Indices across the board sold off today, making it the 5th session in decline as many investors and traders take high valuations as a good time to take profits.
We have seen Stocks rally in an environment where money is cheap, 1 Trillion dollars of fiscal policy for the United States is not enough, and where the Federal Reserve is buying back 120 Billion Dollars’ worth of bonds every month. Pair this influx of liquidity with many investors and traders being able to save due to lockdowns across the world, and you have yourself a buoyant asset market. And it seems like we will be living in this environment for the foreseeable future.
Chairman of the Federal Reserve Jerome Powell signaled that it would continue to keep monetary policy loose and their bond buyback scheme consistent. With that said, he signals a positive outlook for the U.S economy in 2021. A question on whether rising treasury yields signals an improving economy, Powell replied, “In a way, it’s a statement of confidence on the part of the market that we will have a robust and ultimately complete recovery.” This is interesting as an optimistic viewpoint from the Fed may signal that they may tamper accommodative policies in the near term
However, some analysts are wary about the Fed portraying too much optimism. Steve Friedman, senior macroeconomist at MacKay Shields, stated that “We’re not out of the woods yet when it comes to the virus, and the economy also remains quite far from a full recovery.”
What are you looking at in the markets?
Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,
The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.
So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.
That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.
As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.
Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.
Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.
After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.
The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.
However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.
I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.
Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.
Markets are frothy – stay safe, and trade safe.
*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will
The NASDAQ hit a legendary milestone, touching 14,000 as vaccines pump optimism in the markets.
Investors were looking for a defensive asset in a low-interest-rate environment that can appreciate risk-off environments amidst the Coronavirus Pandemic. Investors found that in tech stocks, they showed their ability to generate pure cashflow during the Pandemic's peak.
Stocks like Facebook, Google, Netflix, and Amazon were able to continue to beat estimates while the bulk of the world was in lockdown. This became an overcrowded and popular trade amongst institutions and many retail traders. However, many are questioning whether they still justify the hefty premiums they gained during the global lockdown. Facebook currently trades at 26 times earnings, Google at 35.5x, Netflix at an astonishing 91.5x earnings, and Amazon at 78x earnings.
With the Federal Reserve continuing their $120 Billion buyback scheme, investors are now looking at the progress of President Joe Biden's $1.9 Trillion Stimulus Plan, bolstering the growth in the U.S labour market and the U.S economy. Matthias Scheiber, global head of portfolio management at Wells Fargo, stated that equities were driven by accommodative monetary policies and optimism on fiscal stimulus. However, analysts warn that this stimulus bill will have to be paid somehow, which will likely come from a higher corporate tax rate.
Luca Paolini, Chief Strategist at Pictet Asset Management, stated that "With the additional risks of corporate taxation, not only in the U.S but also in Europe like the U.K – there is a debate about raising corporate tax. So, for the next year, I think the riise in earnings will be much more moderate".
With all this euphoria in Wall Street, Main Street continues to suffer. While down from its all-time highs, daily new and the seven-day average cases are still over 100,00 in the United States, crippled by the lack of infrastructure regarding the rollout in vaccines in the United States.
The headline says it all – market euphoria has reached an all-time high. However, given the events that have occurred in 2020, it feels like it is just another day at the office. For the most part, it is.
Bitcoin reached an all-time high earlier in the U.S Trading session, touching $43,000. This is primarily due to Tesla CEO, Elon Musk, revealing in an SEC filing that they had purchased over $1.5 Billion in Bitcoin in January.
They stated that they invested “To further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity” - or in other words, a bet on Bitcoin using cash not required to run the business. They also stated that they “expect to begin accepting bitcoin as a form of payment for our products in the near future.”
This interest in cryptocurrencies does not just stick to Bitcoin. The meme currency Dogecoin has returned to all-time high levels at around 8 cents after many celebrities like Snoop Dog and, of course, Elon Musk, continue to talk about the currency.
Like I wrote in my previous article, it was relatively common for people to hold hundreds of thousands, if not millions, of Dogecoins in 2014. Assuming those people held them till now, we would have miners and investors with life-changing wealth – all from a meme currency.
In the commodity markets, Oil has made a legendary comeback. Brent Crude topped $60 as vaccines, and unexpected Saudi cuts have made tailwinds for the Black Gold.
However, some analysts are concerned about the quick rise in price, stating that further tension between Russia and Saudi may ensue due to the higher prices. The last time Russia was not on board with OPEC, prices plummeted below $30 a barrel. Brent currently sits at around $60.60 a barrel.
Equity markets saw a breath of fresh air, with the Dow Jones, S&P 500, and the NASDAQ up over 0.4%. Stimulus positivity, alongside vaccination numbers, boost the possibility of a strong fiscal 2021.
John Stoltzfus, Chief Investment Strategist at Oppenheimer, stated, “as people feel safer, investors can expect the economy to experience a rebound that should contribute to revenue and earnings growth as the economy reflates.”
At such inflated valuations in many asset classes, investors and traders should be ready for a sudden pullback on any negative sentiment.
Here are a couple of fun facts from equities in 2020.
· The NASDAQ returned 46% from the start of 2020. If you purchased at the peak of the recessionary period in mid-March, you would've made a return on investment of 85%.
· Meanwhile, the S&P500 only returned 17% from the start of 2020.
· The average price/earnings ratio for stocks in the NASDAQ was pushing 23
· The best performing stock that is in the S&P 500 and NASDAQ was Tesla, providing a 743% Return.
With that in mind, what are we expecting for stocks coming into 2021?
I expect institutional investors (and retailer traders) to take significant money off the table this year if they haven't already. Given that there was a laggard inflow in capital to US equities in the latter part of 2020 trying to catch the bull run, I expect those inflows to take profit if equities tick up in the earlier part of this year.
With that said, I believe euphoria in inequities will continue to rise as the hunt for yield is expected to get more difficult as nations worldwide are predicted to cut rates to take advantage of the economic recovery. Furthermore, lower interest rates significantly affect discount rates for models institutional investors use, favoring equities with longer-dated cash flows – usually associated with value stocks such as banks and telecommunication companies.
When Tesla entered the S&P 500, it had to be indexed in stages because it's market cap was so large. However, it is equities like Tesla which retailer traders have been inflating. Popular names such as Zoom, Netflix, or any essential "work from home "stock has passed the eyes of retail investors, with eye-watering price/earnings multiples. Netflix continues to trade at an 80x multiple, Zoom at a 274x multiple, and Tesla at an absurd 1,673x multiple.
The issue with overpriced equities is that their influence on the indices' fluctuations rise as their market cap increases. With the NASDAQ and the S&P 500 based on the companies' market caps in the indexes, investors in ETFs that track these indices are getting heavily weighted to tracking the large companies in them. With companies such as Tesla being prone to wild swings due to its overprice valuation, anyone holding the S&P 500 will also be prone to the wild swings.
With that said, Goldman Sachs analysts are telling investors to buy stocks on any market weakness, with Peter Oppenheimer saying that the market is in the early stages of a bull phase. "The market is rising on good news but choosing to largely ignore weaker data and rising infection rates."
With extremely low interest rates in the US, which is predicted not to increase anytime in the future, paired with the Coronavirus situation in the United States, large institutions may be wanting to look elsewhere for value – specifically in places where the Coronavirus has been controlled. I believe banks in Australia will benefit from this thesis, as not only are they the parent of New Zealand banks whos economic outlook is looking far better than many other nations in the world, but they also are in an economic environment that is similar to that of New Zealand, Barr a couple of setbacks due to Coronavirus flareups.
I believe we will see another substantial year in equities due to positive sentiment, paired with a recovering economy.
It has been 15 days into the new year, but it feels like a year’s worth of events has already occurred. Most notably:
Strip what happened in 2020 out of the question, and this would be run a racket on the equity markets. However, it seems like nothing can scare off investors in this day in age.
Equity Markets in the United States continues to edge higher, with the Dow Jones and the S&P 500 up 0.1%, with the NASDAQ saying as is. European equities too end slightly higher, with the DAX 30 edging up 0.4%. With turmoil continuing to disrupt the world, why are investors continuing to plow money into equities?
With the Federal Reserve stating that they “are not even thinking about thinking about raising rates,” alongside the introduction of their new tool of letting inflation run higher than their mandate portrays that low yields are here for the foreseeable future. The time to raise rates “is no time soon,” Powell states.
This has forced many managers to search for yield across equity markets. However, this can’t be the only reason, as real yield has been low for the past couple of years, even before the Coronavirus. Mario Draghi, former ECB President, was known for saying that “for rates to be higher in the future, they need to be low today.”
Many companies continue to thrive even amidst the Coronavirus, notably technology firms such as Salesforce, Facebook, and Slack, alongside retailers such as Walmart and Amazon. Their current price premium reflects their ability to generate free cash flow in recessionary periods. Today, value equities in the industrial, financial, and energy sectors led the edge higher today.
The word “reflation” has recently been the buzzword as of late, providing an extra boost to equities. Scott Knapp, chief market strategist of CUNA Mutual Group, stated that “everybody acknowledges the high valuations, but most people say yes – but the stimulus?”. He further continues stating that “Markets are anticipating that reflation is under way.” Reflation may help the backbone of the US Economy, the consumer, to thrive once again and pull the US economy out of the slumps.
Motley Fool, an advocate for long-term, stock-picking mantra, believes that “time in the market, is better than timing the market,” alongside the belief that profitable businesses with high valuations should still be invested in. With a massive influx of retail investors, it would not be surprising that many of them share the same mentality.
Are you plowing your money into stocks?
Margaret Keenan. At 90 years old, she was the first patient in the United Kingdom to receive the Pfizer-BioNTech. The CEO of England’s NHS, Simon Stevens, stated that “I think there’s every chance that we will look back on [Tuesday] as marking a decisive point in the battle against the Coronavirus” You would have thought we should have seen a massive spike in the markets.
However, the market was relatively calm today, even though the S&P 500 broke all-time highs. Interestingly enough, the second person to get the Vaccine in the UK was an 81-year-old man called William Shakespeare.
Depends. Considering the muted response from the FTSE 100, only up around 0.052% on a catalyst that was said to bring a boost to asset prices, there’s a chance that the effects of a vaccine have already been priced in, and the market is looking for more. Turning to the currency markets, we can see some wobbles in the GBP/EUR pair, with the needs waiting on further confirmation on the Brexit negotiations.
Given that it is almost a given that the United States will be granted the Vaccine, there is a high chance that the effects of the Vaccine on the United States population would be priced in, given that the S&P 500 has reached all-time highs before the United States has even received the Vaccine. The markets may be looking for the United States to go back to a relatively normal before pushing the S&P 500 further past 4,000.
Given the lockdowns worldwide, alongside easy access to trading environments such as Robinhood and Interactive Brokers, there has been a massive spike in the number of young retail traders on these platforms. Thomas Peterffy, the founder of Interactive Brokers, stated that the current environment is unlike anything he has ever seen before and that “Money is so easy, why not borrow what you can and put that it into stocks?” With this influx in retail, traders along may see the S&P 500 past 4,000.
Put the Vaccine catalyst, alongside American retail traders together, and we may see the S&P 500 breach 4,000 before 2021.
A combination of positive vaccine news, political certainty regarding the next President, and positive data coming from the United States edged equities to all-time highs.
The Dow Jones is sitting just above that coveted 30,000 level, which makes it up year to date by 4%. The S&P 500 is up around 11.6% for the year, with the NASDAQ up an impressive 36%.
Equity markets aren't the only markets benefiting from positive sentiment. Oil prices have reached an eight-month high, with Crude and Brent touching $46 and $48 a barrel, respectively.
One of the main factors that help push equities higher was the consistent positive vaccine news in the past couple of weeks. AstraZeneca yesterday stated that its Coronavirus vaccine's large stage trials were "highly effective" in preventing the Coronavirus. Professor Andrew Pollard, the Chief Investigator for the AstraZeneca trial, stated that "[the results] show that we have an effective vaccine that will save many lives. Excitingly that one of our dosing regimes may be around 90% effective." This is after Pfizer and Moderna reporting vaccines that have 95% efficacy.
Furthermore, there are signs that Trump is starting to accept his defeat for a second term. Markets have interpreted this as a soothing in political volatility. President Donald Trump has stated that it is "in the best interest of the country" to begin the transition to Joe Biden's future government and instructed officials to "do what needs to be done." However, Trump has still not conceded. President-Elect Joe Biden has started to assemble his government, with his latest pick, Janet Yellen, for Treasury Secretary.
Lastly, Manufacturing and Services PMI's were better than expected at 56.7 and 57.7 with a market expectation of 53 and 55.3, respectively.
Investors and Traders will be looking forward to the FOMC minutes for guidance on the Federal Reserve's opinion for the future of the American economy.
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.
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.
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.
Markets sold off as risk-off sentiment continue to seep into investors and traders' heads.
The largest move downward was in the Oil markets, where Brent Crude and WTI were down 7 and 8% respectively, fearing that the demand recovery as stalled. The Summer Holiday in the United States, primarily associated with peak demand in Oil, currently marked its close on the Labour Day Holiday.
Stephen Schork, the editor of the oil market newsletter The Schork Report, highlighted that "demand recovery at this point is certainly done" and that the "entire oil complex is under threat right now."
As suppliers slowly bring back their supply to the oil markets alongside demand tethering off, the weak fundamentals play into any risk-off sentiment the needs may have. IHG Markit analysts, Roger Diwan, stated that "The weak state of fundamentals and the lack of any catalyst improvement in the near term are resetting price expectations."
However, it wasn't just the oil markets that sold off. US equities had a deep day in the red, with the NASDAQ down 3.67%, with the Dow Jones and S&P 500 down 1.68% and 2.16%, respectively.
As expected, tech stocks being the highest growers, were also the fastest fallers. The question arises whether the current situation is a healthy pullback or a continuing trend. Tom Essaye, a former Merril Lynch trader, stated that "some froth has come off the market, which is a good thing, but keep in mind we still remain well over levels that could be considered as "fair value" in stocks.."
This pullback in the markets comes at a turbulent time politically and economically. Amidst the pandemic, Brexit talks have continued. US-China tensions are heating up again, China Hong Kong relations are heating up again. Elections are not in months – they're in weeks. Federal Reserve continues to pump liquidity into the markets. It is interesting to note there is not much movement in Gold, suggesting that the sell off may be due to profit taking, not pure risk off sentiment.
What was interesting about today's sell-off is that if you re-read the text before this, you will see no fundamental change/data released to suggest a sell-off. Whatever the actual reason is, be it options traders unwinding their positions, or general profit-taking, stick to your analysis and don't get swayed by a swing in price during a turbulent period – as it is to be expected. Remember, volatility goes both ways. If you're a trader, you may want to sit this period out or take the time to backtest your strategies. If you're an investor, you may want to buy the dip as your analysis shouldn't have changed today just because of the sell-off.