Stocks Recover After Geopolitical Fears Fade
New trends appears to be: a geopolitical event occurs, stocks selloff, and then they recover to new highs. Obviously, that’s an oversimplification of the action because stocks are also reacting to earnings and economic reports. U.S. defense secretary stated the attacks on the bases that house U.S. military only caused damage to tents, a parking lot, and a helicopter. No one was killed.
Fears of this being a severe retaliation from Iran were overblown. So the selloff after hours on Tuesday didn’t affect stocks during the trading session on Wednesday. Only those who expected the worst are shocked stocks are back to normal trading. Personally, I don’t like to trade based on geopolitical actions because I’m not an expert in the area. Even the experts can get it wrong sometimes. so I’d rather look at the economy and valuations.
If it wasn’t for the 0.41% selloff in the last half hour on Wednesday, the S&P 500 would have been up more than 1% in the first 5 days of the year which would have been a great sign. In those instances stocks are up 90% of the time with an average full year return of 18.6%. So far, there hasn’t been a correction as the S&P 500 is up 0.69% year to date. It was up 0.49% on Wednesday.
Apple Has Been Repriced
Nasdaq was up 0.67% as Apple was up 1.61%. Apple is already up 3.25% year to date. Apple News has reached 100 million active users which is up from 85 million last year. Apple has transformed itself into a services company which is driving its higher valuation.
As you can see from the chart below, most of its recent rise in the past year has been due to multiple expansion, not earnings growth. It has the highest earnings multiple since before the financial crisis.
When earnings have previously peaked cyclically, the stock has fallen 44%, 32%, and 40%, but this time it is exploding. There’s no doubt services is a more sustainable model than hardware, but at the same time it still needs people to have the hardware to sell them services. Good news is if the services are great, it can make customers more likely to stay with Apple products. Many think the repricing of the stock has gone too far.
Details Of Tuesday’s Action
Russell 2000 was up 0.32%. Banks like that the sharp rally in treasuries abated after investors got over their fear of a potential conflict between America and Iran. 10 year yield is at 1.86% which is still below the resistance in the mid 1.90s. 2 year yield is 1.57%. Fed meeting in 20 days will again be low key as nothing major will occur. There will be no rate hike or cut and there won’t be guidance for any action in the near term. There is a 55.5% chance of a cut in 2020 now that the geopolitical worries have passed. If there is market volatility, those odds will temporally increase.
VIX was down 0.34 to 13.45. Back when some said the VIX could increase on Wednesday, we didn’t know what would happen with Iran. We didn’t know the full details of the attacks on the bases. Now that we do, it makes sense the VIX fell.
CNN fear and greed index rose 3 points to 92 which is extreme greed. I’ve never seen the index stay at extreme greed for so long. Energy sector was the biggest loser as it fell 1.74%. Now, I’m still bullish because I was never betting on geopolitical worries to drive the sector higher. Best sectors were technology and communication services which increased 1.03% and 0.68%.
Bed Bath & Beyond Craters
Bed Bath & Beyond fell 1.13% in normal trading and 9.91% after hours on Wednesday. Bed Bath & Beyond, which owns its namesake, Buy Buy Baby, and Christmas Tree shops, reported terrible Q3 earnings. It had a loss of 38 cents per share instead of a gain of 2 cents. Revenue was $2.76 billion instead of $2.85 billion.
Same store sales growth was -8.3% instead of -5%. It withdrew its 2019 outlook and said it’s expects profitability to stay under pressure next quarter. The firm announced it would delay closing 20 stores. The firm previously announced it would close 60 locations and 40 Bed Bath & Beyond stores. 20 of those Bed Bath & Beyond closings will be delayed until after the first half of fiscal 2020 to sell more merchandise.
Tesla Euphoria/Short Squeeze
Tesla’s market cap is higher than Ford and GM’s combined. It also has the highest market cap of any U.S. automaker ever. Ford’s market cap peaked at $80.8 billion in 1999. Tesla’s is at $88.7 billion. None of those stats should be used to make trades. Just marvel at the recent run in the stock; it is up 17.64% year to date. It’s up 174.98% since June 3rd, 2019. I don’t see any news event that justifies Tesla’s recent run.
Whenever you see a heavily shorted stock exploding, it’s usually a short squeeze. The stock was clearly way too low last year as it is about to launch Model Y which should be hugely successful. Now it’s extremely high. I wouldn’t buy it here. I’d take profits if I owned it. Shorts on Tesla are very passionate. That passion burned them as practicality usually wins in trading and investing.
Conclusion
The stock market quickly got over the geopolitical worries. However, I think valuations will catch up to it soon. I’m bearish on Apple as the repricing has gone too far. Bed Bath & Beyond is in a tailspin like a lot of retailers that aren’t one of the top players (think Target, Costco, & Wal-Mart). Tesla has exploded higher, crushing the shorts who are extremely passionate, but ultimately wrong.
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