August 18, 2022

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Historically high stock market prices: - This incorrect pricing is likely to continue for much longer

Historically high stock market prices: – This incorrect pricing is likely to continue for much longer

Ahead of the weekend, the stock market got a real boost. The Oslo Stock Exchange fell 3.2 percent, while the Paris and Frankfurt Stock Exchanges fell more than four percent. In the US, major indexes fell more than 2%. Large Asian markets also fell in return.

The fall came after a new type of coronavirus, omicron, was discovered in South Africa. Over the weekend, there were reports of the emergence of the new virus variant in several European countries. The fear is that this variant is more contagious and that circulating vaccines will have a worse effect on the new virus variant.

Even if the virus should infection more easily, it is less likely to cause more serious illness, according to FHI.

Obviously, the virus will affect the markets when they open Monday morning. but:

– I think this is going to explode, says Robert Ness, director of Nordea, who still thinks there will be some turmoil for some:

– This is a disaster for parts of the stock exchange, and for airlines it is a disaster. That’s the worst of it, says Ness.

Rigid pricing in the stock market

But the tiny, toothy virus isn’t enough to break into the market if you’re wearing the long-wearing glasses, which look for months and years to come. Pål Ringholm, Head of Credit Analysis at Sparebank 1 Markets, wears the following glasses:

Most likely, with all the reservations that forecasting economic development is a bad thing, the global economy will do well next year. Anyone with an introductory course in finance knows the market after that, says Ringholm.

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But at the same time, the market is historically highly priced. Ringholm refers to the United States of America:

Pål Ringholm, Head of Credit Analysis at Sparebank 1 Markets.

Pål Ringholm, Head of Credit Analysis at Sparebank 1 Markets. (Photo: Per Thrana)

The US stock market makes up 63 percent of the MSCI global index. The US market is as large as the following 11 markets combined. But the US makes up only 24% of the global economy. Is it true that companies in the US, the stock market there, are making much more money than the rest of the world over the next 20 years? Ringholm asks before answering:

– Barely. This is one of the four most expensive markets in American history for 220 years.

– Then we talk about the market before the crash in 1929, and about the dot-com summit in 2000…

– …and 1844, says Ringholm.

continue:

The macro looks good, but the larger market is very expensive. This makes them very vulnerable when the day comes when something happens.

wild and savage

Robert Ness points out that we see a split in the stock market. Some industries and companies are not very expensive at all, such as American Telecom and many pharmaceutical companies, while others are very expensive.

Nordea’s director dived into the numbers and looked at the total market capitalization of companies on the Oslo Stock Exchange, including the low-threshold Euronext Growth Exchange, which are priced at more than ten times their trading volume.

In 2018, the companies’ price was just under 30 billion NOK in total. And now? 678 billion! By comparison, the value of Norway’s largest company, Equinor, is just over NOK 700 billion.

– Isn’t it totally wild?

Yes, says Ness, who notes that companies such as Adevinta, Tomra and Autostore are 76, 79 and 146 times the expected turnover for this year.

But like Ringholm, Næss points out, companies that operate at scale produce impressive results.

– As long as the earnings picture is good, the market will continue to grow. So this incorrect pricing will likely continue for much longer, he says.

But one day there will be a downturn in the stock market.

While we wait for the collapse

Ness believes the drop in corporate profits could be a catalyst to start a downturn, when the time comes.

Ringholm points to the extravagant market as the number one danger signal:

Expected returns in large fixed income and small stock markets. It is very expensive. I have such a model, somewhat like a petroleum fund, with two-thirds of equity and one-third in long-term interest rates. Then I use US data for the last 140 years. When was the most expensive and cheapest? And congratulations! It is more expensive today. It is not a breakout indicator, but rather an indicator of future returns. Ringholm, who also lists higher-than-expected inflation and the Chinese credit market, says the odds of a positive return, based on history, are low, and whether there should be any geopolitical turmoil as things to worry about.

– Not a little afraid of omikron?

– The reaction time is completely different now, so I think and hope there will be no problem, says Ringholm, and continues:

And finally: If the collective distrust of the central bank spreads. With zero interest rates and stimulus on both hands, while the economy grows this way, and people are hard to come by, it may turn out that not raising interest rates was one of the US Federal Reserve’s biggest mistakes of all time.

How low does the market have to go in order for it to fall to normal prices?

– If all goes well in the economy, this market may continue for another year or two. It has a rather high probability, so it should not be excluded. But when it hits… Take the Oslo Stock Exchange, it could drop 50 percent. something like this.(Terms)Copyright Dagens Næringsliv AS and/or our suppliers. We would like you to share our cases using a link that leads directly to our pages. All or part of the Content may not be copied or otherwise used with written permission or as permitted by law. For additional terms look here.