A weekly commentary on current events. Follow populyst to receive notification.
This week: Gold price; Coronavirus – USA; Market risks; Beirut explosion.
We recently published at National Review a new opinion on the surge in the gold price. Read it here >>> Ron Swanson is Smiling.
Coronavirus – USA
The number of USA nationwide reported cases peaked in mid-July and its seven-year average has been declining for the past two weeks. This is consistent with data from states in the south and southwest that saw the biggest surges in June and July: Arizona, California, Florida and Texas.
As noted in these recent Briefs, deaths lag reported cases by three weeks and the seven-year average of daily deaths should therefore peak in the 1,200-1,400 range within the next week before starting to decline.
US stock indices are at or near all-time highs but not everyone is convinced. Several market observers and fund managers see a pullback as inevitable. Since March, they have been wrong as their views have underestimated the impact of large-scale stimulus from both fiscal and monetary policy.
Further, if we look at valuation, the S$P 500 is now trading at 21 to 23x year 2021 earnings. While elevated by historical standards (the average is closer to 15x), current multiples must be evaluated in the context of extremely low, or even negative, interest rates. For example, in the early 1990s, the market traded at 25x forward earnings at a time when US Treasury rates were significantly higher than they are today, with the T-bill then near 3% and a normal yield curve.
The current multiple is also inflated by the top five market cap companies, Alphabet/Google, Amazon, Apple, Facebook and Microsoft that now together add up to 25% of the S&P 500 total market value. Ex-ing out these five names would show a theoretical S&P 495 market trading at less than 20x 2021 earnings.
Further upside can now be driven by 1) a continued meltup in the top 5 and other technology names and/or 2) an improving outlook for companies that have underperformed due to the pandemic. With regards to the latter, the fade in cases and impending fade in deaths should provide support to depressed sectors in the fall.
This scenario would break down however if another pandemic wave materializes in September-October, for example in the Northeastern states that are now considered on the mend, or if the outcome of the election is messy and the winner is in doubt.
Peace to the victims. View this opinion by CNN’s Becky Anderson:
Access all Wednesday Briefs here.