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Is the ASX 200 trading too high right now?

Is the S&P/ASX 200 Index (ASX: XJO) too high right now? We have just seen the ASX 200 rise 6.7% over the past month… too good to be true?
The post Is the ASX 200 trading too high right now? appeared first on Motley Fool Australia. –

Avoid

The S&P/ASX 200 Index (ASX: XJO) is having a fairly ho-hum kind of day today. At the time of writing, the ASX 200 is down 0.67% to 6,190 points, after going as high as 6,241 points earlier in the day. At these levels, the index is still pretty close to the post-March crash highs that we saw last week.

The ASX 200 is up 6.7% over the past month. Since 23 March, the ASX 200 is now up 36.67%.

But how justifiable are these levels? The coronavirus pandemic is unfortunately still with us (albeit at a far more contained level than even a month ago). Economic growth is still sluggish. The Reserve Bank of Australia (RBA) is contemplating further easing, including an expansion of the quasi-quantitative easing programs it has been conducting throughout the year. Interest rates are widely tipped to be slashed again before too long as well, with many commentators suggesting a move from the current cash rate of 0.25% to 0.1% the most likely shift.

Add to that the impacts of the already-initiated government stimulus measures tapering off over the next few months, and the picture doesn’t exactly look bright.

So is the ASX 200 too high today?

Well, not if you look at what’s going on in the United States. Although the ASX 200 is up substantially since the lows of the March crash, it still remains down 7.18% year to date, and down 13.3% from the February all-time high of 7,162 points.

Looking at the US, which is arguably in a far worse economic state than Australia, and has been struggling far more in containing the pandemic, you would think that their markets would be a little more depressed than our own. But that is far from the case. Not only is the flagship S&P 500 Index (INDEXSP: .INX) back above the levels it was at at the start of the year, but it’s also been making all-time highs. All-time highs!

The highest level the S&P 500 has ever been at was 3,580 points, which was hit on 2 September 2020. Today, it’s a touch below that at 3,426. To me, there’s just something a little off about those numbers. Remember, we’re in the midst of one of the worst global recessions in a century. That’s not a time that you usually see share markets at all-time highs…

Saying that, the actions from central banks around the world have been unprecedented in 2020, which is (in my view) the primary reason we are seeing global markets at these kinds of levels. Near-zero interest rates seem normal today, but the reality is we are in uncharted waters on that front.

With interest rates at zero (or even in negative territory in some countries), there’s only one real way they can go from here: up.

Of course, this will probably take years though, at least if what the RBA governors are saying comes to pass.

Foolish takeaway

We might look at the ASX (or more conspicuously the US markets) and think they are too high, given the state of the global economy. But near-zero interest rates around the world have changed the game. Thus, when rates are at these levels, I don’t think we can say markets are too high. But I am worried about the day rates start climbing again. As always, the best answer to these kinds of questions is simply to find businesses that will do well, no matter the economic weather.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The post Is the ASX 200 trading too high right now? appeared first on Motley Fool Australia.

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