Bubble multiples for Wall Street and EU equities, the comparison with previous big recoveries and fears for June


The month of May was also archived on the markets with Piazza Affari goes back to pre-lockdown levels, that is, it has returned to the highs since 9 March. In hindsight it is a small sop when we consider that the balance since the beginning of the year is still over -22%, far worse than the -5.77% of the S&P 500, without bothering his majesty Nasdaq 100 which marks an impressive + 9.5% Ytd with some big companies such as Apple, Amazon and Facebook which in recent weeks have updated the historical highs.

May be positive, but Ftse Mib does much worse than Wall Street and Dax

The Ftse Mib closed May with a + 2.87%, a good performance which, however, makes the nose turn up a bit especially when compared with the other major world price lists. Wall Street also did much better this month with around + 7% for Dow Jones and + 7.55% for the S&P 500, with the latter returning to above 3,000 pts on the peaks at almost 3 months. Best of all the Nasdaq with over + 9%. Even in Europe there are those who have done better than Italy with + 6.68% for the Dax and + 4.18% for the Euro Stoxx 50.
Underperformance of the Ftse Mib which clashes with the fact that Italy was still among the first countries to exit the lockdown and in the last week the bank of the Recovery Fund, which will see the largest slice of the cake reserved for Italy.

Excess of optimism

Optimism continues to prevail on the markets regarding the prospects for recovery, even if there are many strategists who warn against an excess of optimism. Mark DowdingCIO of BlueBay Asse Management, recalls how the equity markets have recovered 70% of the losses recorded since the beginning of the year, compared to the lows of mid-March. “Our conversations with policymakers make us fear that the markets are taking an overly optimistic view – argues the expert -. In fact, we perceive from the authorities a certain concern that their actions will not be able to shore up the economy indefinitely and that the negative effects of the recession will be inevitable. Unemployment will certainly not decrease with the same rapidity with which it has increased and this will represent an important brake on aggregate demand for some time. Moreover, activity in certain sectors will take a long time to return to normal and defaults are likely to increase, particularly in the old economy. ” Dowding believes that in light of this scenario it is difficult to imagine in June returns similar to those seen in the last two months.
The rise in the markets over the past two months has been as impressive as the previous slump. Sentimentrader.com he analyzed every time that a transfer was so rapid and violent as to imply one more than 20% drop below the 200-day moving average, and went to look at how long it took the S&P 500 to recover. In the last century there have been 13 episodes and the average recovery time has been 214 days. Now the recovery from a -26% occurred in just 56 daysor a quarter of the average and half of the previous record, 111 days. Sentimentrader also notes that after these recoveries, the returns of the index within 3 months have been below average, but have improved in the medium term.

Why was recovery so fast? The violence of the collapse, one of the most abrupt in history, is certainly an explanation. “But recoveries are getting slower. In my opinion, the main factor is always the same, which is supporting assets beyond merits and keeping them on very high values ​​according to common standards. The huge supply of monetary and fiscal stimulus, which pushes equities, 2 months after the beginning of a recession that will last perhaps even quarters, to deal on bubble multiples “, he argues Giuseppe Sersale, Strategist of Anthilia Capital Partners Sgr, who underlines how compared to the catastrophisms of a month ago the scenario has changed radically with the epidemic seen quite benign despite the fact that infected people continue to grow globally (Thursday the largest global number of new infected, 116,304).
The consequence of all this is that thereGlobal equity is increasingly expensive in relation to its profitability prospects. “The multiples of the main indices are at levels exceeded only during the technological bubble of the beginning of the millennium,” warns Sersale. The S&P 500 has reached 24 times the expected profits, the Eurostoxx 50 at 20 times, the Nasdaq at 29.

Markets can also be evaluated considering other parameters. Eg compare the dividend yield with government returns which allows you to appreciate the equity risk premium much more. “But this has been true for years in Europe, not benefiting continental stocks over the US, which was dealing with treasury yields,” says Sersale, who estimates that in the absence of a profit explosion in 2021, and / or a drop far below current estimates in 2020, a return of equity to pre-crisis levels implies a total detachment of prices from the profitability of the asset.

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