Weekly Report | Expectation vs Reality

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I’ll start this article with the latest weekly data and where the markets are. As noted, I will try to be as didactic as possible in my presentations and justifications – aiming at the new audience on this platform – of what has been happening in recent months and also of expectations future – according to the possible variables that may arise.

TIME AND MARKET EXPECTATIONS

According to the Goldman Sachs Global Investments Research (chart above), the S&P500 index could reach 4700 points by the end of this year (2021) and reach the end of next year (2022) with an estimate of 4900 points: predict a 25% increase this year and only 4% in 2022.

The Standard and Poor’s 500 Index – S&P500 – is a weighted capitalization index of 500 shares. The index is designed to measure the broad performance of the US domestic economy through changes in the added value of the 500 stocks that represent the largest industries.

More objectively – clearly – in the Goldman Sachs estimate: Investors should keep the expectation of higher profits from major US industries , however, this profit will be significantly reduced compared to this year. Such situation may re-price assets (shares) in accordance with these reported earnings. In practice, companies that have their shares very stretched (overvalued) may suffer a contraction in their values, as there is an expectation that the future of the economy – generally – will be a little turbulent. We see this clearly in our daily lives, mainly due to the constant and widespread inflation and price increase.

Consequently: the consumption capacity reduces, which may reduce the profit margins of companies and also of a large part of the production chain: forcing the entire economic system to take some measures more restrictive in their operations.

‘FAIR VALUE’ PERSPECTIVES

Before entering the chart above, let’s determine a rational parameter on the word ‘Fair Value’ (Fair Value ) for beginners in this reading.
Everything! Absolutely EVERYTHING has a Value. I have been strongly insisting on this concept since I wrote the first book: Money and Market – Purely Behavioral. We are bombarded with a ‘something’: things, products, concepts, practices, desires and wants. We, as individuals, determine what has, or not, Value to us. However, we are fully capable of interpreting and pricing how much we are willing to pay for this ‘something’ that brings us some benefit.

If we value product X by $100, then we won’t pay much more than $100 to get the product. We don’t care how much the the other individual will pay for X, they will adjust the value according to their own perspectives. In the same way we can also price a desire, a will, a dream. As much as we do not price in monetary value (money), we will give another type of ‘Value’, such as: time spent, work, availability, time and among others.

This also works in financial markets, but in a more complex and anticipated way: almost everything is priced as far in advance as possible to either generate more profits or avoid greater losses.

Now going back to the chart above, I interpret the expectation of market variation according to the possible causes that are emerging at the moment to “SUPPORT at a FAIR VALUE”, let’s see:

  1. The S&P500 index is currently at 4358 points with the prospect of reaching the end of the year at 4700 points. This is Baseline – dark blue column.
  2. If we have a scenario of Low Interest Rates expectations, the S&P500 could reach 4950 points. S&P500 rising by 14%.
  3. If expectations about the Interest Rates begin to evolve, the market will price the index at 4350 points at the end of 2021. S&P500 remaining theoretically stable .
  4. If there is no tax reform scenario ahead, again the S&P500 tends to reach 4900 points.

Important Note: Always remembering that these numbers indicate only in relation to the Interest Rates of the ’10-year Treasury‘, that is, it is simply ONE variable among many others that move the financial markets. It is expectations and speculations, internal and external – national and global – that determine the pricing of all markets instantly.

We shouldn’t get caught up in guessing or trying to price the future, but we’ll get a little idea of ​​what will happen to our investments and the financial markets if some variables definitely come into play.

We have so far been able to interpret and rationalize in a very “simple and understandable” way what the future expectations of the American market are, in case we have any changes in the following topics:

  • In relation to inflation risk; loss of general purchasing power; expectations of lower profitability of companies and contraction of profitable margins;
  • In relation to the increase, or not, of the 10-year interest rates in the United States;

ANOTHER FUTURE EXPECTATION: AGREEMENT WITH THE PAST AND CURRENT CONDITION

We enter the third graph to try to assess what behavioral moment investors are at right now, based on similar situations experienced in the past.

We clearly observe: in all major big drops extended in the markets (December 1974, 2000 and 2008) the Drawdowns (demotion) reached above -40% and was preceded by interspersed periods above -30% .

Since the crash of 2008 (Subprime), there has been an increasing Drawdowns index in> in 2015 (-15%), in 2018 (-20%) and, finally, in 2020 (-33%).

Remarkably, we are going through already experienced cycles that preceded major market corrections: by countless factors ( which is beside the point in this analysis).

S&P500 INDEX RATIO vs truck tonnage (LOGISTICS)

S&P500 Index: PURPLE LINE
Logistic Transport: ORANGE LINE

So far, even a lay reader – novice – has managed to interpret the distortions that mark the moment in the current financial market. At first, linking the S&P500 index with a graph on the logistical load capacity of trucks doesn’t seem sensible. However, when we relate the two graphs, we clearly notice that before the 2008 crash, there was an absolute slowdown in road logistics transport, previously characterizing a slowdown in consumption and, consequently, in company earnings estimates.

Even before the pandemic, early 2020, indices went hand in hand. Has everything really changed?

Perhaps this graph does not tell us much, but it can infer an important fact: in any perspective analyzed (also in previous reports), financial market indices are extremely out. of reality. Overvalued companies are unlikely to deliver to shareholders the exorbitant profits they envision, therefore, there is a possibility – according to the history presented – that the S&P500 Index (Purple) will have a contraction with a tendency to follow the Logistics Index (Orange) at some point.

ANALYSIS ACCORDING TO THE CONTRACTING OF GOVERNMENTAL CREDIT

In the last interesting graph, it shows us another variable. Note how the leverage caused by the US government pumps the money flow to the financial markets. The S&P500 denounces this quite objectively: When there is a closure of the money flow by the government authority, the markets tend to have a high level of correction – sudden drops(Light Blue).

FINAL INTERPRETATION OF THE DATA SUBMITTED

  • In relation to inflation risk; loss of general purchasing power; expectation of lower profitability of companies and contraction of profitable margins;
  • In relation to the increase, or not, of the 10-year interest rates in the United States;< /em>
  • Drawdowns Index shows us the recessive history since 1947, informing us of a possible interruption of the bullish macrocycle;
  • S&P500 Index significantly departs from the ‘Loaded Trucks’ Index. One more piece of data to be carefully interpreted;
  • There have been monetary loosenings in the US government since 2008. On both occasions that the government interrupted this flow, even for a few days, the markets suffered greatly.

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