A VOLATILE DAY

Several bulge bracket firms including JP Morgan, Goldman and Bank of America are nervous about what happens if the trade in the mega cap technology companies continue to falter.  All three firms commented about the risk that these companies pose to the S & P 500 “is unprecedented and has never been greater.”

According to Blomberg, the five of the largest companies in the S & P 500 account for 27% of the S & P 500 index, up from about 24% at the start of year and 14% five years ago.

Friday, I commented about the lack of breadth in the market.  According to Goldman just five stocks have contributed to more than half of the S & P 500 gains since April.  Goldman writes “historically periods of sharply declining market breadth are followed by week returns and deeper than average drawdowns.”

Goldman further writes “the technology mega caps have price earnings and price to sales ratios that are nearly double their average over the past decade and are in a precarious position if either earnings growth rate slows or interest rates rise.”

As noted above the dominance of the mega tech names over the last five to seven years is gargantuan, a dominance that has greatly impacted valuations and performances of the indices.

Equites were volatile Friday, the result of a combination of the expiry of equity derivatives and rebalancing of the S & P 500.  Volume was heavy, making it one of the busiest days of the year.

Treasuries advanced in price following a Fed statement that a rate hike will be warranted “shortly after” the central bank concludes its asset purchases in 2022.

What will happen this week?

The economic calendar is relatively light going into a holiday shortened week.  There is the final revision of fourth quarter GDP, several housing and inflation statistics, personal income and spending as a sentiment survey.

Last night the foreign markets were down. London was down 0.98%, Paris down 0.90% and Frankfurt down 1.61%.  China was down 1.07%, Japan down 2.14%  and Hang Seng down 1.93%.

The Dow should open about 0.75% lower and NASDAQ lower by 1.25% on Omicron fears.  And then there is the uncertainty about the President’s agenda given Senator’ Manchin’s weekend statement about “Build Back Batter” legislation.   How much is the Senator’s statement weighing upon the markets?   The 10-year is up 1/32 to yield 1.40%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.