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Volatility is coming back. That’s the shortest description of the last week’s developments. Recent leaders were vulnerable. In this post I shortly describe what was up. Here we go…
Last week
-> The US markets were closed on Monday for the Labor Day. This caused other markets to trade in a pretty subdue manner.
-> As soon as Tuesday the previous week’s volatility outbreak continued with the Dow dropping 600pts to start the week. The selling pressure in this year’s best-performing stocks went on with Facebook (FB), Amazon (AMZN), Microsoft (MSFT) and Apple (AAPL) all down 4-7% in volatile trading. Increasing talks about tech stocks being in a bubble could be heard in most of the media.
-> Let’s take a look then. Here is the Bloomberg P/Es matrix for Nasdaq Composite:
-> Conlusions? If you’d look at trailing P/E the tech space benchmark indeed trades at extremely lofty levels of 60x+. Why that is is of course because of the denominator of the ratio (the E part) having plunged during the Covid-19 downturn. I have written about it in details here. The E part is going to stay low also for the end 2020 expectations, as analysts’ expectations are still dumped. Hence end 2020 forward P/E also looks pretty high at 37x. 2021 estimamted P/E though is at 28x though, which is much closer to the index’s longer-term mean. During the dot.com bubble 1-year forward P/Es were at 70x+ during their extremes. Truth is though, that on a forward-looking basis the tech market is yet relatively far away from a bubble.
-> And here one other note to bear in mind while comparing these two periods: in the dot.com bubble Fed Funds were around 6-7% and now they’re around 0.1%, whilst the 10Y Treasury Yield was 6-6.5% and now it’s 0.7%. Back then the Fed was hawkish and restrictive, now the Fed is dovish like never before. Conclusions again? There’s still space for a bubble ahead of us.
-> The increased volatility continued for the rest of the week. Stocks were back up on Wednesday only to fall back on Thursday again.
-> Friday remained volatile as well with indices being even 2% down. Eventually SP500 ended flattish and Nasdaq 70bps down.
-> Also on Friday The Labor Department said its consumer price index (CPI) rose 0.4% in August, topping a Reuters estimate of a 0.3% gain. Inflationary pressures were seen mostly in autos, food and energy and wasn’t widespread.
-> One of the week’s major stories were the representative of the Electirc Vehilce (EV) sector. 1st to start Tesla (TSLA) was down intraweek as much as 34% form its recent tops and -21% on week. The reason was that it was ommitted in the SP500 rebalancing and many investors hoped for it to become a member of the main US index already this quarter. 2nd TSLA’s much younger peer Nikola (NKLA), which debuted this year via a reversed split with a SPAC (Special Purpose Acquisition Company) announced a deal with General Motors (GM) including cooperation on productions of its Badger vehicle model as well as equity involvement in NKLA from GM. Stock surged almost 50%, only to give away all of its gain later in the week as one of the activist research firm Hindenburg shorted a big position in the name, calling it “an intricate fraud”. I wrote about the NKLA vs. TSLA issue here. NKLA ended the week -10%.
-> Effective weekly index changes: S&P500 -2.5%, Nasdaq -4.1%, EuroStoxx600 +1.7%, DAX +2.8%, Nikkei225 +0.9%.
Other markets events:
-> Bonds: not much action in the US yield curve (10y-FF) which hovers around 60bps, German curve (10Y Bunds-3M) at 0.10 with 10Y Bunds at -0.48%. High Yield Spreads stable around 5.
-> Commodities (ex oil): quietish week on the Gold market ended +40bps on week.
-> Currencies: another OK week for USD, esp given ECB’s Lagarde gave a clear message she don;t like the EUR strenght. DXY (Dollar Index) +0.6%% on week, EURUSD -0.0%.
Major macro events: (times are CET):
Next Week’s major macro events:
Yours!
PC
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Regulation of the Polish Minister of Finance of 19 October 2005 on information constituting recommendations regarding financial instruments, their issuers or exhibitors (Journal of Laws of 2005, No. 206, item 1715) or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be claimed eligibile for any losses of a third party resulting from trading activities based upon this article. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.
