The roaring growth stock trade that has driven the S&P 500 since early summer looks vulnerable. Nasdaq is slowing down, even though interest rates are still contained for the past two weeks, and the price / earnings ratio on Nasdaq compared to Russell 2000 (normalized for profitable companies) is back at the highest level since September 2020.
Last autumn may seem like many years ago, but it was an important moment for the markets. Traders may recall that the S&P 500 fell 10% in just a few days, one of the sharpest corrections ever recorded. It also marked the peak of the forward-looking P / E ratio on the Nasdaq-100 and S&P 500, which has been declining since.
A major thematic investment rotation took place from the fall of last year to the first quarter, when a combination of stimulus money and optimism around vaccines kept consumers and travelers traveling despite a terrible winter -COVID wave. As interest rates rose in the first quarter of 2021, there was enough momentum behind the reflective trade to beat what many thought would be an unstoppable rally in expensive, high-tech names led by Tesla and embodied by Ark Invest’s flagship growth fund. The schism between growth and value at the time created some sharp but short-lived volatility, as the rotation to cyclical stocks did not get too far as Delta sent COVID cases climbing, and economic data began to lack expectations amid the background of a Federal Reserve preparing for taper.
Today, the question is whether there is an appetite for such a rotation again if the technology stalls. To some extent, it is similar. The 10-year dividend — up to Tuesday’s CPI print — honed higher from this summer’s lows, and travel stocks have remained stable since June. COVID cases are declining in this summer’s hotspots, and the Fed has outlined a plan to slow down bond purchases without stepping on the toes of the economy. All of it looks like a reasonable recipe for higher yields and rotation.
If this does not happen, it will probably mean that COVID avoids our control again, or dealers run out of free cash to install on the market. I’m more concerned about the latter as the rate of new money flows in the economy peaked earlier this year and it’s not clear when the next round of stimulus will come from DC Mega-cap tech stocks doing abnormally much work again and the number of companies , making new heights, has fallen since February. Anyone who bought into the ARKK-style high-growth companies in the first quarter is still underwater as the bear market in sectors such as electric cars continues. Not to mention that inflation has also chewed into consumers’ cash flow this summer.
Yeah Al that sounds pretty crap to me, Looks like it’s basically a bear thing I outlined in April. My view is that the summer Covid rise was a net positive force for the stock market as it allowed the Fed to remain vague about its declining timeline and revived the major technological quarantine trade. If case curves go back from here, the market is again exposed to a combination of potentially problematic rotation and withdrawal from central banks.
Nasdaq looks unsustainably expensive again. Apple expects little or no revenue growth from this. If the mega-cap tech meltdown from this summer cools, the bulls will need serious lifts from reopening trades to sustain the market at new heights. There is good basic reason to believe that these companies should bounce, but the technicality does not look encouraging.
The market does not have a good record of crossing the error line between secular technological and cyclical themes without any problems. Expect tremors.