Conclusion! Personally, I’d say I’m 60% cautious
Let me state this up front: I’m writing this to organize my personal thoughts.
Some of you may find this helpful, while others may think, “No way, that’s not going to happen.” Either way, I hope you’ll enjoy this as a collection of ramblings from a non-expert.
[Conclusion] From a long-term perspective, I think this is a good buying opportunity, but I’m remaining cautious.
I still think there’s a possibility of a significant drop, and even if there isn’t a double bottom, it’s more likely to take many years to return to pre-COVID levels.
I’ll outline my reasoning below
Are current stock prices fair?
The Nikkei 225 closed at 20,037 yen on May 15.
Over the past few days, the index has fluctuated around the 20,000 yen mark, remaining well above the recent low of 16,358 yen set on March 19.
Source: Rakuten Securities
Next, regarding the S&P 500, the closing price was $2,863.70
This is also well above the recent low of $2,191.86 set on March 23
Next, looking at the VIX index—commonly known as the “fear index”—and the Nikkei VI, both have fallen significantly since the COVID-19 shock in March
Next, let’s calculate the yield spread—which measures the undervaluation of stocks based on the difference between the dividend yield of stocks and the long-term interest rate on government bonds.
Since I didn’t see much point in calculating this using the Nikkei 225, I calculated it using only the S&P 500
According to Bloomberg, the EPS is 19.73; when calculated using a U.S. Treasury yield of 0.645, the yield spread comes out to 4.4%.
During the sharp decline in U.S. stocks in 2018, this figure fell below 3%, so when compared to the index levels at that time, stock prices still seem to have some room to rise.
The U.S. Treasury yield of 0.645% is down about 1% compared to three months ago (;・∀・)
There are still other factors to consider, but based on this alone, I don’t think current stock prices are particularly high
However, looking at statements from key global figures, there are many reasons not to feel reassured
Notable Statements from Key Figures
There were three statements last week that stood out to me.
The first was a statement by Dr. Michael Ryan, who oversees the WHO’s emergency response.
He stated, “COVID-19 may become endemic—spreading within normal limits in certain regions—and may never disappear entirely,” adding, “It’s important to be realistic; I don’t think anyone can predict when COVID-19 will disappear. It may develop into a long-term problem, or it may not.”
Dr. Ryan pointed out that the risks associated with COVID-19 remain high “at the national, regional, and global levels.” He stated, “I am concerned that if lockdown measures are eased without the capacity to detect new infections, we will fall into a vicious cycle of public health crises and economic collapse.”
Source: REUTERS
The second point concerns President Trump’s relationship with China.
In an interview with FOX Business Network, President Trump stated, “I have been very disappointed with China. China should not have let the COVID-19 outbreak run its course.” He added, “We had just reached a wonderful trade agreement, but it doesn’t feel that way now.That’s because the COVID-19 outbreak spread before the ink on the agreement had even dried,” indicating his view that the COVID-19 pandemic is casting a dark shadow over the U.S.-China trade agreement.
Although he has a good relationship with President Xi Jinping, he said, “I don’t want to talk to him right now,” emphasizing that he has no interest in renegotiating the trade agreement.
Furthermore, regarding China, he stated, “We have many measures at our disposal. We could even completely sever ties.” Referring to the annual value of imports from China, he also stated, “If we sever ties, we could save $500 billion.”
Source: REUTERS
The third item concerns remarks and actions by Warren Buffett, the “Oracle of Omaha.”
It was revealed on the 15th that he had sold 80 percent of his holdings in Goldman Sachs by the end of March. Buffett favors U.S. bank stocks and has allocated substantial funds to them. He invested in Goldman Sachs during the 2008 Lehman Shock and subsequently became a major shareholder.
It was also revealed that he had reduced his holdings of JPMorgan stock. On the 13th, he announced the partial sale of his shares in US Bancorp, a major U.S. regional bank.
At the annual shareholders’ meeting held on the 2nd, he revealed that he had sold all of his airline stocks, including shares in Delta Air Lines. He stated that “the world has changed” due to the pandemic and believes passenger numbers will not fully recover even after the pandemic subsides.
Source: Nihon Keizai Shimbun
The overlap between Dr. Ryan of the WHO’s statement that the virus “may never be eradicated” and Buffett’s view that “passenger numbers will not fully recover even after the pandemic subsides” is striking, underscoring the severity of the headwinds facing the aviation industry.
Furthermore, I cannot help but feel that Buffett’s significant reduction in the proportion of financial sector holdings in his portfolio suggests a bleak outlook for the future.
Berkshire Hathaway, led by Buffett, had increased its cash ratio prior to the COVID-19 pandemic, and while I initially thought the company might calmly buy up shares during this market crash, it is actually rebalancing its portfolio.
I think this is a point worth noting.
Please see here for past articles on Berkshire.
Also, regarding the relationship between President Trump and China:
While relations are currently good, his remarks suggesting that ties could be completely severed raise concerns about future developments
Judging by the remarks from the high-ranking officials mentioned above and the moves by prominent investors, I get the impression that there isn’t much room for optimism regarding future developments
Based on this information, my investment assessment is that while it’s a buying opportunity from a 10-year perspective, the outlook for the next 1 to 3 years is bleak (be prepared for losses).
Today marks the start of a new week
I wish you all the best of luck.
I hope this article inspires someone to keep striving in their investments.
Thank you for reading all the way to the end♪
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