16 Dec THE OUTCOME OF THE FED MEETING ANNOUNCED AT 2:00 P.M.
Equities led by the financials and energy rose on speculation of a federal spending package. Treasuries retreated.
Today is the conclusion of a two-day FOMC meeting. No change in interest rates is expected but some are speculating about a change in bond purchasing. According to Bloomberg negative yielding debt is now at a record $18 trillion.
According to the Bank of England negative interest rates were thought to be impossible. The intended consequences of global QE have not occurred. What will be the unintended consequences?
There are several high-profile firms suggesting the 10-year could rise in yield from around 0.90% to 2.0% in 2021, partially the result of the economy’s reopening that may cause demand pull inflation and partially the result of massive global sovereign debt issuance where the primary buyers are the central bank of the respective country.
Yesterday a Bloomberg headline read “Wall Street is bracing for unfamiliar territory in 2021…technology underperforms for the first time in years.”
The basis for the article is earnings, interest rates and valuations. Bloomberg writes “many of today’s stars are trading at unfathomable 40- or 50-times sales, not earnings.”
Bloomberg pens ironically speaking from an earnings-growth standpoint value stocks in the S & P 500, profits are expected to expand by 46% in 2021, the result of the reopening. Companies in the “benchmark index’s technology group are projected to see profits rise by 6%.”
As widely known the five biggest companies in the S & P 500 comprises about 23% of the index, down from about 27% several weeks ago. Technology as an aggregate comprises about 28% of the S & P 500 capitalization, down from a record of almost 30% about six weeks ago.
The top 5 value stocks comprise only 2.2% of the Index’s capitalization, an all-time low.
Bloomberg states the obvious…if funds gravitate to the issues that are posting the greatest earnings growth, amplified by lack of ownership that has caused a record gap in valuation measures, all in a rising rate environment which will benefit the more economically sensitive issues, writes the rotation that commenced in mid-November is perhaps a harbinger of things to come.
As widely noted the NASDAQ 100, which according to Bloomberg is on track for its best year in more than a decade with a 40% advance, “led by companies with triple digit gains and eye watering valuations” are essentially unchanged since September 2, recently being bested by the smaller and value stocks in the last five weeks, sectors that have advanced about 15% to 20%.
The question at hand is will this continue? As widely noted, the NASDAQ 100—led by the megasized technology companies—has grossly outperformed over the last five and ten years, akin to the massive out performance of value from 1987-1997.
I nor anyone else knows the answer. Perhaps the answer to this question is the direction of interest rates.
The FOMC will announce the outcome of the meeting at 2:00 with a press conference to follow.
What will happen today?
Last night the foreign markets were up. London was up 0.98%, Paris up 0.67% and Frankfurt up 1.55%. China was down 0.01%, Japan up 0.26% and Hang Sang up0.97%.
The Dow should open nominally higher on stimulus optimism. The 10-year is off 3/32 to yield 0.93%.