Stocks Are Setting Up for the Roaring ‘20s Again?

Comparing today’s pandemic to 100 years ago, there are some similarities. Economies shut down, both pandemics were near the ‘20s, and they were both deadly.

There were also some major differences. The Spanish Flu of 1917 occurred post World War I. An estimated 500 million people were infected and 50 million died. Here’s a rough comparison of the 2 pandemics, comparing the global population, infection, and mortality rates:

So, why am I comparing the pandemics? Because the Spanish Flu paved the way for the booming 1920s. Immediately after the Spanish Flu, the 1920s saw America’s economy grow 42%. The world reopened and consumer demand went through the roof.

I think that’s the setup for stocks today. So, let’s take a look at the Big Money data. You’ve likely heard that the market is forward-thinking. According to the Big Money Index, investors scooped up stocks in a massive way after the pandemic lows of March 2020.

It tracks Big Money movements into and out of stocks:

That’s right, stocks were bought ahead of the big, massive 90% rally that the S&P 500 made from the March low.

Now the question is, are stocks expensive? A popular way to gauge how rich or cheap the market is, is by looking at the price to earnings ratio (P/E). Right now, it’s sitting at 45 times:

But remember, the P/E ratio looks at the prior 12 months of earnings. So, it’s backward looking. Maybe the better measurement is to look at the forward P/E ratio for stocks (forward estimate of earnings). It’s currently sitting at 21.1X and falling.

Many investors may miss this when sizing up stocks. A high P/E ratio doesn’t necessarily mean an overvalued market. With an economy set to rev back up, earnings will accelerate, causing the price to earnings multiple to contract…assuming stock prices stay muted.

So, let’s wrap this all up. The world is reopening…the machines are turning back on. This is good for stocks going forward. And my bet is that we’ll see another roaring ‘20s for markets.

I’ll leave you with this quote: “The difference between the greats and the legends is their ability to focus for longer periods of time.” -Jordan Burroughs

Disclosure: the author holds no position in SPY or the S&P 500 at the time of publication.

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