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> [...] the graph below plots US stock market returns against real GDP growth in the United States, using quarterly data [from 1960 to 2020] Note that there is almost no correlation between stock returns and real GDP growth contemporaneously, and while the correlation grows as you look at GDP is subsequent quarters, it is still modest even four quarters ahead. If the relationship between stock returns and measures of economic activity is weak, as both logic and the data suggest, it should be even weaker right now, where every measure of economic activity is ravaged by the crisis-driven shutdown. To those in the media and the investment community who profess to be shocked by the latest economic numbers, my question is whether you are just as shocked to see your speedometer at zero, when your car is parked in the driveway, or when your pie does not bake in an oven that is not turned on? In short, there is almost nothing of use to investors from poring over current macroeconomic data, which is one reason why markets have started ignoring them. That will change, as the economy opens up again, and markets start looking at the data for cues on how quickly it is coming back to life. > My estimated value for the [S&P 500] index is about 2926, which would lead to a judgment that the index was over valued by about 6% (based upon the level on June 1, 2020). As with my March 2020 valuation, I am fully aware that my numbers are just a reflection of my story and that each of the inputs has a range around it, and I have brought in that uncertainty into a simulation below [...] Note that I have centered the simulations around the median estimates of earnings for 2020 and 2021 from analysts, while building in the range in the estimates into the distributions. The median value from the simulation is 2932. On June 1, the S&P 500 was trading at close to 3100, putting it near the 80th percentile of the distribution, bolstering the "market has gotten ahead of itself" camp, but there is something here for everyone. If you are more optimistic about earnings in 2020 and 2021 than the the median analyst, and about how quickly and completely the market will recover from the crisis shock, you will arrive at a higher value than mine. If you are more pessimistic about the future, perhaps because you think the market is under estimating the likelihood of a second wave of shutdowns or a surge in company defaults, your valuations will be much lower. -- Damodaran , http://aswathdamodaran.blogspot.com/2020/06/a-viral-market-u... |