16 Feb WHAT WILL BE THE IMPACT IF 2021 GROWTH IS THE GREATEST SINCE 1984?
Last week I commented that several bulge bracket firms are warning about the difference in valuations between the mega sized companies and the rest of the market. Bank of America joined the crowd stating that one of their primary indicators—the so-called Bull & Bear indicator—is approaching levels of extreme bullishness which can trigger a sell signal that has not been set off since January 2018.
The markets swooned in February of that year. BofA noted that since 2000 there have been 12 such signals producing an average loss of 9%.
Bloomberg is comparing today’s unrelenting advance in the NASDAQ to the era of September 1999-March 2000. In that era, the NASDAQ surged by an incredible 85% as valuations were utterly ignored and then plunged about 80% bottoming in October 2002.
Both BofA and Bloomberg have referenced hyper retail call option buying in the mega sized technology firms as a potential reason for this unrelenting surge in the largest capitalized issues.
According to Deutsche Bank “call volume as a percentage of market cap of the largest 50 capitalized issues has risen at an unprecedented rate, now representing over 250% of their market capitalization.” It has been steadily rising since March rising from about 50% of market capitalization to now at “historic hyperbolic proportions.”
As previously noted massive call buying is intrinsically bullish, equivalent to eating a sugary opioid, but when the buying ends, volatility can massively increase.
I have consistently argued higher interest rates—the result of stronger than expected economic activity and massive fiscal and monetary stimulus—could be the catalyst that could threaten the values of these mega sized growth issues.
Interest rates are the largest component of valuation formulas and any increase will have an outsized effect on overvalued companies. As noted many times the S & P 500 is priced at 32.2x earnings, nominally lower than the record achieved in 2000.
As stated last week, the indices which are skewed by the largest companies are overvalued but the typical company is not.
Partially because of the $1.8 trillion stimulus, 2021 GDP growth is now projected to rise by the greatest amount since 1984 according to a survey of 76 economists. Because of broken supply lines and political pressure to increase the minimum wage, both demand pull (product) and cost push (wage) inflation is expected in increase.
As widely noted, the overnight rate is expected to remain around 0.00% until the end of 2022. Will inflationary pressures become “unanchored?”
Historically in periods of rising inflation and economic activity, “hard asset companies” or companies that manufacture products out perform as such typically have pricing power.
What will happen this week? The economic calendar is comprised of an inflation index, retail sales, several manufacturing and housing statistics and the Minutes from the recent FOMC meeting.
Last night the foreign markets were up. London was up 0.24%, Paris up 0.04% and Frankfurt up 0.03%. China was up 1.43%, Japan up 1.28% and Hang Seng up 1.90%.
The Dow should open nominally higher as optimism over the economy coupled by declining COVID cases amplified by rising vaccination rates. The 10-year is off 16/32 to yield 1.26%. Oil is almost $60/barrel, the highest price in 13 months.