Making Sense of Sky-High Stock Prices
Many have been puzzled that the world’s stock markets haven’t collapsed in the face of the COVID-19 pandemic and the economic downturn it has wrought. But with interest rates low and likely to stay there, equities will continue to look attractive, particularly when compared to bonds.
NEW HAVEN/NEW YORK/LONDON – There has been much puzzlement that the world’s stock markets haven’t collapsed in the face of the COVID-19 pandemic, and especially in the United States, which has recently been setting record highs for new cases. But maybe it isn’t such a puzzle. A measure we call the Excess CAPE Yield (ECY) puts the long-term outlook for the world’s stock markets in better perspective.
Indisputably, asset markets are substantially driven by psychology and narratives. As the Nobel laureate Daniel Kahneman wrote, “familiarity breeds liking,” and several familiar narratives have emerged in the world’s stock markets this year, following the initial COVID-19 shock in the first quarter. For example, there is the V-shaped recovery narrative and the FOMO (fear of missing out) narrative; both might be helping to drive markets to new highs. There is also the work-from-home narrative, which has specifically benefited technology and communication stocks.
But are these narratives the only reason why all of us have not considered just pulling our money out of stocks and putting it into safer alternatives such as bonds, or even under the mattress at home?