Has the Stock Market Become a Value Trap?

“It remains to be seen whether Covid-19 is coming under control. When it comes to valuations, though, the optimists may well have fallen into a trap.” This according to a recent article in Bloomberg.

A value trap occurs, the article explains, when a security “appears inexpensive relative to any number of metrics. The trap springs when the price of the security or asset continues to languish or drop even further.” Stocks looked cheap in mid-March, it notes, but “that was before analysts started cutting their 2020 profit estimates.” Since many analysts held off on adjusting their profit estimates, earnings estimates are likely to fall further.

The article notes the following concerning developments:

  • Global debt levels: Rising debt levels leaves highly leveraged economies vulnerable to “massive” reductions in output lasting more than a decade, even in a low interest rate environment, the article argues. “What’s concerning,” it adds, “is that debt issuance showed no sign of slowing before the pandemic.”
  • Emerging markets: While emerging markets have accounted for a larger portion of the global economy over the past decade, the article notes that “their health care systems continue to lag behind those in developed markets, raising questions about their ability to handle the coronavirus pandemic.”
  • Rice and wheat prices are rising, and the higher costs are a “double whammy for a global population that faces a worldwide recession, with many either already out of work or soon to be.” The reason for the spike in prices is unclear, the article notes, but could be some combination of grain futures prices and “local logistical choke points or panic buying.”