The REAL Reasons Behind The Stock Market Rally

Hi guys, Eddie here. Happy Saturday. Today we're going to be discussing the real reasons for the stock market rally, and this is as a response of, you know, me getting loads of questions. You know, you know, the economy is meant to be in such a bad shape as a result of the coronavirus. We're seeing huge amounts of riots in the streets. Obviously this worldwide pandemic that shut down every major global economy in the world, millions are unemployed, and yet markets are approaching, uh, the highest levels ever with the NASDAQ making all-time highs. You know, when the stock market is booming, we're meant to think the economy is booming, but what, what is the stock market measuring if the economy is in such a bad shape? Does this stock market really reflect reality when the world's up in flames. So today we're going to be discussing some of the economic indicators, but also the real reason at the end of the video why I believe that, you know, stock markets are rallying at a time of unprecedented— my favorite word— economic crises and civil unrest that is, you know, destroying the streets of America. We're seeing it in London, in why is the market so bullish about the future prospects and why have we seen such a rapid recovery in markets, actually not the economy. So to put it into perspective, as you can see by this chart, this is the US GDP and this shrank by 5% in the first quarter of 2020. And this is the biggest drop in GDP since the last quarter of 2008, as basically the coronavirus obviously forced several states to impose lockdowns in mid-March, and this obviously led to mass unemployment in the United States. So what is GDP? It's a key economic indicator of activity, and this is the Atlanta Fed GDPNow basically model, and this is measuring obviously the total output of the economy as a result of traditional economic theory. And this is now suggesting that we're going to see -53.8%, uh, annualized GDP. Um, so this is obviously a horrendous figure, and obviously there's talks of whether you should annualize a figure, um, just because if we are pricing in that V-shaped recovery in the economy, then we're unlikely to see a number this bad. But this is what a federal model from the Fed of Atlanta is actually suggesting, which is obviously diabolical. Obviously, we saw the jobs report, which was a complete surprise. So we saw 25 million jobs created in America in May, and the forecast was for a loss of -7 million by most Wall Street economists. And those predicting the figure. But really, obviously, Trump came out, it's like jobs, jobs, jobs, you know, I'm the best, the stock market's rallying, the job situation's amazing, we created 25 million jobs in the economy in light of this pandemic and everything else going on. But this chart really suggests the reality of it, and millions of people are still out of work. And just because we, you know, lost we made— sorry, created 25 million jobs in the month of May. This does not— this is not representative of the real damage of the economy. And this chart suggests this. More than 40 million people have filed for unemployment benefits as a result of this. And as we can see over a longer time frame, average hourly wages have really not kept up with inflation. And they've really done nothing. So the average person is not benefiting from their wages going up. And then if you overlaid the stock market to this, there would be a huge disparity between what the average person is really making in terms of their net worth, their wages and things like that, and actually how the stock market has just been booming. So the kind of upward figure you see in the chart. And this is really the quite worrying, quite sad thing about this chart is you think, oh, wow, wages are going up incredibly just recently. But what this actually is, is removing the lowest paid jobs from the economy as a result of the coronavirus. I think retail, leisure, the casinos, hotels, all those really— I don't want to say unskilled labor, but those that maybe do not require a university degree have actually been removed from this figure. So then you see the average hourly wage go up dramatically. So this obviously is showing that the people that actually suffered the most from the coronavirus, they're not the tech developers at Amazon, they're not the CFOs. These are the people that are earning minimum wage or something like that. They were unable to work, fueling this kind of bad feeling of raising and rising inequality in America. But the Dow has surged since the March recovery, and obviously this is feeding equity holders. The unemployment rate, 14.7%, was a reading in April, and May was 13.3%. And while people may be celebrating in light of all these riots in response to George Floyd's murder by the policeman. You know, people were celebrating this, but actually the racial disparities remain. Um, Black unemployment has remained virtually unchanged, um, and this has actually increased, uh, in May while the unemployment, uh, figure went down. 19.6 million jobs are still gone. Obviously, 2.5 million jobs coming back, that's not insignificant, but March and April saw 1.4 million and 20.7 million decreases in employment retrospectively. So that means that 19.6 million have still not come back into work. Hospitality and leisure jobs gained 1.2 million, but there's still a 35% jobless rate. And the unemployment rate, whatever you think about that figure that came out creating 25 million jobs, took so many people by surprise. You know, there's something fishy going on there, whatever it is. And the unemployment rate is, in my opinion, definitely higher than it appears. Jobless claims probably are understating the true level of job losses. They don't include pandemic unemployment assistance, and they don't include the mass numbers of workers that were forced to retire. The African-American economic gap remains despite the US expansion. This is the kind of argument— how can senators in America who have a median net worth of around $1.76 million empathize with the struggles of everyday people that have a median net worth of $97,000? And this is a net worth figure, not a salary. Okay, so this is what, you know, the total assets of people are. So how is it even possible for them to basically suggest and kind of empathize with people if their income and their net worth is so much higher? So how can you make money in the stock market? So this is flipping from the economics to the stock market. So you can make money by investing in an equity either by capital appreciation or dividends. Dividends are essentially this fixed income stream that gets paid out by companies to equity holders, and this may attract more equity investors into this company, thus fueling even more capital appreciation. So what is this capital appreciation? It's essentially when a stock market— when a stock price goes up, the stock market goes up. This is the prospect of the business growing, generating more earnings, and the share price increasing. So perhaps you can sell this stock to another buyer at a higher price. And this is why private companies go public for this more— you know, this greater access to capital. And companies realize this, you know, in 1940s or '50s that you can grow a lot faster with outside investments. And this is why these companies have started to go public. And this is what we're seeing now is software companies surpassing expectations in terms of their IPOs and things like that. And this really is a beauty contest. So what's the difference between exchanges and indices, you may ask, from a stock market? London Stock Exchange, New York Stock Exchange, The stock index is a gauge essentially to read the whole market of a— or sector. The stock exchange is where you buy and sell stocks, bonds, and other securities that are listed on various exchanges. So what is— what are these indices? These are a collection of different share prices weighted by price, market cap, or equally weighted. And what does a stock market really do? It encourages people to invest in new ideas, right? But potentially risky ones like Zoom, Google, Apple, Facebook, and Amazon. So this is the problem. So the stock market was originally meant to create wealth for average investors, but really what we see is, you know, huge institutional investors and high net worth individuals holding these equities and obviously really benefiting from the price appreciation, whereas average people do not have access to these equities. Of course they have access, but whether they have the means, uh, to buy into it, uh, is another story. Um, so in terms of the stock market and why we've seen this rally, 20% of these indices is weighted with the tech names and growth stocks, and the lower skilled labor, um, they don't get a look in. Without the investment in the poorest neighborhoods, encouraging equality in the boardrooms, all of this prosperity is concentrated with the skilled labor. The people either working for the company or the high net worth individuals or institutional investors that can own these types of equities. This rebound has really been driven by, you all know the names, Apple, Facebook, Microsoft, Amazon. They've been able to grow even when the economy doesn't grow. When the economy does grow, they grow even faster. Netflix and Amazon are people that have actually benefited from this pandemic. When people are locked in, they buy more, they stream more. The reason we're seeing these stock markets rise, one of the reasons, is that tech giants make up such a high proportion of these stock market indices. They tend to have an outsized effect on the broader market. The stock market, a glorified beauty contest. So this is something put to them, you know, the economic theory of John Maynard Keynes saying, you know, you shouldn't— this is from newspapers where they used to literally say vote for, you know, whoever you think is the most beautiful or pretty, and then they would put, collect all the results and That's very different from saying, you know, who do you think everyone else thinks is very pretty or beautiful, right? And really, that's a good reflection of the stock market. It's not about what company you think the best— is the best from a value or a fundamental perspective. It's what do you think other people are going to invest in? So you think of names like Zoom, Amazon, you know that other people are looking at these names. More recently we've seen the bidding up of, you know, really troubled names like Hertz, Carnival Cruise Lines, think people like that that are now up 100%, 200%, obviously from very depressed levels originally. But people are piling into these, talking about kind of retail investors, because they know other people will be buying these types of things. Another reason is the, you know, the thirst for yield. Um, and obviously this is the MSCI World Index showing that the stock market has recovered dramatically from that March 23rd, um, bottom. And equities in this are denoted by the MSCI World, and they're trading around 20 times forward earnings, about 30% higher than their historical average. And in the US, obviously this is from last week's video, 24 times. It's now around 25.5, 26 times with Amazon, Google, Facebook, Microsoft leading the charge. So we've seen these work from Hone Trends, Dominate, obviously, that we talked about. But global bond yields are trading around 350 bps, 3.5% below their historical average. So the demand for credit funds also reveals this kind of hunger for yield among investors with short-term interest rates falling to around zero. So basically the spread that you can get between inequities So the return, the yield in equities versus bonds is much wider than usual. So if we look at the 3-month performance, for example, Treasuries are up 2.3%. Amazon is up 30%. And this is one of the reasons we're seeing a big disconnect between markets and the economy. And lots of people like to, including myself, and this was obviously the case, blame the Fed so that it's nearly doubled its Treasury holdings since July now to $4.13 trillion. The kind of balance sheet is nearly at $7.5 trillion, which is a huge amount. There's been record issuance in the corporate credit markets because they know they've got the Fed to backstop that. So if you're— if you have anything to sell, seems like the Fed is going to buy. And I got a really interesting quote from Jay Powell from October 23rd, 2012. I think we are actually at the point of encouraging risk-taking. Investors really do understand now that we will be there to prevent any serious losses. So Jerome Powell said it himself in 2012, um, he was encouraging risk-taking, and now he's obviously the chair of the Fed. He's now encouraging this moral hazard where we've got these zombie companies that just want to, um, should be bankrupt, and now people are taking speculative bets because, you know, the Fed are there, and investors are ignoring this near-term economic turmoil and optimistically looking forward to an expected recovery. And any wobble in that, you'll see the Fed and any central banks around the world willing to backstop this. And growth versus value is a theory, and growth has outperformed value since the global financial crisis. What are these? Growth and value are two fundamental approaches in styles of stocks. Where invest growth is, but where investors essentially seek companies that offer strong earnings growth momentum, while value kind of investors seek stocks that appear to be undervalued. And growth stocks have significantly, according to this chart, outperformed value stocks over the last decade. And this is changing in the short term. More recently, we've seen cyclicals like airlines, casinos, cruise liners, banks really outperforming over the last week or two weeks or so, um, as this kind of rotation, uh, flipped from those kind of growth names. But this could be short-term, and I definitely think that, um, the growth kind of beauty stock story, uh, will return, uh, with a, with a vengeance. Um, record number of stocks are trading above their daily moving average. Um, what you know, with record levels, uh, of low downside protection. So what could possibly go wrong? Earnings are awful, but that's okay. And if you actually remember, um, the 2000 dot-com bubble, you know, they were tech companies and internet companies were almost encouraged not to try and make a profit or turn a profit. Why? Because they should be reinvesting those earnings into growing so they could generate them in the future. And if you're an investor, depending on your time horizon, you didn't care because the capital appreciation of that stock, uh, would go up, right? It would increase despite if they're generating earnings. And this is kind of eerily similar, uh, to what we're seeing here. Valuations, like we talked about, uh, have reached the highest since 2000, the dot-com bubble. But hedge funds are getting ready for another slump in stock markets, and they're kind of a bit uneasy about this surge in prices. And it does not reflecting the economic problems ahead. And some managers are fearing that equity investors used to buying the dips— that ended in the March sharp sell-off. And you think about how, you know, how vicious that sell-off was, you know, I think we're going to see this again in terms of the steepness of the velocity of that sell-off if we do see it. In the future. And many have become so complacent about how quickly we can recover from this coronavirus and how effective these stimulus packages actually will be. Like we saw with the stimulus check, saving rates went up, but consumer expenditure didn't increase. But that was the intended measure of the stimulus packages. So they're kind of doubting this kind of stimulus and whether this can be maintained. Investors are also very greedy. The put-call ratio, a measurement that's widely used by investors to gauge the overall mood of the market, um, this is essentially heading back to 0.5. So a falling put-call ratio is bullish. Below 0.7 or approaching 0.5 is considered a bullish indicator. It means more calls are being bought, uh, bought, sorry, versus puts. Investors are also pumping record numbers, uh, $22.5 billion into U.S. bond funds, shifting out of their money market accounts to riskier, more higher-paying investments. And flows are moving and migrating towards areas of Fed support, hence the demand for investment-grade and high-yield credit. And the yield of the Barclays U.S. Corporate IG Index has returned to pre-pandemic levels of just under 2.5% from a March high of 4.5% last month. Investors have also plowed $4.3 billion into BlackRock's LQD corporate bond fund, which is now inevitably, uh, too big to fail. So more investors are getting greedy and reaching for this higher yield. So where are the funds putting their money? They're putting money— where are the flows going? They're going into money markets year to date, but this trend is starting to shift. It according, um, to the kind of indicators that we look at if we build this holistic picture. Um, remember this chart from last week? Where is the smart money flowing? You know, they're selling, uh, S&P, they're selling stocks, and they're buying gold. So what are they scared of? And this is really the crux of the video. Why are stock markets rallying? You know, it is that they are scared of inflation. Okay, so what is driving this market? Is fear. If you have a lot of cash, you know, what happens to your money? If you have money in cash and there's assets, if let's say the stock market or real estate goes up, if you're holding cash, your money is now worth less. And when we're in this kind of irrational trend, you know, people start to follow the crowds when they're scared. They don't care about fundamental valuations. They're chasing these growth earnings momentum stocks just so they don't, you know, essentially their money doesn't become worthless. So with all this QE money printing, money literally being created out of thin air, being printed digitally, how do you preserve your capital? If, you know, before you would hold it in cash, um, you buy assets, right? And if this is the stock market, like real estate and stocks Um, but this is why you're seeing the so-called quote-unquote smart money buying TIPS and gold. They are hugely scared of inflation, uh, as a result of all of this quantitative easing. It's almost at the point of, if Amazon was trading at $5,000, would you care? Maybe not. If the NASDAQ was at $10,000, would you care? Maybe not. Okay, so this is what people are really scared of. And when the bubble bursts, you know, you can make your own mind up where we are in this kind of stages of a bubble. You know, we could be in this kind of bull trap where really the economic reality and stock markets are completely disconnected and we're just seeing, you know, huge greed taking over. And this is really the reasons why the stock market is rallying, in my opinion. So I hope you enjoyed the video and gave you some things to think about. Please leave your comments down below, like and subscribe this video and to the channel. And if you like this kind of longer style, definitely leave your comments down below. Thank you, have a good weekend and take care.