Unbelievable Optimism
The stock market is back to experiencing optimism as it is closing in on its record high. Monday was led by the big tech stocks, but small cap value also increased. It was a party where stocks like Apple got the craziest, but stocks like Mondelez also attended. It’s tough to explain the recent rise in markets other than to say people were taught to buy the dip in March and executed that strategy again in September and October. The charts below are quite amazing.
As you can see, in 2000 there were 3.3 million E*TRADE accounts and in 2020 there were 13 million Robinhood accounts. This isn’t a scientific study because obviously there are other brokers. It just shows trading is probably more common as the proliferation of smartphones, a rising stock market, and free trades have encouraged speculation.
It gets even worse because Robinhood is offering options trading to people who don’t even know how to trade. It’s dangerous and it’s causing wacky swings in the market.
Monday’s Details
S&P 500 was up 1.64% which put it only 1.3% off its record high. A September correction did nothing to stop investors from getting excited a few weeks later. Nasdaq was up 2.56% and the Nasdaq 100 was up 3.09% which put it just 2.72% off its record. Food stocks did really well as Mondelez was up 2.36%.
Cloud index almost had a great day, but ended up just 1.21%. It fell 71 basis points from its afternoon high. It was still good enough to hit a new record though. Some investors would aggressively short this index because expectations are too high. There is no question that the next few months will still require many people to work from home. And there will be a lot of online shopping this holiday season.
However, that will quickly be in the past. Investors should be focused on 2021 earnings now. As you can see from the chart below, Trade Desk has a much larger market cap than its traditional peers even though it has much less sales. Its sales are a blip on the chart, yet people treat it like a disruptor.
FedEx stock was up 74 basis points which is important because it is down just 0.3% from its record high in January 2018. It was a long time coming for this firm. Some think it is mildly expensive. 17 times earnings isn’t great when next year’s EPS growth might be negative due to exceedingly tough comps as more people shop in stores again. Twilio was up 7.7% on its acquisition of Segment for $3.2 billion of stock.
For some reason investors think this was a great deal because its stock is expensive, yet they own the stock. If you think Twilio’s stock is so expensive that it’s worth giving away, why do you own the stock in the first place? This massive bubble company is up 220% year to date.
Apple was up a massive 6.35% which is crazy; this $2.16 trillion company trades like a small cap. Furthermore, Amazon was up 4.75% and Facebook was up 4.27%. Investors are anticipating Apple’s new phone launch on Tuesday. These are 5G phones which are being overhyped by the market.
Many don’t view 5G as a game changing advancement. That's not saying the phones won’t do well. We don’t even know for sure what they will release. It's just saying the product can’t live up to what is being priced in.
Cheaper Small Caps
Russell 2000 was up 70 basis points as it lagged, but still attended the party. Small cap value rose 79 basis points and regional banks rose 1.36%. As you can see from the chart below, the relative forward PE of small cap versus large caps is way below average.
It’s approaching where it was in the late 1990s. Small cap index holds a lot of banks, so if interest rates rise mildly, this relationship will mean revert.
Higher Yields?
10 year yield peaked at 79.5 basis points on October 7th. It’s now at 76.4 basis points which is still elevated compared to the past 3 months, but not yet at the June high of 90.2 basis points. It will likely get to 1% within the next 10 months. All we need is a stimulus and COVID-19 treatments to be dispersed.
As you can see from the chart below, if you use CPI and GDP growth, the 10 year yield should be above 2%. I’m simply predicting it will get to 1%. That’s enough to end some of the speculation in money losing companies.
COVID-19 Update
Johnson & Johnson vaccine trial was halted due to an unexpected illness. Vaccine trials are routinely halted. Some misinformation and fear might cause people to not get it because of this. Either way, therapeutics and testing are ramping up which make a vaccine less important. There were 1.003 million tests on Monday which pushed the 7 day average to another new record of 985,698. Obviously, this spike has gone slower than expected, but it’s still happening.
More testing, the easier it is for people to go back to normal. Better the treatments, the less the risk of people dying from COVID-19. 7 day average of new deaths per day is 694 which is way off the summer and spring peaks, but not low enough to encourage people to go back to normal.
A hotspot everyone is focused on is Wisconsin. 7 day average hit a new record high of 2,547 on Monday. It’s near the worst it will get. And the 7 day average of new deaths is just 13.
Deaths per day in France still aren’t going up. Many people expected deaths to increase significantly when cases started increasing in mid-August. As of September 21st, the 7 day average of new cases per day was 10,116. That’s 22 days ago, yet the 7 day average of new deaths is still only 62. It hasn’t increased in the past few weeks.
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