Although it might have felt like a bit of a rough ride in global equities this week, volatility in cryptocurrencies made equities look like a smooth ride. Bitcoin and its brethren got absolutely hammered on Wednesday before clawing back some of their losses, and then tanked again Friday afternoon. What was the catalyst for the crypto meltdown? A trifecta of reasons: a continuation of Elon Musk’s love-hate relationship with Bitcoin, the Bank of China’s announcement on Tuesday that China would not allow digital tokens to be used for payments (and follow-on statements Friday regarding concerns over Bitcoin mining and trading), and an announcement by the US Treasury on Thursday that it would tighten compliance for cryptocurrency transactions (transfers above $10k).
Although risk overall in global markets seemed to rachet up, we started the week on a positive note with the Eurozone announcing that it had upped its growth expectations for the bloc as the vaccination programme in the EU gains steam. The European Council announced it is considering a policy to allow non-EU citizens to enter the EU without a quarantine requirement if they have been vaccinated, brightening the outlook for the summer tourist season. The UK announced Friday that private sector growth was the fastest in April for 23 years, and that retail sales and business confidence were soaring. Economic data in the US was also good. The FOMC minutes released mid-week suggested that the Fed remains untroubled with future inflation, although there were – for the first time – subtle hints at policy adjustments down the road. Discussions regarding President Biden’s proposed two-pronged fiscal stimulus plan also continue, as the Administration aims to reach a bipartisan agreement on its $4 trillion splash on infrastructure and social programmes. As far as earnings, a number of US retailers released 1Q results this week that were significantly better than consensus expectations nearly across the board.
With this positive economic backdrop and a strong earnings period (1Q21) nearly behind us, why are stocks struggling to find the next leg up? The culprits in my opinion continue to be a combination of overcooked valuations and a recognition that the current economic growth trajectory is not sustainable post-2Q as stimulus measures begin to wind down. On the issue of valuations, equities are priced to such perfection that even significant revenue and earnings beats often don’t make a difference. I suspect valuation concerns will continue to weigh on markets, most pronounced for the high flyers that have no earnings. Valuation concerns “cap” stock appreciation and create a negative bias. These concerns might grow heavier as reality sets in that corporate earnings growth will gradually return (down) to a more normal trendline, compounded by the recognition that central banks will eventually unwind their stimulus plans and adopt a more hawkish posture. When central banks do pivot, there is risk that a “soft landing” will not be achieved. In summary, the road ahead will be more bumpy and I suspect volatility will remain elevated, meaning that equity investors will need to be increasingly discriminating and choosy.
The relative outperformer in the global equity indices this week was the MSCI EM index (+1.7%), whilst the weakest performers were the S&P 500 and the FTSE 100, both down 0.4%.
As difficult as the first half of the week felt in the US markets, it was surprising to see that the NASDAQ Composite eked out a positive week, the only US index that was green on the week. This was the first week that the NASDAQ Composite has been positive in five weeks. The weakest index was the DJIA, perhaps signalling that the reflation / cyclical trade is becoming increasingly crowded. Below is the table for the four major US stock indices.
As I mentioned already, many US retailers – including the likes of Home Depot, Lowes, Target, Walmart, Kohl’s, Macy’s and BJ Wholesale Club – absolutely crushed 1Q21 analysts’ revenue and earnings consensus figures. Operating margins at US retailers are improving, and many of these companies increased guidance for the year. However, with equities largely fully valued and anticipating strong earnings this round, much of the better-than-expected performance seemed to already be baked into prices before earnings were released. The SPDR Retail ETF (XRT) was down 2.6% on the week, and is down 4.4% from its YtD high two weeks ago. For Tesla (TSLA) lovers, famed investor Michael Burry (“The Big Short”), who called the bubble in the US mortgage market well before almost anyone in the runup to the Great Recession, announced that he had amassed a significant short position in Telsa. Depending on his timing, he might have done well already – Tesla is down 34.2% from its Feb 2nd high, after increasing 743% in 2020. You can read more about Michael Burry and his TSLA short in a Bloomberg article here.
Yields on US Treasuries were stable on the week.
10-year government yields were also little changed in the Eurozone (Germany), the U.K. and Japan.
In corporate credit, yields and spreads widened slightly in the US high yield market in all ratings buckets. However, yields and spreads in BBB-rated (IG) corporate credit and European high yield were both flat on the week.
Gold was better on the week, climbing 2.0% to $1,879.88/oz. Gold has now increased three weeks in a row and is up is up 5.7% in the last month, perhaps reflecting growing concerns about inflation or a shift towards greater market risk as investors seek stability. The US Dollar weakened 0.3%, continuing its fairly steady pattern of weakening. Increasingly, this could be a reflection of the relative strengthening of other economies like the EU and UK vis-à-vis the US, as these economies gain ground on the US economy. WTI oil stumbled and was down 2.5% W-o-W, ending the week at $63.84/bbl. Bitcoin was the largest loser by far on the week, down 28.5% for reasons I highlighted earlier.
Other things to listen to or to watch from last week include:
If you can stomach his cantor, Dave Portnoy’s podcast this past week was fairly funny, at least the part where he discussed a hypothetical new cryptocurrency (“SafeMoon”), after providing his view that cryptos are nothing more than Ponzi schemes. Naturally and in line with Portnoy’s straight-forward approach, he added that he is fine with Ponzi schemes as long as he gets in early! Listen here, first 15 minutes or so.
Cathie Wood (ARK Invest CEO/CIO) was interviewed during Bloomberg Businessweek’s virtual conference this week, and was as positive as ever on the high flyers and Bitcoin (and cryptos more broadly). This interview occurred on Wednesday when the market was melting down. I’ll give it to her – she never gets rattled and sticks to her guns. Coinbase became a top 10 holding of ARKK this week as the ARK ETF funds were “buying the dip.” Watch Cathie Woods’ video interview here, starting 35 minutes.
The same day at the Bloomberg Businessweek’s conference, Dr. Raphael W. Bostic, President & CEO, Federal Reserve Bank of Atlanta, also was interviewed. He seemed to be aligned with the FOMC minutes by suggesting that the Fed just might be beginning to think about tapering in the coming months should inflation rise too quickly. The link is the same as for the Cathie Wood’s story, here, starting 1 hour, 35 minutes.
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