‘They’re no longer related to any fundamental analysis whatsoever’
In the middle of a global economic shutdown that has led to soaring unemployment rates around the world, some strategists are arguing that rapidly rebounding equity markets have become “divorced from reality.”
As of May 20, the U.S. Federal Reserve’s balance sheet stood at US$7.09 trillion — the highest level ever. In response to the economic shutdown, the Fed has injected trillions of dollars in liquidity into markets through such measures as quantitative easing, with the bank buying corporate bonds and ETFs for the first time in its history. It has continued to scoop up assets in the form of junk bonds and junk-bond ETFs.
There's a Pavlovian reflex on the side of investors to chase the Fed, and the asset price exacerbation is a side effect Tech stocks, for example, have surged past their all-time highs despite having little in the way of fundamentals to back them. Henrich pointed to Amazon.com Inc.’s stock hitting its record high and trading at a P/E ratio north of 116.
Crescat Capital portfolio manager Tavi Costa, whose hedge fund is net short, believes markets are overdue for a pullback and that a ramping down of Fed purchases could trigger such a move.
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