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…
-> 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:
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