I thought it would be worthwhile to take a look at the current situation to see if the current valuations make sense compared to the economy. The big question is, what is going on?
I continue to have trouble convincing myself that this insane rally is real. So let’s dig in and see if it is.
Looking at the GDP from Q1 2020, we have experienced the most significant GDP decline since the Great Recession. While that is bad, economists are estimating that the Q2 2020 GDP will decline by almost 28%.
The chart below shows US corporate profits over time. In Q4 2017, the profits dipped slightly higher than Q12020. The S&P500 was at 2700 during the drop in 2017, and the S&P500 is around 3200 today. Following the 2017 trend, I would estimate that we should experience a 10%, but we had over a 30% decline.
Our current economic conditions are kind of like the COVID-19 virus itself in that no one knows what will happen with the virus or economy, including when it will be over.
As you can see in the unemployment chart below, the number of people unemployed has vastly surpassed other economic downturns, but it also has happened a whole lot faster.
What happens after people lose their jobs? The next step is people will have trouble paying their bills. The good news is that we have not approached the delinquency rate in mortgages seen during the Great Recession. The bad news is that we see higher delinquency rates than the average. I do expect that this rate will only go higher in Q2 2020 that will also add to the bad news.
In May 2020, we saw over 700 companies file for chapter 11 bankruptcy and comparing that to past years we have hit levels not matched since 2012 and prior. I think this will also grow in Q2 2020 and is just the tip of the iceberg.
Just like everything else with COVID-19, the unemployment rate has jumped from record lows to 13.3% in May 2020. April was worse than May, having over 20 million Americans filing for unemployment.
Taking a look at a map of the US, 14 states are moving in the wrong direction, but the majority of the states are flattening the curve.
As you can see from the state breakdown the US overall is trending down still. The question is will this trend continue.
It is almost unbelievable that 135 vaccines are being worked on to prevent COVID-19. The pace is of vaccines has been traveling at warp speed. The sharing of knowledge around the world has been truly amazing. Even though this progress has been fast, it still probably will not be ready until 2021. If you want to learn about the vaccines, the best article I have found is from the NY Times, read it here.
Hopefully, you found this as entertaining as I did. I think the basic summary of my post is that I think the market is overvalued, and the rally has been built by personal traders looking to get rich rather than fundamentals of companies.
The markets are baking in fast recovery and are at risk of having that bubble popped. I am personally building my watchlist and picking companies I would like to invest in. I am pausing the buying of my investments that are not on auto-invest.
The other significant risk is if there is a second wave of COVID-19. Yahoo Finance recently posted an article about how there could be a second wave of coronavirus cases emerging in the U.S., which is raising alarms as new infections push the overall count past 2 million Americans.
This post is my opinion, which is strictly for information & educational purposes only. The post is not intended to provide any investment advice. Please seek your own duly licensed professional for investment advice as they will be able to consider your situation. Please read my Terms & Conditions Page for a full disclaimer.