Home Capital Tong's Portfolio

Excessive unproductive liquidity causes irrational speculation in stock markets

Asia Analytica
Asia Analytica7/17/2020 6:30 AM GMT+08  • 8 min read
Excessive unproductive liquidity causes irrational speculation in stock markets
The reality is that, while earnings and cash flow determine stock prices in the long run, short-term prices are driven by demand and supply.
Font Resizer
Share to WhatsappShare to FacebookShare to LinkedInMore Share
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

(July 17): This market rally is, without a doubt, driven by massive amounts of liquidity, created by major central banks of the world in an effort to limit the fallout from the Covid-19 pandemic. To many, the strong global stock market recovery from the lows in March and subsequent resilience appear disconnected from the dismal economic data and corporate earnings. After all, the price of a stock is supposed to reflect its underlying intrinsic value, which is the discounted future cashflow stream, plus a layer of premium for risks and liquidity. By this measure, many of the best-performing stocks are trading at irrational valuations.

The reality is that, while earnings and cash flow determine stock prices in the long run, short-term prices are driven by demand and supply. Investor demand is, in turn, driven by prevailing storylines.

In other words, the seemingly irrational stock prices we see today reflect the chase for the hottest trends — be it fad, hype, buzz or, yes, even blind faith — rather than staid old business models, sustainable competitive advantage, balance sheets and profit margins.

For more insights on corporate trends...
Sign In or Create an account to access our premium content.
Subscription Entitlements:
Less than $9 per month
Unlimited access to latest and premium articles
3 Simultaneous logins across all devices
Bonus unlimited access to online articles and virtual newspaper on The Edge Malaysia (single login)
×
Loading next article...
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
Subscribe to The Edge Singapore
Get credible investing ideas from our in-depth stock analysis, interviews with key executives, corporate movements coverage and their impact on the market.
© 2022 The Edge Publishing Pte Ltd. All rights reserved.