Central bank money printing and investor confidence have been two of the key drivers of stock market returns in recent years, while fundamentals have played a secondary role. Investors have rationalised lofty valuations in many cases when placing their bets. Certain companies have become 'must own' stocks despite the fact that they lose money consistently year after year. I noted last week in 'History Rhymes' that 76% of companies that went public in the US in 2017 had negative earnings, the highest level since the peak of the fateful dot-com bubble. When money printing stops and confidence turns, the markets can run into trouble very quickly.
How do you value confidence? It turns out, as one would expect, that consumer confidence is highly correlated to personal consumption and income growth. That makes sense. However, at certain times, consumer confidence can deviate, either positively (1999-2000 and 2017-2018) or negatively (2010-2011) from this broad underlying trend.
We are at a point in time again today, similar to the 2000-2001 period, when consumer confidence has continued to surge higher, along with the stock market, despite personal consumption and income growth trending in the opposite direction. Something has to give. Confidence can turn on a dime and I think it will in the months ahead as perception and reality return to normal.
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