Bull Market Ignores Economy: “No Risk on Valuations”

You haven’t heard?

Investors need not bother worrying that the market is overvalued anymore.

Nope. That’s because old-fashioned valuation tools like a P/E ratios are apparently, “no longer the right metric to evaluate stocks,” according to one well-regarded analyst on Wall Street.

Stimulus Means Valuation Tools “Out of Style”

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Credit Suisse’s Jonathan Golub raised his 2021 year-end outlook for the S&P 500 to 4200 from 4050. He did so, in part, because he anticipates a massive amount of stimulus in the economy, including checks to individual Americans.

Golub told Marketwatch.com in an interview that the price to free cash flows is a more appropriate way of measuring stock values, arguing that companies are generating more cash flow than ever before.

In all seriousness, Golub could be onto something–at least in the hear and now.

Ultimately, higher valuations will need some strong economic fundamentals to accompany them…nonetheless, I agree with Golub that a government spending spree will help serve as a massive support for consumer demand. If the vaccine is successful, it’s certainly possible that consumers will spend any stimulus money they are provided as a result of pent-up demand. Things could be very good.

However, however… however.

Economy Needs To Catch Up to Market

Much of the market valuations we see now are contingent on the economy stabilizing and the consumer coming back. But, what if government handouts, instead of helping the economy, incentivize people to not return to work? What if our government spends so much money that our debt balloons to massive levels never seen before?

The reality is, the government is going to be walking a tightrope. And, given the Democrats desire to spend first, ask questions later… it’s true the markets could have a heck of a party in the coming months, but eventually wake up with a nasty hangover if there isn’t a robust (and real) economic recovery.

In the meantime, Bitcoin has soared. It surpassed $40,000 USD. Subscribe and listen to today’s podcast for more:

 

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