- UBS Global Wealth Management's chief economist said high stock prices could signal a misallocation of capital in the economy.
- He said politicians often incorrectly point to rising stock markets as a sign of economic health.
- Meanwhile, U.S. stock investors are the most bullish they've been in two years.
Conversations about markets often take a familiar shape.
It's a good day when stocks go up. It's a bad day when stocks go down.
However, as is often said, stocks are not economics. Yet politicians and the media sometimes confuse the two when it suits them. Doing so is often misleading, said Paul Donovan, chief economist at UBS Global Wealth Management.
He told Business Insider that the key in any market is to value assets fairly, not to drive up their prices.
“If expectations for the future are positive and asset prices are rising, that's a good thing,” Donovan said. “But if you have a bubble and asset prices are going up because they’re moving away from fair value, that’s not good.”
Donovan said that when investors invest in assets such as stocks, even when the outlook for the economy and future earnings is cloudy or negative, they have less money available for other, more valuable investments. claim.
Donovan said that while the dominant financial conversation is that rising stock prices are “good,” that's not always the case, and instead it's important to state that “fairly priced stocks are good.” Ta.
In fact, in Donovan's view, investing in something because you want it to go up rather than because you believe it's being valued is bad not only for your investment but also for the economy as a whole. .
One example, according to some experts, is Bitcoin.
European Central Bank analysts said in a blog this week that Bitcoin's fair value is zero because it has no real-world use and is likely to cause more problems than it solves. Ta. In the ECB's view, Bitcoin faces boom-and-bust risks that could result in “massive” collateral damage, and that price increases are mainly due to price manipulation and hype.
“Anything that leads to distortions in asset prices leads to misallocation of funds, and that obviously can be a problem,” Donovan said. “Then what you're doing is over-investing in things that are worthless because it's a bubble, and under-investing in things that will benefit the economy.”
In recent weeks, U.S. markets have been posting record after record, even as concerns about a possible recession remain.
And on Thursday, Japan's Nikkei Stock Average hit an all-time high since 1989. Notably, Japan is currently in recession, highlighting the disconnect between investor enthusiasm and the economic outlook.
Bank of America's latest Global Fund Manager Survey, released in early February, shows investors haven't become more bullish on stocks in the past two years, and Charles Schwab 's Q1 2024 Customer Sentiment Report reflects similar results. More than half of respondents gave a bullish outlook for the first time since 2021, up from 32% last quarter.
For UBS's Donovan, ultimately it's not a matter of whether recent stock price gains were good or bad, but whether they accurately reflect investors' expectations about the global economy and future earnings.
“If you have changed your view of the world economy and related economies to a more pessimistic view, then it is healthy rather than 'good' for stock prices to fall, because stock prices are more “This is because we are accurately discounting the pessimistic ones.” future. “
