Google and Facebook: Digital ad market is avoiding coronavirus disaster - VentureBeat

(Reuters) — Reports of the demise of the digital advertising market due to the coronavirus outbreak appear exaggerated as the tech giants dominating the online ads business, Google and Facebook, said this week they saw early signs that the worst could be over. Their remarks countered Wall Street expectations of a devastation of the market as hard-hit brands in travel and autos, traditionally big ad spenders, have pulled marketing dollars and as small businesses, the lifeblood of big tech companies’ businesses, have shut down.

At Google’s parent, Alphabet, first-quarter total revenue grew 13% from the previous year to $41.2 billion, while Facebook‘s ad sales rose 17% to $17.44 billion. They issued first-quarter results that factored in only two weeks of the widespread stay-at-home orders in the United States. But both companies also reassured investors that revenue for the first three weeks of April showed signs of stability, following lower revenue in March.

Alphabet, Facebook, and Snap credited direct response ads, or ads that solicit a direct action, such as clicking a link, using a coupon code or downloading mobile games, for propping up sales during the pandemic. Such ads help advertisers get the most for their money by encouraging immediate response from audiences and are easier to measure, since brands can see how many people clicked on a link or took an action after seeing the ad.

Brand advertising that is used to spread awareness and name recognition for a company, but whose effectiveness is often more difficult to measure, was harder hit. Alphabet said on Tuesday brand advertising declined on YouTube in mid-March, when the pandemic accelerated in the United States.

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Ad prices drop when marketers lower their spending and demand for digital ads decline, and direct response advertisers have been taking advantage of that, said David Campanelli, chief investment officer at ad agency Horizon Media. “This will likely continue through 2Q as we expect pricing to remain low for the foreseeable future,” he said.

Facebook executives said on Wednesday they expected direct response advertising to continue to drive ad sales and that the coronavirus pandemic only reinforced the importance of the strategy. Still, Facebook was cautious, given economists are forecasting a global downturn in the second quarter and “if history were a guide, would suggest the potential for an even more severe advertising industry contraction,” said David Wehner, Facebook’s chief financial officer, during an earnings call.

Alphabet warned that the second quarter could be difficult because the early April trends may not hold. Snap, which owns messaging app Snapchat, said it would shift resources on its ad sales team to serve direct response advertisers better, due to the success of the category.

But Twitter alarmed investors on Thursday as it pointed to a 27% decline in ad revenue as a sign of what the company has seen so far in April. Twitter’s ad business is heavily event-driven and “the suspension of major sporting leagues in March will have hurt its bottom line and will continue to do so as long as social distancing and stay-at-home measures remain in place,” said Jasmine Enberg, senior analyst at research firm eMarketer.

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Stock Market Wrap-Up: Big Investors Are Betting on Airlines. Should You? - The Motley Fool

The stock market gave up ground on Thursday, but that wasn't enough to take away from what was an amazingly positive month for stocks in April. Even with the day's declines, the Dow Jones Industrial Average (DJINDICES:^DJI) finished the month with a gain of more than 2,400 points, or 11%. The S&P 500 (SNPINDEX:^GSPC) and Nasdaq Composite (NASDAQINDEX:^IXIC) posted even larger gains of 13% and 15%, respectively, reflecting the optimism that investors have adopted by looking at the market's future.

Today's stock market

Index	Percentage Change	Point Change
Dow	(1.17%)	(288)
S&P 500	(0.92%)	(27)
Nasdaq Composite	(0.28%)	(25)

Data source: Yahoo! Finance.

Airlines, in general, saw even bigger losses today than the broader market. Yet they've continued to draw interest from investors, and that's helped them raise capital that might prove crucial in weathering the difficult conditions they'll likely face for months to come.

What investors are buying

Today's performance for airlines was generally poor. Major players Delta Air Lines (NYSE:DAL), American Airlines Group (NASDAQ:AAL), and United Airlines Holdings (NASDAQ:UAL) all posted 5% losses on the day. JetBlue Airways (NASDAQ:JBLU) and Alaska Air Group (NYSE:ALK) took 4% hits. Only Southwest Airlines (NYSE:LUV) managed to gain ground, picking up 1% on the day.

However, we've continued to see interest from institutional investors trying to pick up good deals in working with airlines. Today, Delta raised $3.5 billion from selling five-year notes, more than doubling the initial size of the offering from $1.5 billion. Participants in the private offering were happy to buy the secured notes, which don't offer any equity conversion rights but do include collateral in the form of various route slots, airport leases, and international flight-operation rights. An interest rate of 7% was certainly an enticing kicker for bond investors.

Image source: Delta Air Lines.

Delta's experience follows Southwest's move earlier this week to raise capital on its own. Southwest also boosted the size of its offerings, ending up raising $4 billion. Half of the money came from a secondary stock offering, while the other $2 billion came from convertible five-year notes paying 1.25% and offering conversion at a price about 35% higher than the stock price.

Cash has never been more important

The need for liquidity is obvious, and American made it even clearer with its quarterly results. The airline posted a first-quarter loss of $2.2 billion and says it's burning about $70 million on cash every day so far in the second quarter because of the near-standstill in travel activity. CEO Doug Parker warned that investors shouldn't expect a V-shaped recovery for airlines, saying that, "[R]ecovery will be slow, and demand for air travel will be suppressed for quite some time."

Not all airlines should expect equal treatment from institutional investors. Delta has a strong reputation among business travelers, while Southwest has cost advantages and doesn't have the same exposure to international travel that its big-airline peers have. By contrast, American and United face some unique challenges that could make it more difficult for them to raise further capital on favorable terms.

At this point, it's still unclear when airline stocks will see industry conditions return to something resembling normal. It's good that investors are still willing to put money into the sector, but the businesses still have to perform better before too long or else further liquidity could dry up quickly. If you're looking at buying shares of airlines, you have to be comfortable with all that risk -- and also be willing to accept the fact that institutions can get access to types of investments that you might not be able to buy.

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Coronavirus causes worst smartphone market contraction in history - The Verge

The coronavirus pandemic has caused the smartphone market to suffer its fastest ever first-quarter year-on-year decline, according to new data from analyst firms. Counterpoint Research and Canalys both put the overall drop in global shipments at 13 percent, though Counterpoint says the drop in China alone was 27 percent while Canalys calculates it at 18 percent.

Whichever numbers you look at, the situation is clear: it’s the first time shipments have come under 300 million since 2014, with a precipitous collapse in China preceding falling demand around the world. “By the end of the quarter, as COVID-19 started to spread to other regions, and lockdowns of varying severity were imposed, the pendulum of disruption started to swing from supply to demand,” Counterpoint’s team of analysts writes in a statement.

Samsung, Huawei, and Apple are still the top three vendors, with Apple seeing the smallest decline in shipments year on year. Both Canalys and Counterpoint rank Xiaomi fourth, cracking 10 percent of global market share for the first time.

“Demand for new devices has been crushed,” says Canalys senior analyst Ben Stanton. “In February, when the coronavirus was centered on China, vendors were mainly concerned about how to build enough smartphones to meet global demand. But in March, the situation flipped on its head. Smartphone manufacturing has now recovered, but as half the world entered lockdown, sales plummeted.”

“From the consumer standpoint, unless replacing a broken phone, smartphones are mostly a discretionary purchase,” says Counterpoint associate director Tarun Pathak. “Consumers, under these uncertain times, are likely to withhold making many significant discretionary purchases. This means the replacement cycles are likely to become longer.”

The true impact of the pandemic is yet to be felt. “Most smartphone companies expect Q2 to represent the peak of the coronavirus’ impact,” says Stanton. “It will test the mettle of the industry, and some companies, especially offline retailers, will fail without government support.”

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Cramer says his most trusted indicator 'makes me concerned' about the market's trajectory - CNBC

Stocks on Wall Street have reached levels that are "too hot" for Jim Cramer's liking.

After the market completed its best month of trading in more than three decades, the host of CNBC's "Mad Money" said he is worried about its near-term trajectory.

"We're now at plus 7.2% on the S&P short-range oscillator. That's the one I swear by. This is the one that called the bottom when it fell to the minus 20s in March," he explained. "Anything above plus 5 is overbought. A 7.2 reading makes me concerned."

The comments come after stocks fell as investors digested the latest economic data and quarterly corporate earnings during the session. Though the major averages all declined on the last day of April, Wall Street's most monitored indexes all finished the month up double digits, topping the gains made in January 1987.

First-time unemployment claims have climbed above 30 million nationwide, due to coronavirus-induced business closures. More than 3.8 million Americans filed for jobless benefits in the past week, according to the Labor Department. Additionally, U.S. consumer spending plunged more than 7% in March from a year ago and gross domestic product fell by 4.8% in the first three months of 2020, according to government data released Wednesday.

Government responses to the health pandemic last month ended the longest period of economic expansion in recorded history, though trillions of dollars in stimulus measures intended to stop the economic bleeding helped carry the market 31% from its March lows, according to FactSet.

The Dow Jones Industrial Average and S&P 500 both declined about 1% and the Nasdaq Composite dipped about 0.28% in Thursday's session.

"The market was overbought, and we got hit with yet another Great Depression-sized unemployment number. That is not exactly confidence-inspiring, for me," Cramer said.

"Meanwhile, there are lots of people who are itching for an excuse to take profits. Today's jobless claims number gave them one, and there'll be a lot more bad news behind it."

In the month of April, the Dow Jones gained 11%, the S&P 500 advanced 12.7%, and the Nasdaq rose 15.5%.

"The rally from the lows made perfect sense, as did a big chunk of last month's crash," Cramer said.

"The bottom line is that we're going to need something new, something different," he continued. "I don't know what it would be. Without it, though, the market is simply too stretched at these levels after a fantastic run and if we rally without some" positive news "I can't blame anyone ... for ringing the register."

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Stock market news live updates: Stock futures extend declines after Amazon, Apple earnings - Yahoo Finance

Stock futures kicked off the overnight session Thursday evening, pointing to a lower open for the first session of May despite constructive earnings results from technology bellwethers.

Earnings results from some of the most heavily weighted companies in the major U.S. stock indices came in mixed after market close Thursday. Amazon (AMZN) posted first-quarter sales that jumped 26% over last year, but warned that $4 billion in expected coronavirus-related costs could drag operating income negative to the tune of $1.5 billion.

Meanwhile, Apple (AAPL) reported quarterly revenue that was virtually flat over last year, and declined to offer an outlook due to uncertainty over the pandemic.

Despite ending the regular session lower on Thursday, the S&P 500 closed out April on a high note and posted its best monthly gain since 1987. The blue-chip index climbed a total of 12.68% for the month, but was still off 14% from its record high on February 19, and down nearly 10% year to date.

“We forecast further gains in most risky assets between now and the end of next year. This reflects our expectation of a rebound in economic activity starting in the second half of 2020, alongside the continuation of massive monetary and fiscal policy support,” John Higgins, chief markets economist for Capital Economics, wrote in a note Thursday.

“Admittedly, risky assets have already recovered quite a lot of the ground that they lost after the outbreak of coronavirus. And two key downside risks remain,” he added.

“First, success in containing the virus could be reversed as economies reopen. Second, the consensus for policy support might break down,” he said. “But assuming these risks do not materialize, we anticipate that the rally will continue.”

Still, equities are entering what has historically been a tougher six-month period in terms of comparable returns.

During that time frame, the S&P 500 have averaged returns of just 1.5% during the May through October period since 1950, according to LPL Research data, and ended the period higher just 64.3% of the time. In more recent history, however, stocks produced positive gains in seven of the past eight six-month periods between May and October, and as much as 10% during the similar period in 2013.

The recent stock rally comes despite mounting evidence of the damage the coronavirus pandemic and social distancing measures have inflicted on the domestic economy. A government report Thursday showed another 3.8 million Americans filed for new unemployment claims last week, bringing the total over the past six weeks to more than 30 million.

But the outbreak at least showed further signs of easing on Thursday, fueling hopes that businesses could slowly begin to open across more jurisdictions and lead to a recovery in economic activity. U.S. coronavirus cases rose just 1.2% on Thursday for the slowest pace of increase of the month, according to Bloomberg and Johns Hopkins compiled data. Overall cases have topped 1.05 million in the U.S. and 3.2 million globally.

—

6:02 p.m. ET Thursday: Stock futures open lower

Stock futures pointed to a lower open on Friday, as investors braced for more earnings and data that are all but certain to show how badly the coronavirus has stifled global growth.

Here were the main moves at the start of the overnight session for U.S. equity futures, as of 6:02 p.m. ET:

• S&P 500 futures (ES=F): down 38 points, or 1.31%, to 2,864.5

• Dow futures (YM=F): down 260 points, or 1.07%, to 23,970.00

• Nasdaq futures (NQ=F): down 157.25 points, or 1.75%, to 8,831.25

Wall Street and New York Stock Exchange in Downtown Manhattan, New York City, USA

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Why a stock-market bull who called the relief rally that took the S&P 500 to 2,950 now refuses to raise his target - MarketWatch

The 5 stock-picking legends you must study up on to become a smarter investor - CNBC

Online books are having a moment. They are the highest-ranked category in year-over-year e-commerce growth, surging 295%. Phil Town, an author whose investing books have been best sellers, is also a big reader of iconic investors who have displayed a penchant for writing.

Here are the five market giants Town recommends for reading material if you want to become a better investor. 

Ray Dalio

Ray Dalio is the billionaire founder of the world's biggest hedge fund, Bridgewater Associates. In 2017 Dalio published "Principles: Life and Work," a book Mark Cuban has described as "A bible to the greatest skill an entrepreneur can have, the ability to learn in any situation."

With the onset of the Covid-19 pandemic, Dalio has been releasing articles on his LinkedIn page and created a weekly newsletter, "Principled Perspectives." Dalio provides insights into where the economy is headed, based on research and data generated from Bridgewater.

"He's the guy I would look to and say, 'How are we going to come out of this?'" says Town.

Warren Buffett

Warren Buffett is among the most successful investors of all time, and every year his company, Berkshire Hathaway, holds its annual shareholder meeting in the spring. It's known as Woodstock for capitalists, and since 1977, Buffett has released a letter to shareholders available online in which he candidly discusses investments, mistakes he had made, and broader views on the good and the bad about the stock market and Wall Street. 

Charlie Munger

Mohnish Pabrai and Guy Spier

In 2007 two businessmen spent over $650,000 on a lunch date. Investors Mohnish Pabrai, founder of Pabrai Investment Funds, and Guy Spier, who now runs an investment fund based in Zurich, bid on the chance to dine with the Oracle of Omaha at an annual charity auction the Berkshire Hathaway CEO has hosted since 2000 at the Smith & Wollensky steakhouse. It apparently was a bargain: Last year's winner paid over $4 million for the honor of sharing a lunch with Buffett.

That same year, Pabrai published "The Dhandho Investor," a book that lays out his framework of value investing.

Pabrai's book tells the story of how the Patel family from India came to own over 40% of motels in America, expanding on principles of value investing. Value investing can be defined in more than one way, including an investment strategy for picking stocks that investors believe are trading at less than their intrinsic value, and stocks that are underperforming and therefore considered "cheap."

After lunch with Buffett, Spier wrote his own book, "The Education of a Value Investor." Spier's memoir is candid and takes readers from the darkest corners of Wall Street to a practical guide on what it takes to become a successful investor.

Both Pabrai and Spier continue to post musings on personal blogs. 

CNBC's Warren Buffett Archive is another great resource for everything Buffett. With 130 hours of searchable video and 2,800 pages of transcripts, readers and viewers can get a full Buffett education. 

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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.

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Stock Market Surge Isn’t as Crazy as It Seems - The Wall Street Journal

If investors had missed the catastrophe hitting Main Street, United Airlines at half its book value would look like a bargain.

Photo: Justin Sullivan/Getty Images

By

James Mackintosh

James Mackintosh
The Wall Street Journal
• Biography
• @jmackin2
• james.mackintosh@wsj.com

April 30, 2020 8:19 am ET

The disconnect between the stock market message of glad tidings to capitalists and the economy’s slump into the worst performance since the Great Depression is unmissable. Are investors making a horrible mistake?

In zoological terms, is the 34% rebound since the low of March 23 the start of a new bull market or merely a dead cat bounce we will all forget when the bear returns?

My starting point is that I would worry about the scale of the rebound if I thought investors were becoming confident about a rapid, V-shaped recovery, which appears unlikely. I would also fret if they were way too optimistic about the risks to survival companies face.

Dig into the market and neither is clearly the case. Investors have singled out the companies most at risk from the economic freeze, not blindly bought everything. Airlines, aerospace manufacturers, cruise operators, mortgage stocks and office supplies were among the hardest hit in the February-March crash, and lagged behind in the rebound, too.

If airhead investors had somehow missed the catastrophe hitting Main Street, United Airlines at half its book value would look like the bargain of the century. In reality, investors know full well what is going on, and are pricing United and other stocks that lost the bulk of their revenue for the real risk of disaster.

The same goes for Ford: Anyone expecting a rapid return to normality should merely expect a couple of bad quarters. Instead, even after the recent jump, investors who reinvested their dividends have made virtually nothing since February 1994. Ford’s stock price is once again where it stood in 1986.

Furthermore, it has been a strange recovery.

After energy stocks, the two best sectors in the S&P from the March low up to Friday were health care and utilities, defensive companies usually expected to prosper in bad times, not in a bounce back. Industrials, classic cyclical stocks that ought to do well when investors expect the economy to prosper, underperformed. Only this week, when tentative moves to end lockdowns and news of drug tests boosted hopes for the economy, did investors start to place standard recovery bets on beaten-down cyclical stocks.

Other things were weird, too. Boring stocks that don’t swing around a lot are meant to offer some protection against falling markets. But that strategy failed this year. After years of outperforming, the S&P 500 low-volatility index fell more in the crash and rose less in the rebound.

A bunch of stocks previously regarded as safe—as safe as houses in the case of real-estate investment trusts that own mortgage bonds—turned out to be very risky in the lockdown era. And some shares usually regarded as risky, such as biotechnology and online shopping stocks, suddenly seemed like a much safer bet as they could actually benefit from lockdown.

“What looked like low risk at the outset was not really low risk,” says Melissa Brown, head of applied research at financial analytics firm Qontigo.

The result is that more than one in five S&P 500 members managed to lag the market in all environments: in the final three years of the bull market that ended on Feb. 19, in the bear market and in the renewed bull (or dead cat) market up to the end of last week. Stocks as diverse as Wells Fargo, Walt Disney and General Motors missed out on the big gains of the bull market, fell more in the bear market and then managed only a weak rebound—before putting in big gains this week.

The market might be wrong to expect a slow but steady, U-shaped recovery, and in the past few days I fear it is showing too much optimism that a medical solution can prevent or cure a second wave of infections. But those who think the market is obviously missing something because it is up so much even as unemployment soars are misinterpreting what has driven it to these levels.

One note of caution comes from the similarity to the brief bull market of November 2008 to January 2009. Yes, bull market: It is easy to forget given how bad things were at the time, but stocks jumped 27% in 30 trading days, easily qualifying for the standard definition of a bull market.

Just like then, the pattern of the fall was reversed: Winners became losers and losers became winners (see table). Yet, back then there was a dash for trash, with little discrimination; even crippled bank Citigroup jumped almost 60% in the 2008-09 bounce.

This year, investors have made more effort to pick out the coronavirus losers. A statistical measure of the strength of the reversal was twice as strong back then as in this rebound, up to Friday. It is somewhat reassuring that the strength of the reversal this year was the same as in the early months of the true bull market that began in March 2009—although this week, blind faith seems to have taken over. Two examples: Norwegian Cruise Line Holdings and Royal Caribbean Cruises are up 54% and 37% respectively from their intraday lows Friday.

I don’t think the market has disconnected from reality. But it is turning optimistic, raising the chance of disappointment. If you want to find peace of mind and haven’t sold yet, cashing in some of the gains since March makes sense.

Ford’s stock price is once again where it stood in 1986.

Photo: Anthony Lanzilote/Bloomberg News

Write to James Mackintosh at James.Mackintosh@wsj.com

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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How to navigate the stock market when ‘all news is great news’ to care-free investors - MarketWatch

By Nigam Arora

Published: Apr 30, 2020 10:30 am ET

Investors have pushed up tech stocks, including Facebook, even as surging jobless claims show the economy is wrecked

Weekly jobless claims were published Thursday and, again, the total was ugly: 3.8 million.

I have witnessed periods when the stock market believes bad news is good news, and good news is great news. At this time, the “hopium” in the market has turned into something quite different from most euphoric periods, which previously had led to crashes: All news is great news.

Read: Jobless claims climb 3.8 million in late April to push coronavirus total to 30 million

How should prudent investors navigate this stock market? Let’s explore with the help of three charts.

Charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA-1.49% which tracks the Dow Jones Industrial Average DJIA-1.46%

Please click here for an annotated chart of the S&P 500 ETF SPY-1.26% which does the same for the S&P 500 SPX-1.3% compared with several securities.

Please click here for an annotated chart of Facebook FB+5.16% stock.

Note the following:

• Investors should consider analyzing the stock market in multiple time frames. Please see “The biggest mistake stock market investors are making now — failing to look ahead.”

• The first chart is monthly, giving a long-term perspective. It should be the starting point of all analysis.

• The second chart is daily, giving a short-term perspective.

• The third is a five-minute chart, giving a very short-term perspective.

• The first chart shows that the stock market is at the lower band of the resistance zone. This is a high-risk area. Historically, after a small penetration, there is a high probability of a reversal. This is exactly what was likely to happen before good news on Gilead’s GILD-0.3%  remdesivir treatment for coronavirus was released. Please see “Gilead’s news saved the day for the stock market, which is in a high-risk area.”

• The third chart shows a strong increase in Facebook after the company reported earnings. Investors focused on earnings stabilizing in April and higher engagement numbers. After all, people across the world are stuck at home — what else did investors expect other than more people visiting Facebook more often? The second chart shows that Facebook stock had run up going into earnings.

• Investors ignored the simple fact that Facebook does not charge people to use the social-media service. Facebook makes money from advertisers. What did Facebook have to say about advertisers? The answer: Falling advertising, lower ad rates and lower profit margins this year. What did investors do in response to these negative comments? They, of course, bought the stock.

• The third chart shows the VUD indicator, which is the most sensitive measure of net supply and demand in real time.

• The third chart shows that at least in the case of Facebook for the period shown on the chart, sanity among investors had not completely gone out of fashion. The chart shows that there was some net selling, as has recently been the case in many stocks, such as Twitter TWTR-6.85% and Alphabet GOOG-0.89% GOOGL-1.03%

• Before you send me hate mail, please know that The Arora Report bought Facebook at $49.92 and is still holding the position in the Model Portfolio. Moreover, in March, Facebook fell to the low of about $137 in the Arora buy zone before bouncing back.

• The second chart compares the S&P 500 to shares of Apple AAPL+0.76% Amazon AMZN+2.15% Facebook, Microsoft MSFT-0.01%  and Alphabet.

• The second chart shows that during the stock market swoon, four of the five big tech stocks fell into Arora buy zones, giving investors opportunities to buy at attractive prices.

• The second chart also shows that the strategy of buying value stocks has failed this year. Value has no place in the new stock market hopium; only momentum counts.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

What does it all mean?

Investors ought to follow the framework of protection bands, strategically buy when stock and ETFs dip into buy zones and nibble only when there is a pullback or a decisive breakout. In addition, investors who are trading-oriented should consider taking advantage of short-term opportunities when the setups are right. Please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

Answers to your questions

Answers to some of your questions are in my previous writings. You can access them here.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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Warren Buffett's favorite stock-market indicator hits record high, signaling a crash could be coming - Business Insider

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• Warren Buffett's preferred stock-market gauge hit a record high, signaling that stocks are overvalued and that a crash could be coming.
• The "Buffett indicator" divides the total value of publicly traded stocks by quarterly GDP.
• "It is probably the best single measure of where valuations stand at any given moment," Buffett wrote in a Fortune magazine article in 2001.
• The famed investor and Berkshire Hathaway boss said it was "a very strong warning signal" when the indicator peaked just before the dot-com bubble burst.
• Visit Business Insider's homepage for more stories.

---

Warren Buffett's favorite stock-market indicator has climbed to a record high, signaling that stocks are overvalued and that another crash could be coming.

The so-called Buffett indicator takes the combined market capitalizations of a country's publicly traded stocks and divides it by quarterly gross domestic product. Investors use it to gauge whether the stock market is overvalued or undervalued relative to the size of the economy.

Buffett, a billionaire investor and the boss of Berkshire Hathaway, described it in a Fortune magazine article in December 2001 as "probably the best single measure of where valuations stand at any given moment."

The indicator has its flaws, including GDP not counting income earned overseas and US-listed companies not necessarily contributing to the US economy.

Read more: A fund manager who's beating the market by betting on tiny companies says coronavirus 'turbocharged' the trends driving his portfolio. He told us what they are, and the 3 stocks he's most bullish on.

But it has a strong track record of predicting downturns — for example, it surged to 118% just before the dot-com bubble burst in 2000, and it topped 100% before the 2008 financial crisis.

"Nearly two years ago the ratio rose to an unprecedented level," Buffett said in the Fortune article. "That should have been a very strong warning signal."

The Buffett indicator sat at a historic high of 179% on Thursday, reflecting the US stock market's rapid rebound since the coronavirus sell-off and the 4.8% slump in annualized GDP last quarter. Its current level is well above the average reading of 107% over the past 20 years.

Several market commentators have questioned whether US stocks are overvalued in light of slowing economic growth, surging unemployment, and other alarming data in recent weeks. The latest Buffett-indicator reading is likely to add more weight to their worries.

Read more: A former software engineer quit a 6-figure job and started investing in real estate full-time. He shares the popular 5-part strategy he's leveraging and exactly what he looks for in a deal.

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What the stock market knows - The Week

April 30, 2020

It's hard to identify much good economic news these days.

First quarter GDP figures show the economy contracted at an annualized rate of 4.8 percent, and the second quarter results are expected to be much worse. The unemployment rate may already have reached levels not seen since the Great Depression, and is still rising. And while deaths from COVID-19 may have peaked nationally, we don't know how long the plateau is going to be, and some very populous areas — like California — are still seeing rising case loads.

Nor is America prepared to contain future outbreaks if it tries to reopen. America's testing infrastructure continues to lag well behind what would be needed to replicate South Korea's so-far successful approach, but with cabin fever growing the political momentum is behind loosening restrictions sooner than later, which may be setting us up for a bad second wave of infections with further economic damage. Meanwhile, even China, which believes it has largely licked the virus, is seeing a very sluggish recovery in its aftermath. Pessimism would seem to be more than warranted.

But take a walk over to Wall Street, and things look a whole lot sunnier. As of this writing, the S&P 500 index is up over 3 percent just since the weekend, and up over 33 percent since its late-March lows. It feels like the stock market is living in an alternate reality.

Well, maybe it is.

Before explaining what I mean by that, I should stress that while the current situation is very bad indeed, it's never wise simply to project that situation into the future. The market's job is to discount all the various possibilities — and those are not all gloomy. New treatments are being tested all the time, and though good news (like the latest claims from Gilead Sciences for its anti-viral drug, remdesivir) should be taken with a grain of salt, a breakthrough on that front would have huge implications for fighting the virus, and therefore the prospects of economic recovery. Even in the worst-case scenario on the containment front, where we face hundreds of thousands or even millions of deaths, the long-term economic cost of the virus itself may be limited, so long as the virus does burn itself out rather than recurring annually. Human societies and free economies are highly adaptable, and the market may be discounting those facts better than incredulous observers think.

But there is another possibility worth considering. The market might be fairly rational in its pricing, but also not pointing to a meaningfully higher probability of a quick recovery. Instead, it might be saying something about what that recovery will look like.

The market is not a mirror of the economy, nor is it supposed to be. Rather, it's supposed to measure the present value of future profits of publicly traded companies. That value does go up if the economy is expected to grow, all else being equal. But it also goes up if returns on other assets — such as bonds — are expected to be very low or even negative. And it also goes up if the profits of publicly traded companies are expected to grow as a percentage of the economy.

Both of those factors are likely at play in today's market. When interest rates are at zero, the expected nominal return on the lowest-risk instruments, like treasury bonds, is similarly extremely low, or even negative. (Negative expected nominal returns are perfectly possible if the market is anticipating deflation, which would make real returns positive, or if a high enough premium is accorded to the combination of liquidity and safety that assets like treasury bonds provide.) That puts an effective floor under the value of equities, which at least have the potential to generate a positive return.

The other factor may be even more important, though. The consequences of the virus and the measures enacted to fight it are crushing the economy — but they're not crushing everyone equally. Some industries, like travel and tourism, are going to be hit harder than some others, like home-video streaming services — that's part of the dynamic adaptation that will ultimately serve us well. But one notable effect across the economy is that larger and more powerful businesses are in a position to survive better than small ones, which are less able to adapt as well as less able to sway the government to support them. Chain restaurants are in a position to consolidate more of the restaurant dollars as independent restaurants go under. Amazon is poised to destroy even more physical retail. And so forth.

That has significant implications for a possible disconnect between the stock market and the real economy. Small companies are unlikely to be represented on the exchanges in the first place, and even more unlikely to be represented in big indices; a transfer of business from small private companies to large public companies would be expected to make the market go up even if the real economy didn't change at all. As competition shrinks, large companies gain more market power, which means they are more able to extract rents from consumers. They will also have more ability to extract concessions from workers — which businesses generally do during periods of economic retrenchment.

The stock market, in other words, may be rationally assessing not only the prospects of an economic recovery, but the differential character of that recovery: one that benefits larger, publicly-traded companies at the expense of small businesses, and business interests in general at the expense of labor. Add that to the reasonable expectation that the government will do anything possible to avoid an outright spiral into depression, and maybe the stock market's relatively upbeat take doesn't look quite so crazy after all.

That doesn't mean the stock market is a "good buy" at these levels. I have no particular reason to believe I can forecast the future any better than anybody else. Moreover, if a major reason why the stock market has bounced back is that interest rates are so low, that's an equally good reason to expect that stock market returns will be low going forward as well.

It just means that the stock market might not be a very good proxy for predicting most people's personal fortunes in the years to come.

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Stock Market Surge Isn’t as Crazy as It Seems - The Wall Street Journal

If investors had missed the catastrophe hitting Main Street, United Airlines at half its book value would look like a bargain.

Photo: Justin Sullivan/Getty Images

By

James Mackintosh

James Mackintosh
The Wall Street Journal
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April 30, 2020 8:19 am ET

The disconnect between the stock market message of glad tidings to capitalists and the economy’s slump into the worst performance since the Great Depression is unmissable. Are investors making a horrible mistake?

In zoological terms, is the 34% rebound since the low of March 23 the start of a new bull market or merely a dead cat bounce we will all forget when the bear returns?

My starting point is that I would worry about the scale of the rebound if I thought investors were becoming confident about a rapid, V-shaped recovery, which appears unlikely. I would also fret if they were way too optimistic about the risks to survival companies face.

Dig into the market and neither is clearly the case. Investors have singled out the companies most at risk from the economic freeze, not blindly bought everything. Airlines, aerospace manufacturers, cruise operators, mortgage stocks and office supplies were among the hardest hit in the February-March crash, and lagged behind in the rebound, too.

If airhead investors had somehow missed the catastrophe hitting Main Street, United Airlines at half its book value would look like the bargain of the century. In reality, investors know full well what is going on, and are pricing United and other stocks that lost the bulk of their revenue for the real risk of disaster.

The same goes for Ford: Anyone expecting a rapid return to normality should merely expect a couple of bad quarters. Instead, even after the recent jump, investors who reinvested their dividends have made virtually nothing since February 1994. Ford’s stock price is once again where it stood in 1986.

Furthermore, it has been a strange recovery.

After energy stocks, the two best sectors in the S&P from the March low up to Friday were health care and utilities, defensive companies usually expected to prosper in bad times, not in a bounce back. Industrials, classic cyclical stocks that ought to do well when investors expect the economy to prosper, underperformed. Only this week, when tentative moves to end lockdowns and news of drug tests boosted hopes for the economy, did investors start to place standard recovery bets on beaten-down cyclical stocks.

Other things were weird, too. Boring stocks that don’t swing around a lot are meant to offer some protection against falling markets. But that strategy failed this year. After years of outperforming, the S&P 500 low-volatility index fell more in the crash and rose less in the rebound.

A bunch of stocks previously regarded as safe—as safe as houses in the case of real-estate investment trusts that own mortgage bonds—turned out to be very risky in the lockdown era. And some shares usually regarded as risky, such as biotechnology and online shopping stocks, suddenly seemed like a much safer bet as they could actually benefit from lockdown.

“What looked like low risk at the outset was not really low risk,” says Melissa Brown, head of applied research at financial analytics firm Qontigo.

The result is that more than one in five S&P 500 members managed to lag the market in all environments: in the final three years of the bull market that ended on Feb. 19, in the bear market and in the renewed bull (or dead cat) market up to the end of last week. Stocks as diverse as Wells Fargo, Walt Disney and General Motors missed out on the big gains of the bull market, fell more in the bear market and then managed only a weak rebound—before putting in big gains this week.

The market might be wrong to expect a slow but steady, U-shaped recovery, and in the past few days I fear it is showing too much optimism that a medical solution can prevent or cure a second wave of infections. But those who think the market is obviously missing something because it is up so much even as unemployment soars are misinterpreting what has driven it to these levels.

One note of caution comes from the similarity to the brief bull market of November 2008 to January 2009. Yes, bull market: It is easy to forget given how bad things were at the time, but stocks jumped 27% in 30 trading days, easily qualifying for the standard definition of a bull market.

Just like then, the pattern of the fall was reversed: Winners became losers and losers became winners (see table). Yet, back then there was a dash for trash, with little discrimination; even crippled bank Citigroup jumped almost 60% in the 2008-09 bounce.

This year, investors have made more effort to pick out the coronavirus losers. A statistical measure of the strength of the reversal was twice as strong back then as in this rebound, up to Friday. It is somewhat reassuring that the strength of the reversal this year was the same as in the early months of the true bull market that began in March 2009—although this week, blind faith seems to have taken over. Two examples: Norwegian Cruise Line Holdings and Royal Caribbean Cruises are up 54% and 37% respectively from their intraday lows Friday.

I don’t think the market has disconnected from reality. But it is turning optimistic, raising the chance of disappointment. If you want to find peace of mind and haven’t sold yet, cashing in some of the gains since March makes sense.

Ford’s stock price is once again where it stood in 1986.

Photo: Anthony Lanzilote/Bloomberg News

Write to James Mackintosh at James.Mackintosh@wsj.com

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