IRRATIONAL EXUBERANCE GRIPS EQUITY MARKETS. Despite suffering through the worst economic shock since the Great Depression, the Dow and S&P ended the year by setting new records. The S&P 500 spiked 68 percent from its March lows, and the Dow closed the year at 30,606, hitting a record high.
The NASDAQ rose 43.6 percent in 2020, its best year since 2009.
Among S&P 500 companies, the price-to-earnings ratio is above 22, where it has lodged for much of 2020, the highest level since 2000.
The total value of U.S. stocks, which Warren Buffet once called “the best single measure of where valuations stand at any given moment,” is now higher than at any time during the 1990s’ dot-com frenzy.
DoorDash went public last year, its share price soaring 86 percent on the day of its release. The next day, Airbnb’s shares zoomed 113 percent, raising the unprofitable company’s market cap to $100 billion. A company called 908 Devices saw its stock price climb 150 percent on its opening day last month.
Among companies that went public last month, the average share price gained 85 percent as of 18 December, the best performance for IPOs since early 2000.
In fact, more initial public stock offerings appeared in 2020 than in any year since 1999 – 447 new issues that raised about $165 billion, almost equaling the $167 billion IPOs raised 22 years ago just before the dot-com bubble went poof and erased $8 trillion in market value.
Another parallel: the market’s irrational exuberance has lured individual investors. Their eagerness to cash in on the trending market has pushed up share prices 300 percent for online retailer Etsy. Quantumscape, an energy storage business, has watched its stock price rise 144 percent in recent months.
The share price for Tesla, a darling among individual investors, is up nearly 700 percent in the last 12 months, bestowing on the company a market value of $600 billion.
Unhappy New Year?
Yesterday, the Dow rang in the New Year falling 1.3 percent, the S&P and Nasdaq both declined 1.5 percent.
Why the selloff? The word on The Street is that investors, i.e., gamblers, are worried about a second COVID wave will sweep the globe, and the renewed lockdowns across Europe, the U.S., and around the world will stall an economic recovery.
Today, the Dow closed up 253.69 points on the news of better-than-expected U.S. manufacturing data and the NASDAQ was up 120 points. The Institute for Supply Management reported that its manufacturing index rose to 60.7 in December, 3.2 percent higher than what economists polled by Dow Jones expected.
TREND FORECAST: How low can the economy go? How high can the markets fly?
As we have reported, and Gregory Mannarino has strategically detailed, the game is rigged. There is no correlation between Wall Street and Main Street.
The market’s blessings are not being shared widely.
As we reported, Bloomberg’s “Billionaires Index” showed the richest 59 billionaires in the U.S. watched their net worth skyrocket during the coronavirus outbreak and now own more wealth than the poorest 50 percent of Americans.
Their findings showed that the top 1 percent of Americans combine for a net worth of $34.2 trillion while the poorest 50 percent of the country, which amounts to some 165 million people, have $2.08 trillion. The report said the 50 richest alone are worth $2 trillion.
In addition, the stock market’s performance played a major role in the widening wealth gap. As reported in the Trends Journal, wealthy Americans have a significant amount of their fortune tied up in equities, while the poorest tend to have little to no money in the stock market.
About $5.7 trillion of added wealth came from stock market gains, of which 10 percent of the population owns 87 percent, and 1 percent owns 52 percent.
For much of 2020, stock markets have ignored economic fundamentals and instead have been buying the U.S. Federal Reserve’s cheap money guarantee.
After the global shutdown crashed the economy, the Fed slashed interest rates, opened fiscal floodgates to ensure corporations and markets would continue to function, and pledged to keep the cheap money spree going.
The Fed also has changed its policy of ticking up rates to quell inflation. Instead, it now plans to hold rates at or very near current lows until inflation reaches 2 percent… or possibly higher.
And following its policy meeting in December, the Fed planned to keep its benchmark short-term interest rate near zero through at least 2023.
With the U.S. central bank guaranteeing unlimited injections of monetary methadone, there is little concern among investors of economic fundamentals and nothing to remind them that what goes up must come down.
GOLD/SILVER. With the dollar index hovering close to April 2018 lows, and central banks around the world locked into the low-interest rate, cheap money binge, gold hit a two-month high today closing at $1,952.
And silver, the other premium safe-haven precious metal, which was trading at $22.53 per ounce at the end of November, was up 1.36 percent today, closing at $27.73.
On the news of more coronavirus relief aid and central banks flooding markets with cheap money, gold was up some 25 percent last year and silver roughly 48 percent.
Thus, our 2019 and 2020 forecasts for both precious metals have proven accurate, and we maintain our forecast for gold to trade in the $2,100 range and above in 2021 and silver prices to move well above $50 per ounce.
BITCOIN. As we go to press, Bitcoin is trading at $33,888.
On 27 June 2020, when Bitcoin was trading at $8,974, we had forecast that for younger and more speculative investors, Bitcoin will remain their alternative to precious metals, thus pushing that price higher when it solidly breaks above the $10,000 mark.
Also, as forecast, Bitcoin prices will continue to rise as governments, particularly China, go digital. And, unlike older generations who view gold and silver as safe-haven assets, the going-digital trend will prove bullish for cryptocurrencies, particularly for younger generations who live in a digital world and are fearful of an economic future of worthless money.
On 27 October, we had forecast Bitcoin will continue to rise, surpassing its all-time high. As the “Greatest Depression” worsens, more cheap money will be pumped into failing economies, thus pushing the value of currencies down… and inflation higher.
The lower currencies fall and the higher inflation rises, the greater the demand for safe-haven assets such as precious metals and Bitcoin.
However, considering Bitcoin’s surge, we do expect a market correction. The downward breakout point will be hit should prices fall below $25,000 per coin.
OIL. After Reuters reported that OPEC+ is set to hold output steady in February, rather than raising production, Brent crude spiked 5.03 percent, breaking above $50 for the first time since February, closing at $53.66.
Prices were also pushed higher after Iran detained an oil tanker “due to repeated violations of marine environmental laws.”
Brent crude and West Texas International prices ended 2020 down some 20 percent below 2019’s average. Brent Crude traded above $68 per barrel and WTI traded above $63 per barrel at the start of 2020.
If tensions increase and military actions escalate, oil prices could sharply spike, possibly soaring above $80 per barrel for Brent Crude. Should they reach near or at that level, the high cost of oil in a rapidly declining world economy will push the global economy deeper into the “Greatest Depression.”
In the event of such an occurrence, equity markets will plummet and precious metals and Bitcoin prices will spike.
