose. "Looked at this, the stock market sounds logical," says Krugman.
On the micro side, the strengths and innovation of certain sectors explain the success they have on Wall Street. A report this week from the Goldman Sachs Research Department notes that "The coronavirus has accelerated the adoption of countless technologies, consumptions, and behaviors to drive ecommerce . "
The penetration of ecommerce on the disposable income of consumers in the US is only 16%. It is estimated that it could reach 22% in 2023. In one month, what took three years of work grew, explain Goldman Sachs.
Finally, the bank believes that the market (still) underestimates the growth and earnings of companies like Amazon. He estimates that the action can reach US $ 3,800 . On Friday it closed at $ 3,164. What else do you suggest buying? Walmart, Alibaba, Mercado Libre, Asos, Farfetch .
"We believe this is sustainable and while we expect a decline as the merados reopen, the reality is that many businesses will face difficulties and we will likely see a second wave of increase in the use of ecommerce."
Even so, specialists make a distinction when evaluating the prospects of these companies: those with intensive advertising-based businesses (the Google case that reported a drop in sales on Thursday) versus those that rely more on commerce ( Amazon, Apple). The latter face better prospects.
It's a bubble
Only five companies dominate the Wall Street market: Apple, Alphabet (Google), Amazon, Facebook and Microsoft . All of them made US $ 30,000 million in the last quarter and their shares rose 35% in the year. All together they are worth US $ 6.5 trillion but only represent 1% of the firms surveyed in the S&P 500. According to a FactSet calculation, 52% of the S&P 500 sectors are equivalent to only 17% of the United States GDP. .
Wall Street is definitely not the US economy. And just as in the cover of The Wall Street Journal on Friday, it could be read that Amazon and Apple announced extraordinary profits, that same day the largest oil company in the United States, Exxon, published two consecutive quarters of losses: US $ 1.1 billion. And Chevron $ 8.3 billion.
If there are doubts about the advertising market and Google's perspectives, also about the purchasing power of the American economy and how it will impact commerce.
What will happen, for example, when the stimuli of the Trump administration are removed? Family income in the US increased in the second quarter as a result of the aid. But the weekly payment of $ 600 expired on Friday. According to the University of Chicago, 68% of the unemployed subject to receiving this aid had more money in their pockets than the amount they had stopped receiving from their jobs. What will happen when the fiscal stimuli are withdrawn?
"More than half of the sales of many of these companies are outside the US," says Krugman about technology companies. "Many of the prospects have to do with a recovery in Europe and Asia when what we see is a United States economy. United complicated. We are seeing a hobby in the market. ”
Finally, how much is in vogue on Wall Street? In March alone, the e-trade platform - an app for trading from a mobile phone - opened 260,500 new accounts. A new generation of people invest, buy and sell shares from their homes. They are Generation Robin Hood -Robin Hood is another application to invest in.
Many compare these people who have turned to the market in these months, with online sports betting users. The average age of those who downloaded Robin Hood in recent months is 31 years old . As reported by Bloomberg, the number of user who traded Hertz stock increased by 100,000 in June. Weeks after he declared bankruptcy the stock rose 577%.
Andrés Vilella Weisz, head of the operations table at Conosur Inversiones, explains that “The American market continues to trend upward. After the strong scare in February, the stock indexes recovered the loss but without managing to exceed the maximum prices that they had registered at the time. It would seem coherent to re-weigh the portion of the portfolio dedicated to shares, sell part of the shares that showed strength and buy others that lagged in the recovery. For example evaluating opportunities with the banks that have been the losers in the rebound ”.
Should we invest now in Tech on Wall Street? "The balance sheets have exceeded expectations and would not sell if they were in the portfolio. In case of wanting to buy I would expect a cut, the market always gives an opportunity ” .
As Shiller tells in his latest book, a millionaire told a friend on Wall Street in 1929.
–If anyone can invest in the Stock Market and a shoe shine can predict the future…, the market is undoubtedly overvalued. Bad signal.
To be continue.