Most investors, including Warren Buffett, are in denial
The present rally in the stock market has rightly been described as one of disbelief.
Even visionary investors like Warren Buffett and Stan Druckenmiller missed the Bus while waiting for a correction.
“The market’s behavior since the March 23rd bottom of 2191 to the 43% gain by July 2nd to 3130 has confounded most observers, from the novice investor to the most experienced and savvy, such as Stan Druckenmiller and Lee Cooperman. It appears that even Warren Buffett, who took advantage of every big bear market to pick up stocks cheaply, and who has always counseled investors to “be greedy when others are fearful and fearful when others are greedy,” ignored his own advice and sat this one out,” Bill Miller has stated in his latest newsletter.
Friday Thought – > Number of People Waiting for Stock Market to Crash is hitting New Highs ?
— Sunil Singhania (@SunilBSinghania) July 17, 2020
There is no connection between the economy and the stock market
The reason most people are viewing the present rally with disbelief is because the economy is in a bad shape.
“We were in the worst and fastest decline in economic activity since the Great Depression – 40 million were out of work due to a government mandated economic shutdown, leading to an unemployment rate not seen since the 1930s, yet stocks were inexplicably soaring,” Bill Miller noted.
He also pointed out that the belief amongst investors appears to be that stocks go up when earnings and the economy are going up and they go down when the economy is doing the same. So, in short, stocks and the economy are positively correlated.
However, the fact is that there is no co-relation between the economy and the stock markets.
Also, the economic numbers report the past while the market looks forward. The market predicts the economy; the economy does not predict the market.
Miller also pointed out that even the economy is getting better and not worse, earnings are bottoming out and should begin to recover in Q3, the Fed has said they do not expect to raise rates for years, inflation is non-existent, interest rates provide no impediment to higher stock prices, and even valuations are not demanding at around 20x 2021 earnings given levels of inflation and rates.
He also pointed out that Goldman Sachs expects annualized economic growth of 25% in Q3 after Q2’s decline, and 2021 growth of 5.8%.
“If that is correct, then GDP ought to be back to record highs some time in Q2 or Q3 of 2021,” he said.
I, Who Hates Shorting, Just Shorted the Entire Stock Market. Here’s Why. For your entertainment so you can hail me as the obliterating moron that shorted the greatest stock market rally floating weightlessly above the worst economic & corporate crisishttps://t.co/9Y9RrjnxDS
— Wolf Richter (@wolfofwolfst) June 19, 2020
Aggressive action by the FED has ensured gush of liquidity
Bill Miller pointed out that during the stock market crash of 2008-09, the Federal Reserve was slow to react to the crisis.
However, in the 2020 crash, they reacted immediately and aggressively.
“Every bull market has begun with the Fed cutting rates and every bear market has followed the Fed raising rates. It took a while for the Fed to marshal enough firepower to end the financial crisis of 2008/2009 but end it, it did. This time their response was immediate and overwhelming and stocks have responded accordingly,” he stated.
He explained that the pandemic and economic shutdown had led to a collapse in money velocity as there was little to spend money on with so many businesses closed. So the Fed responded by expanding the money supply, at a record pace in an effort to stem the drop in GDP and set the stage for recovery.
Some of that money is making its way into the real economy and the data indicate economic activity bottomed in the second quarter and things are improving. It also made its way into the markets, helping to lift stocks.
“There is a reason one of most time honored adages in the market is “Don’t fight the Fed”, he added.
my god Jerome is this what it has come to pic.twitter.com/xtuYbRi5mA
— Hunter SPX Thompson (@jaksburner) July 17, 2020
— Harold Dick (Genius) ? (@DickWealthy) July 17, 2020
Cash levels are at record highs
“The result of the panic out of stocks in March is that there is now all-time record cash in money market funds, and bond funds have seen huge inflows even as rates hover at levels not seen for thousands of years,” Miller has stated.
The result of the zero interest rates on Bonds is that investors have no avenue to invest in other than stocks.
“The S&P 500 yields 3x what the 10-year Treasury does, and dividends grow over time while treasury payouts do not,” he pointed out, implying that even risk-averse investors will now prefer stocks to Bonds.
Stocks always go up in the long run
“Stocks go up most of time because the economy grows most of the time, about 70% for both time series. So if you knew nothing else and someone asked what the chances were that stocks would be higher in any given year, the answer would be 70%+,” Miller opined.
He drew an analogy between a casino and the stock market.
“Unlike investors, casinos don’t shut down and refuse bets if they lose money at the roulette wheel. Knowing the odds are in their favor, they keep at it and ignore losing streaks,” he pointed out.
A couple things to remember: Nobody has ever traded through a global pandemic. I have as much experience as the suits here. The market has no connection to reality. And stocks always go up. #DDTG pic.twitter.com/QBc7IBZ9nM
— Dave Portnoy (@stoolpresidente) July 2, 2020
When I came to the stk mkt in 1989, the Sensex was about 800 at that time. Today it is closer to 36k, gone up 50-60X. All kind of events have taken place in last 30 yrs, from Kargil to DeMo to fin crisis. But the index always finds its way higher – Ramesh Damani#indexfunds
— India ETFs & Index Funds (@IndiaEtfs) February 5, 2019
Be long stuff that is going up, and short stuff that is going down
Bill Miller quoted from the timeless wisdom of Reminiscences of a Stock Operator and also George Soros.
“You have forgotten something very important. You want to be long stuff that is going up, and short stuff that is going down,” George Soros had said, implying that we have to keep our personal prejudices aside and do that which the market is telling us to do.
CoronaVirus is/was one of the 5 great buying opportunities
It is worth recalling that, during the depths of the crash, when most of the Gurus were frozen with fear, Bill Miller was one of the lone voices urging us to buy stocks aggressively.
“There have been 4 great stock market buying opportunities in my lifetime. The coronavirus has given us the 5th. Shares bought at these prices will prove to be quite rewarding over the next few years, and perhaps a lot sooner. If you missed the other 4 great buying opportunities, the 5th one is now front and center,” he had said in a prophetic tone.
“I’d definitely call it a panic in the markets,” investor Bill Miller said yesterday about the recent coronavirus-induced volatility, which he calls the 5th great buying opportunity of his adult lifetime. But he adds, “it takes a lot to maintain a panic.” https://t.co/dSUMkyyCfj pic.twitter.com/eu0lwt7mfx
— CNBC (@CNBC) March 19, 2020
If we did not follow his advice then, it is better that we follow it now at least!