03 Jan IS THERE A MAJOR CONTRADICTION?
In my view the opinions on Wall Street are either extremely bullish or bearish. The bullish camp contends technology shares will continue their exponential rise. Bloomberg writes Apple and Microsoft contributed about 35% to the Dow’s 2019 gains. As written several weeks ago the amount of wealth concentrated in five companies—about 19% of the value of the S & P 500—is unprecedented. The technology sector represents about 28% of the S & P 500 capitalization shattering 2000 record of about 23% as per Bloomberg.
As stated above the bullish camp argues this trend will continue.
Changing asset classes, many are writing 2020 will be the year of reckoning in corporate and sovereign debt. Again referencing Bloomberg, Bloomberg writes the biggest economies will roll over $8.7 trillion of sovereign debt in the next 12 months. This value of sovereign debt from the G-7 nations plus key emerging markets that is coming due this year is up 25% from five years ago.
Yesterday S & P took its most bearish stance on US corporate debt since 2009 as a huge wall of investment grade rated must be refinanced this year, debt that was primarily originated for non-economic purposes such as stock repurchases and increased dividends. S & P rhetorically asks will there be a “crowding out effect” the result of a huge demand for sovereign debt?
It is widely accepted that interest rates are the largest variable of valuation formulas. Wages is the largest cost of production. Challenger reported yesterday that US job cuts are at the lowest since 2018, falling about 26% from November and 25% from last December. Wages are increasing at the greatest rate since 2006.
What happens if inflationary expectations begin to rise because of wages, amplified by the massive amount of debt that must be rolled over? Will equities suffer a severe bout of volatility?
I believe the surprising aspect of 2019 was the Fed’s 180 degree turn on interest rates. At year end 2018 the markets believed the central bank would continue its tightening phase into 2019 by raising the overnight rate by an additional 0.75% on the heels of a 1% jump in 2018. Such action and belief was a major catalyst for December 2018 plunge.
In reality the Committee lowered the overnight rate by 0.75% and re-padded its balance sheet bring it back over $4 trillion by year end.
Many of commented because of technology based trading where interest rates are one of the largest variables of these programs, such is a major reason as to why the market averages had a strong 2019. It was a liquidity vacuum but in the inverse.
I find it interesting that several bulge bracket firms are bullish on mega size technology issues that are dominating market averages but yet are bearish on corporate debt and negatively waxing philosophically about the sovereign debt market. Is this a contradictory stance based upon “accepted” reasons for December 2018 plunge and 2019 advance?
Commenting about yesterday’s market action equites rose as the Chinese central bank made moves to strengthen its economy. Treasuries also rose in price because of Chinese policy.
Last night the foreign markets were down. London was down 0.28%, Paris down 0.45% and Frankfurt down 1.70%. China was down 0.15%, Japan closed for a holiday and Hang Sang down 0.32%.
The Dow should open considerably lower on Middle East tensions. The 10-year is up 16/32 to yield 1.83%.