It’s almost like the stock market is on another planet, with its record-breaking performance while the real-economy seems to be a different world. But when you take a closer look, the separation of the market from the real economy is not so mysterious but driven by “Covidnomics -- the unique economics of the Covid pandemic.
The FAANGM companies -- Facebook, Amazon, Apple, Netflix, Google, and Microsoft -– led the economic recovery after the Covid shutdown, and they have roared ahead of the broader market. But appreciation in shares of FAANGM share prices are magnified enormously in the performance of the major stock indexes, like the Standard & Poor’s 500, which weights each company by market capitalization –- the price times the number of all shares outstanding.
The largest 25 companies in the S&P 500 account for about 42% of its return, while the smallest 25 of the 500 companies in the index accounted for just three-tenths of 1% of its return. The huge losses sustained by the smallest 25 companies are hardly a factor in the market-cap weighted S&P 500 index, but they reflect the world of pain in the real economy. Of the 500 stocks in the S&P 500, 294 suffered share-price declines so far in 2020 and the average loss was 24.1%!
At the same time, it’s also important to note that the FAANGM stocks are not wildly overvalued.
The PEG ratios of the FAANGM – their price-to-earnings ratios divided by their earnings growth rate – are not unreasonable, nothing like a stock-bubble of 1999!
With stock indexes breaking records, remember that the S&P 500 is NOT the real economy. It’s just Covidnomics, just one of many financial economic anomalies caused by the Covid pandemic shutdown and recovery.
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