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NASDAQ ranges as Coronavirus licks 30 million

Much of the excitement that fueled the rise in equity markets has fizzled out on a recent downbeat and neutral news on the Coronavirus development.

NASDAQ 100 has been ranging

From its March lows, the NASDAQ 100 has returned 83.26% from its peak at the start of September. This legendary market rally came from Jerome Powell and the Federal reserve’s loosening monetary policy in March. However, Powell’s dovish stance yesterday, hinting that he is willing to keep rates near zero till 2023, has made traders and investors realize to support these lofty valuations, even in tech stocks, we will need more positive developments regarding the Coronavirus.

Market indices have retracted on lofty valuations from its peak in early September, with the NASDAQ 100 retracting 10%. The Bank of International settlements attempted to quantify how much of the rally this year has been driven by rate cuts, and they estimate that “close to half and a fifth of the rebound in the US and Euro area” were due to the rate cuts.

Interesting problem regarding the NASDAQ and the other indices

The problem regarding the equity markets is interesting. If there is no good news regarding the Coronavirus (vaccine, decreasing Coronavirus), the Market won’t do anything. However, if the Fed does not provide a “more than expected” dovish stance on their meetings, the Market will assume accommodative environments will disappear, forcing a sell-off. Simply put, the Market wants good world conditions, alongside accommodative financial conditions. We currently are in the best accommodative conditions for equities, which is a larger factor than the global conditions. Any improvement in the global environment will see the Fed cut back on accommodative policy, possibly hurting equity prices.

Central banks back the idea that low rates spur asset prices upwards – an intended consequence in monetary policy. However, this year’s rally is something that central bankers don’t want to admit they were responsible for, mainly because they don’t want to validify the Powell “put,” instilling excessive risk in investors mind.

Currently, the Market has been ranging in a clear consolidation. Only a clearer Coronavirus pathway will push equity markets further.

Your stock market app? Delete it

Outside of work and trading, I believe everyone should have a stock/asset investment portfolio working for them.

However, we all are swayed by what we hear and what we watch.

If you're an investor, you're probably guilty of doing something similar – waking up, checking Facebook who knows you're an investor and gives you an article from CNBC saying that either

Either way, you check your portfolio. And on good days, you're like, "So why didn't Citi hire me?" However, on bad days you contemplate your decision to purchase said stock, and you think of all the cons in buying the stock. "Oh, they were overvalued, Goldman put a sell rating on it" etc. etc. However, the chances are that it is just your emotion getting to you.

I believe the whole point of owning assets is that it works for you. By looking at the returns daily, you get into this mindset that you're working for your investments – getting stressed when it goes down, wondering whether to sell when it hits all-time highs. An excellent way to alleviate this issue? Delete the app. Remove the tickers off your Stocks app. You invest in the business, and the only time you should consider divesting in your assets is if the business changes from your original thesis. Here is a couple of reasons why you should "Delete the app."

Apps like Robinhood have made stock investing easier by presenting it almost like a video game

Stock works best when left alone

1. In the short run, the market is a voting machine. But in the long run, it is a weighing machine. – Benjamin Graham

In the short run, a stock price reacts to technical factors, news, and irrational behaviors by investors. Take the Coronavirus pandemic, for example – risk assets sold off, even tech equities. However, as seen by many of their Q2 earnings, they weren't so effected at all. Comparing the pandemic to daily market moves is a stark contrast to what happens most of the time. However, it helps highlight the benefit of not having access to your portfolio's returns daily – you're not swayed by the change in the price daily. You should only be swayed by a change the original thesis you put on the business

2. Reduces your stress

This flows from the first point. By not being exposed to the green/red text, you can go on with your day without stressing whether your investment is a good one. Remember, time is your best friend. Time in the market is better than timing the market.

3. The most important – buy not looking at it every day, the assets work for you!

This last point (and this whole article) hinges that you invest in good businesses in the conventional sense and not wildly speculating on the stock price.

If we compare, for example, stocks to houses. It would be crazy to get your rental property valued every day So why should you do the same for stocks? If you believe in the company you invested in, you should have no problems letting it run along as normal. If you cannot comfortably let the investment sit and generate capital gains, you may want to re-evaluate

With all that said, investing may be scary for many. And that's not to say I am a perfect example either. Especially with my job, it is hard for me to ignore what is happening with my portfolio. However, I try my best to – and it starts with deleting the app.

NASDAQ pulls back – but is the bull run over?

NASDAQ has posted weekly gains 11 of the 16 weeks since the lows of March. However, with the recent pullback in the midst of stocks like Tesla returning over 330% since its March lows, many skeptics reference 1999 as a benchmark for NASDAQ’s trajectory. However, are we going to see a repeat of 1999?

NASDAQ Then vs NASDAQ Now

The NASDAQ in 1999 was filled with companies synonymous with names such as pets.com – many of which were the equivalent of “Tesla” to retail traders. Pets.com was an online retailer that sold pet supplies. They had a successful IPO in 2000, raising $82 million, only to go bust 9 months later. This was similar to many businesses that seemed to fix inefficiencies in markets; however, they fixed them in a way that was not profitable.

This is reminiscent of WeWork – a company that seemed to fix market inefficiencies of empty office spaces and leases it mainly to smaller businesses. However, there is a key difference between what happened with pets.com and WeWork. Softbank, the majority owner of WeWork, attempted to have an IPO for the debt-laden, unprofitable company, only for investors to scoff at their proposed $47 billion valuations. The market accessed the company and deemed it not to be worth its recommended value. This is in comparison to the 2000s, where a venture capitalist at the time stated that “we’re in an environment where the company doesn’t have to be successful for us to make money.” Sure, we may point to the likes of Uber and Lift with their $1b quarterly cash burn. However, this generally highlights the difference between many businsses in the NASDAQ back then vs the now: businesses now intend to be in business in the future. (Or as accountants call it, “Going Concern”)

Morgan Stanley tracked 199 internet stocks in 1999, with a market cap of $450b ($692b accounting for inflation). Those 199 stocks generated $21b in sales ($32.32b accounting for inflation), however, they generated a net loss of $6.2b ($9.54). Compare that to the “FAANG” stocks now – which in total account for $5.18 Trillion in market value, with $197 Billion in revenues. While tech stocks during the bubble, whereas Christian Wolmar’s words, “little more than optimism feeding on itself,” tech stocks are now fully fledged businesses that print money like there is no tomorrow.

NASDAQ breaking records

Interestingly, after the 79% crash in 2000, it took the NASDAQ 15 years to regain its former high in 2015. It only took 4 years to 2019 to double.

Should you go long the NASDAQ?

It depends on your time horizon. There is still a good chance there is a massive reversal due to negative investor sentiment. However, it is hard to tell, especially due to Coronavirus threats, where these types of stocks thrive relative to other stocks such as consumer retailers or luxury. However, it may be that Coronavirus proof business models that push these stocks higher.

Future of the US Dollar

As the Coronavirus started to wreak havoc across the world, the US dollar stepped up as the world's de-facto currency. Risk-off sentiment drove investors and traders to the US dollar in droves, pushing the US dollar to highs not seen since 2017.

US Dollar Index

The world's de-facto currency, making up over 60% of all known central banks' foreign exchange reserves, saw the FED offering swap lines to central banks to provide liquidity in the market by "swapping" their currency for US dollars. However, the dollar's strength may be short-lived as the market sentiment cautiously shift to risk-off assets.

Risk-off shown by demand for FX Swaps for the US Dollar

Thanks to the FED's swaps, demand for the US dollar across the world have been met, restoring equilibrium in the market. This was shown in a chart from Steven Englander of Standard Chartered Plc,

There may be more headwinds for the US dollar. As we all know, everything depends on the assumption on how we emerge from the Coronavirus pandemic. If we assume that we shall see an economic recovery with the markets discounting a second wave, we should see the USD depreciate back to pre-coronavirus levels. Furthermore, there are a couple of other factors that may help the dollar depreciate

Quantitative easing increases the supply of the US Dollar

Federal Reserve's balance sheet

With the Fed's balance sheet swelling up to $7 Trillion, they have been loosening their limits on what assets they are willing to purchase. They have recently added corporate bond ETFs to the lists of assets they are ready to buy. With quantitative easing and stimulus comes an increase in money supply, which historically has seen the currency in question to depreciate (See Euro and the ECB in 2015, Government Stimulus in the US in 2009, and Bank of Japan in 1997)

Low rates for a longer time

"We are not even thinking about raising rates", Jerome Powell stated at a conference earlier this month, showing that they are willing to provide accommodative financial conditions until 2022. This also means investors may want to see their money earn a return else wear where yields are relatively higher, especially in EM currencies.

Higher oil prices

Since oil transactions are denominated in US dollars, there is an inverse relationship with oil prices and the US dollar. Correctly, as oil prices increase, the pressure is put on the US dollar as producers convert more US dollars to their home currency.

If we see a promising recovery, there is a high likelihood we a sharp depreciation in the US currency. 

Week ahead: GDP, FED Decision. Markets Recap

It has been a turbulent week for the markets and social stability. The markets extend their risk on rally during protests around the world for the death of George Floyd and a surprising 2.5m jobs that were created for non-farm employment. This is your week ahead.

The SP500 has gapped higher at the start of each trading week

All dates are in NZDT.

Japan’s GDP Annualized – Today, 8th June

Japan is an example of a nation that has returned to a relativel normal without fully squashing the curve. This is slowly showing the cracks of their method of not officially entering a lockdown, as the daily number of average cases grow. With an aging population and slowing pre-coronavirus GDP rate, a growing Coronavirus case may not bode well for the long-term view of Japan’s GDP. Analysts forecast a drop in the growth rate by -2.3%.

 

Euro GDP Growth Rate Year over Year – Tuesday 9th June

With Italy and Spain opening their borders after a brutal Coronavirus period for both countries, citizens are looking forward to a relatively familiar normal. With the EU’s GDP predicted to shrink by 8.7%, Christine Lagarde led a charge for the ECB to inject an extra $1 Trillion into the economy. There have been 6.8M Coronavirus cases confirmed, with just under 400k deaths.

Federal Reserve Interest Rate Decision – Thursday 11th June

A turbulent week for the United States with protests over George Floyd’s death engulfing the public with rage. However, markets seemed to ignore the unrest, rallying on unexpected news such as the 2.5m Jobs non-farm jobs gained – a far cry from the anticipated 13.3 million job loss. Analysts predict Federal Reserve Chairman Jerome Powell to keep rates steady at 0.25%. However, investors may be interested in Jerome Powell’s Economic Projections on the same day for market-moving statements. 

United Kingdom’s GDP Year over Year – Friday 12th June 

Suffering one of the highest death rates for the Coronavirus at around 14.17%, the UK government has had many controversies with regards to their response to the pandemic. Finance ministry officials predict that the government deficit could swell to over 337 Billion pounds this year from just 55 Billion in March. GDP YOY Growth is expected to drop by 22.3%.

Market recap