Data from trading app Robinhood show that the newest generation of investors is learning fast that you can’t fight the Fed. Millennials’ willingness to snap up beleaguered stocks that will continue to struggle if the economy doesn’t turn around speaks volumes.
The End of the Impenetrable Rally
How much longer can the stock market continue to trade in a parallel universe? Probably not much longer, according to those with experience.
Danny Yong from Dymon Asia summed up what’s coming as he turned toward put options to protect his hedge fund from an impending correction:
The stability in equity markets does not reflect the job losses and insolvencies ahead of us globally. I believe we will see new lows in global equity markets later this year. As March…has shown us, prices cannot diverge from fundamentals for too long.
Even when you take the economy out of the equation, investors have lost sight of the reason they’re buying shares in the first place.
According to FactSet, the last time the S&P 500 was this expensive in terms of price to future earnings was January 2002. That means investors are willing to pay top dollar for shares because they believe those stocks will deliver substantially more in the coming year. That’s not just optimism, it’s naivety.
The market is going to continue to trend higher here. I think the Fed stimulus, central bank stimulus around the world, fiscal stimulus in significant quantities, the prospect of additional stimulus which the market expects is going to take place, and the expectation of therapies and vaccines in the future all basically allow the market to continue on its upward trajectory.
Kraus’ sentiment underscores the fact that investors are essentially suckling on Donald Trump’s teat as Papa Powell continues to print money. What happens when its time to start weaning investors off of all that liquidity?
The stock market is trading on nothing more than momentum and the promise of free money. As long as the Fed and government keep that faucet on, investors can hide from reality. But eventually, the stock market always returns to the fundamentals. Without a V-shaped recovery on the cards—they don’t look pretty.
Disclaimer: This article represents the author’s opinion and should not be considered investment or trading advice from CCN.com.