10 Nov THE INVERSE OF LAST WEEK….
The Dow soared 2.9% and bonds tumbled after a large-scale coronavirus vaccine study delivered promising results. Unlike last week’s advance where the majority of the companies in the S & P 500 declined on both Wednesday and Thursday, Bloomberg reported yesterday 85% of the Benchmark’s members advanced. The NASDAQ closed lower about 1.5%. The S & P was up about 1.2%.
Bloomberg writes the reversal from stocks that had the greatest momentum…aka the stay at home stocks–was at the greatest degree since the 2008 commencement of this indicator. At that time the reversal was in the financials.
Treasuries were crushed with the 10-year declining over 1 ½ points and thirty year off over 3 1/4 points. Yields are now at six-month highs. As noted many times interest rates are the largest component of valuation formulas. At some point rising rates will impact equity valuations, especially in the mega sized technology firms.
In every selloff since the financial crisis for the exception of March’s was the result of rising rates.
About three months ago Goldman wrote if the five largest stocks in the S & P 500 which at that time comprised over 25% of the index’s capitalization stumbled in aggregate of 10%, in order to keep the S & P 500 flat from current levels, Goldman writes the bottom 100 S& P 500 stocks would have to rally a collective 90%.
Indexing is now the market as over 55% of managed funds are in passive investments. Indexing has gravitated from a strategy to the only strategy, an environment that has perhaps created unprecedented risk. No one knows how this may unfold especially since a significant minority of the S & P 500’s capitalization is concentrated in five names.
As stated above, the catalyst for yesterday’s equity advance and Treasury decline was positive COVID vaccine news. A new issue that may unfold is because of the lack of inventories, demand pull inflation may arise which may morph into cost push inflation (wage). Inflation is a two-part phenomenon—part monetary and part psychological…too much money chasing to few goods fearing higher prices tomorrow.
Excess bank reserves are gargantuan. Future inflationary expectations are nonexistent. What happens if there is a minor change in either of the two elements?
As noted many times, overall spending has remained robust. Even if spending does not accelerate, inflationary pressures may continue to rise given the dearth of inventories. What will inflationary data released later this week suggest?
As widely noted, over the last four years value has been completely crushed as compared to growth and the discrepancy in valuations is at historical proportions, greatly eclipsing the 2000 peak. The S & P 500 Index dividend fund has also been crushed, down over 25% YTD, the result of which that that many of these companies are viewed as “value.”
In March 2000, the NASDAQ peaked and during the next 18 months it declined over 72%, partially the result of rising inflationary pressures, massive over valuation based upon unfounded reasons, and great concentration of monies in 50 names.
A major difference between today and 2000 is that the NASDAQ 100 companies are making money. Another major difference is the concentration of wealth in just five names. Moreover, according to third quarter profit reports, the hypothesis the shutdown has accelerated six years of revenue growth into six months was validated. However, valuations are suggesting such growth will continue into infinity.
To the best of my knowledge no one is suggesting a 70% implosion in the NASDAQ as which occurred in 2000, however there is a minority who believe the NASDAQ could decline around 35%, which incidentally according to Bloomberg is the typical decline of a market sector, the result of rising inflationary pressures that further challenges valuation assumptions and from the massive concentration of funds in just five names.
Will history repeat itself? I nor anyone else have any idea.
Last night the foreign markets were up. London was up 1.33%, Paris up 1.01% and Frankfurt up 0.07%. China was down 0.40%, Japan up 0.26% and Hang Sang up 1.10%.
The Dow should open nominally higher, the S & P 500 nominally lower and the NASDAQ down almost 2.0%. Is this a bona fide rotation? Unfortunately, only history will answer this question. The 10-year is off 4/32 to yield 0.96%.