Why are stocks so high and will the stock market crash?

The S&P 500 sits at an all-time high, the FTSE 100 is down, but given the economic chaos, one could be forgiven for expecting it to be much lower. So why are stocks so high and will the stock market crash?

Article updated: 27 August 2020 3:00pm Author: Michael Baxter

As I write, the S&P 500 sits at 3,443 the last time it hit that level was, errr, never. The NASDAQ composite doesn’t merely sit at an all-time high; it is actually around 15% up on the pre-Covid record. 

In the UK, things are not quite so good. The FTSE 100 is at 6,000, that’s 25% shy of the record. But even that reading seems surprisingly high to me, considering the depth of the recession. After all, the index lost almost half of its value in 2008. Covid represents an even more significant threat to the economy than the banking crisis.

Are these levels justified? Will the stock market crash? Will the FTSE 100 close the gap on the S&P 500? Let’s take a look?

Why are stocks so high?

Central banks

Central banks are deliberately trying to boost asset prices. That is the rationale behind quantitative easing (QE). By buying government bonds, central banks push their price up. This makes other assets look cheap in comparison. As a result, investors start buying these other assets, pushing their price up too. Central banks hope that by doing this, they will encourage bank lending and, in that way, boost the money supply. It is important to understand that QE is not money printing. It only leads to growth in the broad money supply if governments use QE to fund spending instead of taxation or conventional borrowing, or if the private sector borrows more.

Where else to put money

Linked to the above, where else are investors going to put their money? The money exists and has to be stored somewhere. It’s a case of buying equities because of limited alternatives.

Importance of techs

Five tech companies, AppleMicrosoft, Amazon, Google/Alphabet, and Facebook, make up around 20% of the S&P 500. These five companies are now worth around $7 trillion, between them. If you drill down, the next tier of techs: Tesla, Nvidia, Netflix, Salesforce, are worth another trillion dollars and in each case, shares are either at an all-time high or were quite recently.

There is a good reason for the exceptional performance of these techs — they all have products that have proven even more popular during lockdowns.

The S&P 500’s performance has been distorted by the techs. That is the main reason why the FTSE 100 has not performed so well

Expectation of a vaccine

The markets are also betting on either a vaccine or Covid cure. I think they are too optimistic. Unfortunately, I don’t think either will be available at mass scale until well into next year.

Expectation of a sharp recovery

Partly linked to expectations of a Covid-vaccine or therapy, the markets are betting on a swift recovery.

Recent economic data has indeed supported the idea of a sharp recovery. The latest flash UK composite purchasing managers index (PMI) for August has risen to an 82-month high, for example.

Naivety

But I am not convinced. Well, I am sort of convinced about the tech stocks and believe their current valuations will be much higher later this decade. But I suspect their shares will fall first, we may even see a full-blown stock market crash.

The sharp economic recovery was a mathematical probability — output had fallen so low, that some growth was inevitable.

But the output is a long way below the Pre-Covid levels. I am genuinely worried about a second wave – I mean personally worried, I think myself and my family were lucky first time around. What will happen when it gets colder and central heating goes on?

Sooner or later reality will catch up with the markets.

That is why I think shares will tumble again.

Post-Covid, the world will be a very different place. Use of digital technologies will be much more common than before the crisis. Companies that don’t adjust will go bust. Those who adjust quickly will thrive. Opportunities for investors will abound


All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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