Sunday, November 29, 2020

Stock Market Overview -- "Melt-Up" Phase Ending?

 

Stock Market "Melt-Up" Phase Ending?....
Market valuations are hiding how close the stock market is from experiencing another collapse, but strategies have been warning that overpriced assets are only manipulating and distorting the real situation of the unbelievably inflated market, which has been constantly fueled by the Federal Reserve throughout the economic decline to the point of a bubble burst becoming unavoidable.

There are many dangers of the next bubble bursting, and how an unprecedented stock market decline will arrive sooner, rather than later — dragging the US economy and any prospects of a decent rebound along with it.

The term “melt up“ has been used to describe how stocks just keep hitting new highs, no matter the drama going on around the world, exactly what we have witnessed in the current economic recession.

A Melt-up is built on the economic philosophy that mainly relates to the governments response to financial crises. The Federal Reserve, and governments around the world, have used extraordinary policies for years, most notably, since the financial collapse of 2008 and 2009.

The policies were enacted to ease the burden of the crises by unleashing large amounts of “easy money“ into the markets.

The bullish market response seen after a deep economic recession is just the first of a four phase pattern of the downfall, and not to be construed as the end.

The first event or phase was seen when the whole world had fallen into a major economic crisis earlier this year, forcing governments and central banks around the world to start taking massive action to end the crisis, which resulted in interest rates being lowered and held at rock bottom levels for a very prolonged period of time.

This produced an asset boom, so extreme that it could be larger than any of us will ever see again, during our lifetimes.

The unprecedented amount of “helicopter money“ has added more fuel to the current asset boom, and it’s unbelievable heights have reached groundbreaking scales never before recorded, as the government and policymakers will likely keep propping up the markets to absurd extremes, just to maintain the feeling that things are turning towards the right direction.

This has been a global health crisis with government shut downs, different than the great recession that had the mortgage crisis and housing bubble, followed by a stock market decline, then, the Federal Reserve fueled the record stock market rally.

The Federal Reserve, in March 2020, within a 10-day period, has created more free “fake money“ than it did in the previous 30 years, even before the financial crisis of 2008 and 2009. At this point, interest rates are nearly at zero, again, the same way they did just after the financial crisis, and the consequences of it can already be seen, because for every “melt-up there is a “melt-down,” even though there is more money available within the financial system.

The massive government fueled asset bubble has become so extensive that we’re moving towards the end of this “melt-up“ phase, and being pushed to the brink of a major stock market “melt-down” — the bigger the bubble, the more chaotic the pop.

The current market momentum has been called “outright fiscal insanity,“ marking a huge disconnect between economic reality and equity prices. We’re in the middle of the most deteriorating economic collapse that sparked a prolong US Depression, with market valuations at or near all time highs, posing a threatening signal.

In fact, the major tech stocks that have supported the entire market are based on speculative valuations that are far away from reality. The five largest stocks in the S&P 500 index have a combined market capitalization equivalent to the smallest 389 stocks. Four companies alone have a total market capitalization of over $6 trillion, which is larger than the Gross Domestic Product (GDP) of every country in the world, except the US and China.

Corporate earnings have been declining for over two decades, even though the S&P 500 index is trading at the highest multiple in 70 years. The recent S&P 500 index value implies a price-to-earnings (P/E) ratio multiple of 36.7 times, the highest ever seen. The forward P/E ratio is above the record high during the dot-com madness in 2000.

Markets simply can not justify the current rally, as well as suggested double-digit earnings ahead, because it is dominated by speculative excess, high valuations, the prolong economic depression, colossal unemployment rates, and reduced business and consumer spending.

The core of the US economy is built around consumption, with roughly 70% of the United States GDP being reliant on consumer spending, but tens of millions of Americans are already facing serious financial hardship that will have a negative impact on consumption, since the unemployment benefits have expired, and any further stimulus is on hold.

Therefore, the real foundation of the financial markets are in serious trouble, with the US in a “rolling depression” — as one area of the economy gets hit hard, then, followed by another one. The recovery for the different sectors will be very transient.

In summary, the stock market is being maneuvered by the Federal Reserve. The market lacks any form of fundamental valuations, as perspective P/Es are in the stratosphere, with the various stock indices, as a percentage of GDP, at or near all time record levels.

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