After our comments on the increased risks on the markets, we would point out another issue: the current (beginning of June 2020) market performance and its effects on the valuations.

What we observe is a strange and troubling detachment of the financial markets from the real economy, in terms of performance, risk assessment and sentiment. Just a couple of examples:

• Fed is projecting the worst 2nd quarter
• The employment, retail sales and other major macro indicators are plummeting
• The uncertainty about the near future of many sectors is high,

while in another reality:

• Stock markets are booming – e.g. Nasdaq is hitting new record highs
• Bankrupt companies are trading “as usual” – even selling new shares
• Overconfidence and recklessness are prevailing

So, what is the reason for these two realities? We would point out the economic policy in the USA and other developed countries to manage the pandemic (but also political, social, election and even structural economic problems) by financial stimuli in gigantic proportions and central bank interventions. As a result, the market players act on the “free” and cheap money, assuming a continuous market support by the governments and the central banks. In addition, the central banks (especially Fed) are becoming not only a market player but basically the dominant player in many markets. Regardless of the validity of the macroeconomic goals, from the market price and valuation perspective, these could be seen as price manipulations. The latter has some serious implications when using the market approach in valuations:

• The currently observed market multiples derived from public companies might be misleading because both the numerator (e.g. Enterprise Value, affected by the market cap) and the denominator (e.g. pre-pandemic EBITDA) might not reflect the economic and business realities in the specific company
• The market approach based on public company multiples might not be the best method to use these days; the application of the market approach should always be accompanied by an alternative approach: the income approach (e.g. DCF), at the minimum as a sanity check.