Remember, a wise man once said, "be cautious or even fearful when everyone seems greedy, and be greedy when everyone is fearful" - Warren Buffett
Summary
The NASDAQ and S&P 500 soared to consecutive record closes in the first half of the week, only to encounter significant selling pressure on Thursday and Friday, setting the tone for what should be a very interesting next week.
The U.S. financial markets will be closed on Monday for the Labor Day holiday, a long weekend that is probably well-needed given the late-week volatility
US Treasuries were little changed on the week, whilst gold and WTI oil were both weaker. The US Dollar broke with its recent trend and strengthened.
Economic data in China, the U.S. and Germany were slightly better than expected last week, but still must be considered in the context of where the global economy stands on an absolute basis.
There were no real newsworthy developments regarding CV19, as the world adjusts to a “new normal” with the school year restarting in many parts of the world.
Global Equity Markets
The sharp decline in equities last week was arguably long overdue, so it was no surprise really that the scales finally tipped towards rationality, especially in the high-flying tech market. To be fair, the about face occurred only on Thursday, as the first three days of the week saw two and three consecutive days of record high closes for the S&P 500 and the NASDAQ, respectively. The wheels didn’t completely fall off until Thursday, a one directional (down) day, whilst Friday brought wild variations with the U.S. equity markets clawing back overnight losses to open stronger on better-than-expected U.S. employment data, before losing its support and plummeting again during most of the day. However, investors came in with some pre-holiday support late in the session (acknowledging low pre-holiday volumes) pushing the indices higher, which even turned green late in the session before sagging again in the final hour.
What was the damage for the week? The NASDAQ is the most interesting to look at because of its tech-heavy bias. The NASDAQ was down only 3.3% for the week, but it felt much worse, and certainly could have been. The week started with both the AAPL (4:1) and TSLA (5:1) share splits taking effect, and Zoom Video Communications (ZM) smashing its consensus revenue and earnings targets. ZM’s stock soared from its already-lofty close of $325.10/share on Monday to as high as $478/share on Tuesday (+46%) whilst both TSLA and AAPL recorded their record highs ever that day. The breadth of the rally was better on Wednesday, although things turned quickly following the close that day. In fact, from its close on Wednesday to its trough mid-session on Friday, the NASDAQ was down nearly 10% (9.8%), with a rally in the second part of the day Friday saving this tech-heavy index from what could have been a calamitous two days of losses. Stocks like Apple and Amazon closed the week down 3.1% and 3.2%, respectively, whilst even more highfliers like Zoom Communications and Tesla got completely hammered. At one point on Friday, both TSLA and ZM were down nearly 25% from record intraday highs reached earlier in the week, although both rallied into the close on Friday to lessen their weekly losses.
Some of the unusual market movements have been attributed to a combination of “Robinhooders” (a pseudonym for a broad array of unsophisticated small-lot retail investors) and a rapid and “skewed” increase in the purchases of call options on large and volatile technology names, including the FAANG+M stocks. I have written about the former (see “Robinhood, robintrack.net and Retail” from August 11th). The latter was covered in an article in the #FT on Friday, with SoftBank apparently identified as the massive buyer of call options of listed technology companies, heavily influencing their rapid increases in prices with no fundamental justification. See “SoftBank unmasked as ‘NASDAQ Whale’ that stoked tech rally” if you want to learn more. SoftBank has become much more of a high risk investment company than the operating company I always thought it to be.
The question that must be crossing your mind now is “will investors step in to provide further support to U.S. equities, including the highfliers, post Labor Day?” To me, the fundamentals are still screaming “overbought” much more than “oversold”, so it remains to be seen if the momentum crowd shows up next week to save the day. As I have written for several weeks, some of the levels of the “popular” stocks have been defying gravity. Trying to rationalise the prices will just make you bang your head against the wall, especially if you’re prone to write-off unconventional factors like unprecedented Fed stimulus. Could we also finally be seeing a convergence of the dire state of the global economy with the equity markets which, to date, have been completely out of sync? It’s anyone’s guess, because since the March lows, enough investors have shown up consistently to “buy the dips”, rescuing the market each time from any prolonged decline.
Globally, the equity indices I track generally performed poorly this past week, and the heavier the bias towards tech in an index, the worst the pain. Here’s how the week ended for the indices I track.
Looking at the table above, it is amazing, albeit not surprising, how poor YtD returns have been in the U.K equity markets. This has been caused by a confluence of severe economic weakness compounded by the failure of the Conservative government to reach a post-BREXIT trade deal with the E.U. (or anyone else for that matter), and more recently, the Pound strengthening, a negative for most U.K. companies which rely heavily on exports. When it was reported earlier this week that the market cap of Apple (approached $2.3 trillion at highs) was greater than the market cap of the entire FTSE 100, this sent a strong message both about the (over)valuation of Apple and the incredible weakness of the U.K. equity markets.
One factor that could weigh on the U.S. markets this week is the decision by S&P, announced after the market close on Friday, to not include Tesla in the S&P 500 index, a bet many investors now will have had wrong. According to an article in Bloomberg, the stock plummeted over 6% in after-market trading following the announcement, meaning that – if these levels hold – the stock would be down around 22% from its post-split intra-day high reached just last Tuesday (Sept 1st). TSLA shorts might finally be having their day.
Monday is a holiday in the U.S., probably much-needed after the nervy second half of last week. What would be my advice as we head into the autumn? Retrospectively, it made sense of course to lighten on tech names into this run as their valuations reached ridiculous levels, perhaps moving some equity dollars into more defensive sectors or, more conservatively, into cash or Treasuries. That’s easy to say now of course. However, if you’re a long term investor that believes in the historically superior returns of equities, stick it out (or at least keep some money invested in equities) if you can sleep at night, so long as you have sufficient cash on hand to weather the choppiness that may lay ahead. After all, if you don’t need the money in the near future, the equity ups and downs are just paper gyrations, rather meaningless (until, of course, you need the money).
Credit Markets
The U.S. corporate credit markets were rather uneventful in the run-up to the long weekend in the States. Oddly, the best performing credit market of the week was the CCC rating bucket in which spreads tightened 22bps on the week, whilst the worst performing was the BB bucket, in which the index spread was 14bps wider. I find this rather meaningless in terms of saying anything about credit risk appetite, aside from the fact that the extreme end-of-week volatility in equities did not seem to drift into the credit markets, at least not yet.
Safe Haven Assets & Oil
U.S. Treasuries were better throughout the week, bottoming on Thursday as the U.S. equity markets unravelled. However, Friday’s U.S. employment data for August was better than expected, and this encouraging news pushed yields back out so that Treasuries ended up little changed on the week (10-year at 0.72%, 2bps tighter W-o-W). The sheen has also come off of traditional safe haven asset gold, as the ultimate “store of value” has been range bound between $1,930/ounce and $1,970/ounce since peaking at $2,000/ounce on August 18th. Gold was down 1.6% last week, closing at $1,933.83/ounce. The US Dollar defied its recent trend and also strengthened last week perhaps reflecting the better U.S. economic data during the week. The US Dollar has been weaker every month since April but has started September on a positive foot.
WTI oil weakened last week rather significantly on a percentage basis, even in the face of
slightly better-than-expected U.S. economic data, as you can see from the #Bloomberg graph to the left. Of course, oil prices have unique demand and supply dynamics as we all know. Even so, the harsh reality of the underlying economic weakness of the global economy has arguably been laid bare by the CV19 contraction. Even if economic data is occasionally better than expected, the reality is that it is historically bad still, and there is no “solution” to the pandemic. WTI closed below $40/bbl for the first time since late July and was down 7.4% last week driven by a combination of global producers gradually increasing production and demand from summer driving tailing off. Traders will be looking at support levels post-Labor Day, to see if WTI will fall further through the important $40/bbl support level.
Economics & Politics
In the U.S. last week, ISM manufacturing PMI (Tuesday) Markit Services PMI (Thursday) were both better than expected, showing the U.S. economy is continuing to recover slightly faster than expected. Further support came with first-time unemployment claims on Thursday (881k vs 950k expected). On Friday, the early tone to the financial markets were further bolstered by better-than-expected non-farm payrolls for August, along with a decline in the unemployment rate in the U.S. to 8.4% (vs 9.8% expected and a strong improvement, even in light of classification adjustments, compared to July). However, it turned out very much to be “the shoe on the other foot” for a change, as strong economic data could not rescue equity markets that were being deluged by selling pressure on Thursday and much of Friday.
In the U.K., housing prices rose more than expected although manufacturing and services data both disappointed. We have reached September now with no post-BREXIT trade deal in sight, and this will continue to put pressure on the government of Boris Johnson. The performance of the FTSE is very much reflecting this weakness, and the stronger pound is putting further pressure on U.K. businesses as I mentioned earlier. Manufacturing and services data were stronger overall in the Eurozone, led by Germany, but the data was worse-than-expected in the E.U.’s second largest economy, France.
Monday started on a positive tone, with much better-than-expected manufacturing and non-manufacturing data for China for August. It is of course important that the world’s second largest economy continue its momentum to ensure that the global economy carries on with its recovery.
From a political perspective, the world’s attention will be squarely on the upcoming U.S. Presidential election, with the venomous rhetoric between Joe Biden and President Trump sure to rachet up after Labor Day. Democracy is about electing the person that the majority of the population (or, in the U.S., the electoral college) selects, and this decision needs to remain sacred and be respected by both parties. Let’s hope that is the case. I would encourage you to do your best to try to understand the platforms of each candidate, and to try to filter out the innuendo and “fake news” that is coming from both sides. It’s only going to get worse!
COVID-19
There were no material developments as far as the pandemic this past week, with the most important approaching milestone being that schools in many parts of the world are restarting, most physically for primary and secondary students. Let’s hope that there is a continued return to normalcy for your children and your children’s children, so that their anxiety levels will be reduced during this difficult period.
The table below shows the monthly evolution of cases of and deaths from CV19, with all of
the usual caveats about how cases are counted, how many people are tested, etc., that could cause the data to be over- or understated. The world is rapidly approaching 27 million cases and 900,000 deaths from CV19. I look at the Johns Hopkins Coronavirus Resource Centre for much of my data, but the Worldometer Coronavirus website is also an excellent resource with loads of interactive information. For example, you will find that the U.S. and the U.K. rank 18th and 19th, respectively, by number of people tested for CV19/1m people, even though the U.S. leads the world in cases and deaths. Germany ranks 41st, France 49th, China 59th and Japan 151st as far as testing/1m people, to give you a sense of the scope of testing by some major countries.
Conclusion
Valuations remain ridiculously high in equities and the disconnect between global economies and financial markets remains distorted, largely due to excess central bank liquidity that is artificially inflating asset prices, albeit a necessary evil to blunt the economic effect of CV19. The end of last week might be a sign of what we are in for as the summer ends, or it could be just another “blip” on the one-way rocket ship upwards. Monday is a holiday in the U.S., but the opening of other equity markets that day will set the tone for the U.S. opening on Tuesday. Personally, I am strapped in, not expecting this one directional “Teflon-like” market to carry on at this pace with the confluence of weak economic data globally and an upcoming U.S. Presidential election on the horizon.
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