20 Aug IT IS NOW THE S & P 5 NOT THE S & P 500
Perhaps Brown Brothers Harriman put today’s market into proper perspective when the firm stated
The Fed’s largesse means that there are trillion of dollars of excess liquidity sloshing around seeking greater returns than the near zero or even negative rates offered by fixed income. Monies are not necessarily gravitating into the real economy but rather into the same five or six momentum driven mega sized stocks which has created the most imbalanced market in history and if history is to repeat itself it will end disastrously for the owners of these companies.
Brown Brother’s further commented another stimulus is all but inevitable, the amount of which is what is in question. The firm rhetorically asked will there be more of the same, inferring the monies will not enter the real economy but rather further bid up the massively over owned companies even beyond today’s historical levels?
Some have commented that today it is no longer the S & P 500 but the S & P 5.
A pivotal question at hand is the extent of inflationary pressures. For a myriad of reasons retail sales are greater today than one year ago. However, production is lower than a year ago. Will demand pull inflation occur given the declines in inventories and lack of production? High frequency data is suggesting such may be in a nascent phase.
Continuing with the inflation theme, M-2 is up 23%. Historically such money supply growth is consistent with inflation.
The Federal Reserve is not forecasting a 2% inflation rate until the end of 2023. What the odds that such could be reached by early 2021 partially the result of the rebound in the economy? The Atlanta Fed is now suggesting a 26.2% annual 3Q GDP.
Higher inflation will impact valuations. I rhetorically ask has the market priced the current growth rate for the largest companies that have thrived during the pandemic into perpetuity? First Trust opines the companies that have dominated during the past six months, these firms have “pulled” five years of growth into six months, the result of the shutdowns that eliminated many of their smaller competitors.
What happens if there is a moderate increase in interest rates and the rate of growth slows for the leviathans, the result of greater competition via reopening?
Speaking of interest rates, the recent Minutes from the most recent FOMC meeting indicated there is no longer the possibility of introducing yield curve control measures and is now in favor of some form of outcome-or calendar based forward guidance in the statements combined with the adoption of an average inflation target.
The Fed stated the obvious the health crisis will weigh heavily on economic activity and repeated its view that the path of the recovery would depend on containment of the virus.
Markets reversed course and ended nominally lower on the Minutes.
Last night the foreign markets were down. London was down 1.11%, Paris down 0.97% and Frankfurt down 0.88%. China was down 1.30%, Japan down 1.0% and Hang Sang down 1.54%.
The Dow should open nominally lower on continued pandemic economic concerns highlighted by the Fed. Weekly jobless claims are released at 8:30. Consensus is predicting 920k initial claims and 15000k continuing claims. The 10-year is up 8/32 to yield 0.65%.