The latest vaccine news seems to cool down the concerns about further rising covid numbers and following with that further restrictions, especially in the US. This great news give further potential for a bright year 2021 for stocks. But lately more and more market participants seem to be concerned about the current valuations of stocks.
The last time we saw valuations like today we saw big stock market crashes with the Dotcom Bubble in 1999/2000 and the Great Financial Crisis in the year 2008/2009.
On the world wide web already are so many statistics and indications that the market is overheated and needs a reset. But it is what it is and what we should deal with.
The best example in my opinion is the value investment generation, like all the Warren Buffets and so on. This kind of investment approach had really tough times compared with investment approaches which doesn't give much about stock market valuations.
So it's more like the time to reset our thinking and fundamentals when it comes to evaluate a stock or the stock market in general.
My take on this topic is that we have a different starting position in the current position we are in right now. First and foremost we should look at the interest rate level since 1998.
When we last time had those high valuations, we also had a much higher interest rate level.
Both times the market crashed, we had a level of round about 5 percent.
I think that a near zero interest rate environment like we have it right now, benefits much higher stock valuations. And with that said it is also a bet on a long term near zero interest rate environment. That's for me also an explanation why investors are okay with paying much higher premiums on stocks with a great growth forecast for the upcoming years.
And on the other hand we still have fiscal and monetary help in the back. Moreover we see that fiscal and monetary policy go hand in hand especially in the US right now.
This is another phenomenon which is a new for me personally in the year 2020.
Modern Money theory isn't a joke anymore. It's more like we see first attempts of practicing it but like nobody wants to see it.
And also with the beginning of 2021 we should see further stimulus by the government under the Biden administration.
The FED will react whenever they will be needed, as FED chair Jerome Powell said over and over again. This fact alone is a reason to be optimistic about the upcoming year and the call for too high stock evaluations is in the current position to neglect.
I believe that in every investors lifetime there comes the point where you have to ask yourself if your valuation tools are still appropriate in the current financial environment.
I think this point is now.