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%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. 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. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.