Replay of the 1928 U.S. stock market surge just temporary?

Trump 2.0 is about to return to the White House, and the US stock market is welcoming a new round of gains. However, Bloomberg columnist John Authers believes that this rebound seems to be a "replay" of the situation in 1928. From Herbert Hoover's election in 1928 to the outbreak of the Great Depression in 1932, history has proven that stock market rebounds do not necessarily mean economic prosperity. Similarly, although Trump's re-election has brought short-term gains to the stock market, risks such as market overvaluation, debt pressure, and inflation are accumulating, making it more difficult to predict the future direction of the US economy. Perhaps the market should not rely on stock market performance to judge the economic situation. The volatility of the stock market is high, and short-term stock market rebounds cannot predict long-term economic development. 1928 and 2024: Amazing similarities Looking back at 1928, when Herbert Hoover was elected President of the United States, the stock market also experienced a strong rebound similar to today. At that time, the United States was experiencing a period of economic prosperity known as the "Roaring Twenties," with the automotive, electrical, construction, and steel industries driving the development of the US economy. In this unprecedented prosperity, all worries or dissenting voices were drowned out. Unregulated bank funds flowed massively into the stock market, and stock trading was exceptionally active. In 1925, the total value of stocks on the New York Stock Exchange was $27 billion, soaring to $87 billion by September 1929, more than doubling, and the stock market skyrocketed. Although the stock market was booming, the fundamentals of the economy had already shown signs of fatigue. The purchasing power of the American people had exceeded their limits, income inequality restricted the ability for the economy to continue growing, and economic expansion was limited. On October 24, 1929, known as "Black Thursday," marked the beginning of the collapse of the US stock market. On this day, the stock market performed extremely harshly, with trading volume on the New York Stock Exchange reaching 12.895 million shares, setting a historical record at the time. The market selling frenzy emerged like a flood bursting its banks. This was followed by the decade-long disaster of the Great Depression. Now with Trump's re-election and a significant rebound in the US stock market, especially in industries aligned with Trump's policies, the performance is particularly strong. In a sense, Trump 2.0's economic policies are seen by the market as a "panacea" for revitalizing the US economy. However, history teaches us that the volatility of the stock market is immense, and short-term gains do not necessarily mean long-term economic improvement. High valuation poses a threat Authers believes that the high valuation of the US stock market is a huge risk facing the market at present. Taking the S&P 500 index as an example, the current market valuation is close to historical highs. A high valuation in the stock market often means that returns in the coming years will be far lower than expected. Especially in the post-pandemic global economic boom of 2021, the valuation of the S&P 500 hit new highs, and the current valuation is similar to that of the dot-com bubble period in 2000. Furthermore, the cyclically adjusted price-to-earnings (CAPE) ratio also shows similar warning signals. The CAPE compares stock prices to the average inflation-adjusted earnings over the past ten years, adjusting for errors caused by market fluctuations. Data shows that the current CAPE index is close to 38, almost matching the level seen in 2000 when George Bush was elected, which was the peak of the dot-com bubble. Although this does not directly predict a stock market crash, it does indicate that the market's high valuation may mean lower returns in the future. Beware of inflation pressure Authers also points out that changes in the bond market are also cause for concern. After the election, US Treasury yields surged, especially the yield on 10-year Treasury bonds rapidly increased. The market began to fear that Trump's tax cuts and trade policies could bring inflationary pressure, and the Federal Reserve might pause its rate cuts because of this. The yield spread in the bond market has narrowed to historically low levels. A similar situation occurred in 2007 when the spread on high-risk debt narrowed, eventually leading to the subprime crisis and the global financial crisis. Additionally, rising prices and high interest rates are also significant risks in the current economic situation. Authers points out that inflation in the US has far exceeded the Federal Reserve's target, and after the election, expectations for future rate cuts have shifted, with the Fed likely to maintain higher interest rate levels to combat inflation. A high-interest-rate environment will increase the cost of financing for businesses, reduce consumer spending, and could slow economic growth. Authers believes that although Trump's economic policies may bring some short-term stimulation, especially in tax cuts and trade, in the long term, the current high valuation of the stock market and rising debt levels cast a shadow over future economic growth. This article was reproduced from "Wall Street Horizon", GMTEight Editor: Lee Fo.