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Published February 21, 2020


The force with which certain stocks are blasting higher so far in 2020 has some investors wondering whether the overall market is entering the “blow off top” euphoria phase that tends to characterize the end of a long bullish run. We note that a similar run occurred in January 2018, which also looked at the time to be a euphoric move. Stocks fell the following month and for the year. But it wasn’t the end of the bull move. The article below from Mark Decambre at Marketwatch presents a number of observations from market-watchers.

“What happens when everything rises all at once? That’s what some investors are scratching their heads about as they look out at the current landscape on Wall Street.

On Wednesday, the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite indexes drifted toward record territory-seemingly inoculated from coronavirus contagion.

Speculative stocks like electric-vehicle maker Tesla Inc. (black line below), and Virgin Galactic Holdings Inc. (red line below), a space tourism company that only began trading publicly three months ago, also surged. Virgin’s stocks is up 118% THIS MONTH (!), while Tesla has gained more than 41% over the same period after a huge surge in January.

Tesla and Virgin Galactic stocks

But it’s more than just those names.

Gold prices are trading near the richest levels since 2013 and the U.S. currency is hovering near its loftiest level in more than a year (against a basket of a half-dozen rival currencies).

Another asset, bitcoin, is barreling above $10,000, approaching its highest level since August.

Frank Cappelleri, executive director at Instinet, wrote that 19 exchange-traded funds were at or near records earlier this week, including groups as varied as global infrastructure, utilities, and internet stocks. It’s a wildly broad (and odd) mix, from the quite defensive to the very aggressive.

19 exchange-traded funds at or near records earlier this week

Meanwhile, a number of bond-pegged ETFs, which wouldn’t be expected to rise while equities are gaining, were also near their recent highs, including the broad U.S. bond market ETF and Investment Grade Corporate Bond ETF.

It’s almost as if investors putting money to work this year can’t lose, and that setup has caused some confusion among strategists, investors and analysts.

Cappelleri said he’s unsure if this is a true “everything” rally but advised caution.

“So, whether one thinks this is an ‘everything’ bull market or not, it’s clear that various assets are rallying concurrently right now. And that makes it important to stay on the right side of those trends for as long as we can,” he wrote on Wednesday.

On Tuesday, hedge-fund billionaire Leon Cooperman told CNBC that he saw euphoria in pockets of the market. He said “we’re at the early stage of knocking on the door of euphoria but not quite euphoria.”

Michael Antonelli, market strategist at Robert W. Baird & Co., said that the market’s multiasset rise can be attributed to one thing: “unprecedented stimulus.” Notably, easy-money policies from the Federal Reserve, which has kept U.S. benchmark rates at a 1.50%-1.75% range, with investors betting that the central bank will be more inclined to cut rates than to raise them in the near term, particularly with China’s COVID-19 outbreak emerging as a global threat.

Antonelli said the viral outbreak accounts for much of the catalyst for the state of play across markets. The infectious disease that emerged in Wuhan, China last, year, has hamstrung the world’s second-largest economy. How significantly it has hurt China remains to be seen.

“We know that China is basically sitting idle right now. Once the pandemic slows a bit more I’d expect to see some really massive injections both fiscally and monetarily from the Chinese,” Antonelli told MarketWatch.

“They can’t let this pandemic threaten economic growth because if it did, that could threaten political stability,” he said.

Fresh stimulus from China and an accommodative Fed may not provide much comfort, said Vincent Deluard, global macro strategist at INTL FCStone.

He paints a picture teeming with potential excess, where newly minted “traders share screenshots of their extraordinary gains on Reddit and Twitter and savagely roast anyone who is not leveraged long their favorite highflying tech stocks.”

Deluard says one of his bigger concerns is that the rally isn’t supported by solid fundamentals.

He argued that by one measure, tracking stock price gains compared against a number of measures, illustrated that equity valuations are historically rich.

The chart below shows the market value of the S&P 500 in aggregate compared against its replacement cost, or Tobin’s Q; stock-market capitalization relative to gross domestic product; and the Shiller P/E, or price-to-earnings, ratio. Based on those measures, stock market caps represent 230% of GDP, Shiller P/Es are at their loftiest since 2000 and Tobin’s Q is at a level last since in 1999, Deluard noted. Admittedly, these higher level, long term metrics can be at “excessive” levels for quite some time before the market reacts.

Valuation Measures of U.S. Stocks

On top of that, the profits of small-capitalization Russell 2000 index companies, meanwhile, have shrunk in each of the past four quarters, Deluard wrote.

Small Caps earnings recession

“Even large-caps are not immune to the earnings recession: profits for the S&P 495 index (which excludes Facebook, Apple, Amazon.com Inc., Microsoft, Google-parent Alphabet Inc.) declined by 3.9% in the past quarter (see chart above).
It’s impossible to say how long this tandem rally can last.

Legendary mutual-fund manager John Templeton once said that bull markets don’t succumb to old age, but die in a bout of euphoria.

And that notion may be swirling in a number of investors’ minds as this bull market that began March 9, 2009, heads toward its 11th anniversary.

Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors, told MarketWatch that all this apparent optimism may evaporate if the coronavirus’s impact is greater than investors are betting. “A number of strategists are playing amateur epidemiologist and I think that’s a little bit of a challenge,” Forester said.

He also said some investments bets being placed currently also reflect that investors are playing defense, buying Treasury bonds as well as assets they think may grow in value.

“I think it’s a function of investor positioning and sentiment. There’s only been a few days of actual weakness so far in 2020, which means people have to keep chasing to keep up,” Cappelleri told MarketWatch.

Indeed, Chris Senyek, chief investment strategist at Wolfe Research, in a Wednesday note, said that there were four distinct trading buckets in which investors are currently assessing the market: recession scare, defensive growth, momentum growth and value trade (see attached chart):

Four distinct trading buckets

Deluard said that what he describes a “manic phase” for stocks will eventually pop and lofty valuations and central bankers could be the cause. “The main value of these examples is to illustrate that some of the largest stocks in the world have entered the manic phase, where mobs of leveraged individual investors have hijacked the normal price discovery process,” he wrote in his research report. “What could end this irrational euphoria?”

Deluard speculates that ultimately companies may significantly pull back on their stock buyback programs, which has been one of the key drivers of stock-market multiples. “Buybacks, the single-largest source of demand for stocks in this cycle, will become the transmission channel through which irrational prices finally adjust to rising cost pressures,” he wrote.”

Market Update

Investors returned from a Monday holiday to find Apple (AAPL) announcing that the company would fail to meet its revenue forecast this quarter due to the negative impact of the Coronavirus on demand. Stocks slipped only -0.3% on the news, however, with the tech/consumer-heavy Nasdaq actually working back to breakeven on the day. Stocks bounced back +0.5% Wednesday as the Chinese government announced programs to support businesses affected by the virus. However, that optimism was undone Thursday after Proctor & Gamble (PG) joined Apple in reducing its outlook, and Goldman Sachs (GS) issued a note saying investors are being too complacent about the potential impact of the virus. After dropping sharply mid-day, stocks cut their losses by more than half to leave indexes down -0.4% on the day. But Friday brought more pressure with weakness in a couple of domestic economic reports pushing investors to be defensive. The Nasdaq tumbled almost -2% while gold continued its strong week. The sharp rise in gold appears to be reflecting the nervousness some investors are feeling, even as market indexes remain near record highs.

Stocks slid back this week with the S&P 500 (SPY) falling -1.22% while the Nasdaq 100 (QQQ) slipped -1.86%. The small-cap Russell 2000 (IWM) fell a relatively light -0.48%, though the index has also lagged the move higher so far this year.

Warm wishes and until next week.