The US stock markets recently hit a new record of $40 trillion market capitalization. That implies a market cap to GDP ratio of 1.80x, on last year’s GDP (taking it on current year would mean an even higher number). To put things in perspective, this is higher than levels seen in 1999 and 2007 before the stock market meltdowns, so definitely not comforting by historical precedents.
What’s fueling this rally, as the economy isn’t as rosy? To answer in short, the stimulus packages by the Government due to Covid19, coupled with near zero Fed fund rate and money pumped in by the Fed (the Fed balance sheet has expanded by $3T+ this year compared to $1.5T increase in 2008-2010). So it’s a liquidity fueled rally.
Is the rally uniform across sectors? No. The diversified market indices such as Dow Jones and Russell are up marginally from pre Covid levels but the Nasdaq, which is technology focused, is up 30% in 2020. The top 6 technology companies, Apple ($2.1T), Amazon ($1.6T), Microsoft ($1.6T), Google ($1.2T), Facebook ($0.8T) and Tesla ($0.6T), together account for $8T of the market cap. India’s combined market cap of ALL listed stocks is less than a third of the markets cap of these 6 companies!
Are all stocks in bubble territory? No. You can justify the valuations of some like Google, Amazon, Microsoft based on robust growth rates, entry barriers for new players, dominant market share and product diversification in recent years. But for some of the others same is difficult to fathom.
For example, Apple is solely and heavily reliant on iPhone sales even though it has managed to enter the watch segment. Facebook is losing the star status of its cream business facebook.com, and relying on acquisitions like Instagram and Whatsapp, with no new products or innovation generated organically to drive new businesses. But they do have advantage of our short term memory, since we forget what happened to earlier titans like Blackberry, Kodak, MySpace, Google Plus, Orkut when a new player emerged ...