Weekly Update

Will Zero Interest Rates Lose Their Impact?


Published September 18, 2020




A couple of notes from widely read investment blogger Josh Brown provide reason to be a little less than thrilled with the Fed’s current language, while also reminding investors that the sharp rally in our favored Nasdaq 100 (QQQ) index has some strong fundamental support, something lacking in prior QQQ rallies.

Here’s Mr. Brown (first quoting Peter Bookvar):

“Two more things after Fed Chair Powell’s press conference: The Fed Chair said that three years of no rate hikes in their estimates, assuming all else equal, is essentially forward guidance. He expressed his view that this is a “powerful” stimulus. My belief is that it is actually the exact opposite. The whole point of stimulus is to stimulate economic behavior to happen today instead of waiting until tomorrow. Telling us that rates will stay low seemingly forever creates NO sense of urgency to act now. Thus, it is an economic depressant instead.

Imagine a car dealership:

For the next two weeks, zero dollars down and zero percent financing on a new Yukon! Act now, offer expires September 30th!
Zero percent financing pretty much forever. Come on in anytime you want between now and 2023!

Which presentation brings in more economic activity to the dealership? Using monetary policy as a form of economic stimulus works along the same lines. Or, at least, it’s assumed to work along the same lines. Giving people a sense that there’s no rush to do anything works precisely counter to the Fed’s intent. The good news is, the housing market is already going wild as is corporate borrowing, so whatever.”

And looking at the rally in the Nasdaq 100 (QQQ):

“A recent Barron’s article by Ben Levisohn does a good job of capturing the storytelling that’s led to one of the greatest stock booms we’ve ever seen:

The story began easily enough, if not with “once upon a time.” A virus forced the country to shut down and accelerated the gains in a select few technology stocks that are uniquely capable of thriving with everyone stuck at home. A central bank took quick action to prevent financial markets from seizing up, pushing interest rates about as low as they could go. That helped lift the stocks of companies that are growing, including chiefly the aforementioned tech stocks, even if some have no profits. These stocks were among the first to rally once the stock market bottomed in March.

Nasdaq 100 / S&P 500 ratio

While it’s easy to marvel at the pace and trajectory of the rally, there is far more behind the current rally than there was back in the dot.com boom. For example, revenue growth for these high-fliers is powerful.

Powerful revenue growth for high-fliers

So, you can call it a stock bubble, but then you’ll also have to acknowledge the fact that it’s a business bubble too…? And there’s no such thing as a business bubble. People are either buying and consuming products/services or they aren’t. And they clearly are. With all due respect, show the fundamentals too. That’s the whole story.

Maybe instead of calling the 2000 dot com bubble a “dress rehearsal”, why don’t we simply say that investors in the year 2000 were precisely right about the impact that the internet would have on the world, but they were ten to fifteen years too early, betting on some of the wrong companies and business models in the early days and paying valuations that were unjustified at the time.

With the exceptions of Sun Microsystems, Oracle, Intel, Microsoft and Cisco, there really wasn’t any revenue (or revenue growth) to back up the skyrocketing Nasdaq 100 at the turn of the millennium.

Now, it’s just the opposite – there has been nothing but revenue growth in the names comprising this index – and so much of it seems to be secular (non-cyclical) that you almost get the sense that it’s all been immune to any semblance of a traditional business cycle. That immunity probably can’t last forever, as these companies gradually begin hitting their heads on the Law of Large Numbers ceiling, but where is that ceiling exactly as the global economy digitizes? Two years away or twenty?

So yes, the Nasdaq 100 has now done significantly better than the S&P 500 over the last few years. But this time, it absolutely should have.”


Market Update

Stocks kicked off the week with solid gains on news of a trio of mergers in the biotech and consumer technology sectors. The S&P 500 gained +1.3% in Monday trade. The rally continued Tuesday with another +0.5% lift with investors looking ahead to Wednesday’s Fed meeting outcome. That gain was reversed Wednesday when the Federal Reserve meeting issued a note of caution. That caution led to an afternoon selloff after earlier gains were fueled by a strong earnings report from FedEx (FDX). The Wednesday afternoon selling bled over into Thursday with stocks selling down by -0.8%. Tech/consumer stocks continued to take the brunt of the downdraft with the Nasdaq sliding -1.3%. Friday saw a continuation of the selling as little new information emerged to dampen the market tumble. Stocks fell another -1.1%.

Stocks fell for a third consecutive week as September lives up to its historic trend of weakness for markets. The S&P 500 (SPY) slumped a modest -0.59%. The tech-heavy Nasdaq 100 (QQQ) continues to feel the most pressure in the pullback, shedding another -1.32% this week, and losing its hold on the 50-day moving average. Small-caps (IWM) displayed a rare burst of outperformance this week, rising +2.78%.

Warm wishes and until next week.