The Stock Market Has Become A Casino

For you regular readers of this blog, you know that my ongoing battle continues to be to try and reconcile the current reality of stock market moves with the fundamentals (Price to Earnings ratio for one metric), which (courtesy of Liz Ann Sonders, Chief Investment Strategist at Charles Schwab) has for the last 20 years has had a 90% correlation:

Until March 23, 2020. Remember that day?

Since then, the correlation has been a mirror image: -90%

What?

In other words, stock market buyers have in fact been pushing equity prices higher while earnings expectations continue to erode. 

So who is buying and more importantly why?

I wrote this question in my daily journal on May 12 and have been trying to figure it all out since. I hear on the radio, see it on T.V. and read it in the financial news print: financial advice givers telling us that "investors" are looking "beyond" the current pandemic. Seriously? How far do we have to look? Are these supposed "investors" expecting a return to normal? Even the U.S. Federal Reserve Chairman Powell has warned that this is going to be tough economic time for quite some time into the future (and he is normally rather optimistic). The Fed (along with the BOC and other central banks) has pushed plenty of liquidity and almost 0% interest rates on us. Some might say that their policies are forcing investors into stocks as the only alternative.

In his morning research that our friend David Rosenberg sent a couple of days ago he posed the exact same question: "Who are the people doing the buying?"

And then in yesterday's note it became rather clear:

"We know from the fund flow data that it isn't the general public. We know from the BAML survey it isn't institutional investors. We know that from the CFTC data that it isn't the hedge funds. If I told you who the people are that are bidding equity prices higher you wouldn't believe me."

But an article in the Financial Times may have shed some light on the subject: "Frustrated Sports Punters Turn to U.S. Stock Market" :

"Gamblers who cannot bet on professional sport because fixtures have been scrapped are flocking instead to the US stock market, creating a new class of customer for online brokerages and adding fuel to the market rally."

Sure, there have always been gamblers trading stocks, but now there a whole lot more of them and from that the risk in owning stocks becomes that much more egregious. 

As David said in yesterdays briefing: "Hundreds of thousands of frustrated gamblers have shifted from on line sports gambling... this is infinitely worse than the cab driver giving you stock tips, which in the past was always a sign of a speculative market top".

My friends, I believe that we may need to prepare ourselves for a whole lot more volatility before this is all over. Certainly, when you hear financial media commentators calling stock market participants "investors", you are going to have to think a little harder on that.

Be safe, stay healthy!