The market is a Kugel sphere, ready to plunge back to Earth
Have you ever seen a Kugel Fountain? It’s a water sculpture crowned by a large stone sphere held up by the pressure of the water rising beneath it. A bit like the situation we see today, with stock market being the sphere, supported by a steady flow of central bank money. And therein lies the problem: turn off the water and the sphere plunges to Earth.
When it comes to the stock market there are always two camps – the buyers and sellers, and they typically have divergent views about the future.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
dane campbell
:
Lets not forget that treasury may also sitting on the dry powder they “saved Australia” by miscalculating JK payments….
Roger Montgomery
:
yep. we’ve now covered that in our evening webinars and also in subsequent posts.
Ricky Leong
:
It’s been said that markets can remain irrational longer than you can stay solvent. Global governments are flooding markets with cheap money. A hangover is coming – but nobody is sure when.
I see 3 main catalysts that could spark a market collapse in the short term. 1) A second coronavirus wave. 2) slower than expected economic recovery 3) geopolitical tensions
In response to 1 – the risk of a second wave seems to be declining. Kerry Chant doesn’t seem to think one is coming and we aren’t seeing much evidence from US states who opened up early. However, this risk cannot be eliminated. In response to 2 – with money so cheap, governments are likely to ramp up stimulus to smooth over short-term bumps. In response to 3 – both American and Chinese leadership rely on economic growth for their political legitimacy. While the rhetoric may get heated, it is in both their interests to play nice at least in the short term.
On the contrary, I see 2 potential positive outcomes. Firstly, a number of clinical trials are being conducted and it’s possible we could get more positive news on the treatment / vaccine front.
Secondly, with long run interest rates so close to zero, using a DCF valuation produces “crazy” numbers far above current prices. Markets may decide to “look through” the coronavirus earnings gap and push up valuations regardless.
Only time will tell.
Roger Montgomery
:
Hey Ricky,
really good summary there. Thanks for sharing.
Brendan
:
Hi Roger,
Isn’t this just a repeat of the GFC then (albeit on a much larger scale)? The Fed (plus Central Banks around the world) pumping-out liquidity to (and artificially inflating) markets around the world, resulting in share prices that aren’t supported by fundamentals but are unable to reset to ‘realistic’ values?
And the last time they did this it resulted in the longest bull market ever, only to be stopped by Covid-19. So could we see a period (potentially years) where shares are even more ridiculously priced due to their falling earnings?
Brendan
Roger Montgomery
:
ANything’s possible Brendan and it is something we have to contend with. Look at all the cash Buffett has accumulated since the GFC!
Luke Joseph
:
What is the alternative? Hold cash while it’s true value is inflated away at a rapid rate?
Roger Montgomery
:
its not particularly appealing is it? But as I said all through 2019, 1.5% is better than minus 30%.
Dan
:
I find myself wondering if I missed the boat as this rally keeps going.. I do agree with your sentiment Roger.
Roger Montgomery
:
And those that have participated fully are wondering if it’s all going to reverse!
Peter_Thompson
:
good read; albeit somewhat deflating when taking into consideration the grind ahead of everyone.
Roger Montgomery
:
indeed Peter. The government however will now throw everything they have at it. Scott Morrison may be our very own Mario “Whatever it takes” Draghi.