The Roaring growth stock trading that has been fueling the S&P 500 since the start of the summer looks vulnerable. The Nasdaq slows even as yields have remained contained for the past two weeks, and the Nasdaq price / earnings ratio to the Russell 2000 (normalized for profitable companies) is back to its highest since September 2020.
Last fall may seem like a long time ago, but it was a big time for the markets. Traders may recall that the S&P 500 fell 10% in a matter of days, one of the biggest corrections on record. It also marked the peak of the forward P / E ratio of the Nasdaq-100 and S&P 500, which have trended downward since.
A large thematic investment rotation has taken place from the fall of last year to the first quarter, as a combination of stimulus money and vaccine optimism drove consumers to spend and travel despite a heinous winter wave of COVID. As yields increased in the first quarter of 2021, theThe reflation trade had enough momentum that it interrupted what many thought was an unstoppable rally in expensive, high-growth tech names led by Tesla and embodied by flagship Ark Invest. growth funds. The schism between growth and value at this point has created strong but short-lived volatility, as the rotation to cyclical stocks has not gone too far as Delta has pushed up COVID cases and economic data has gone too far. started to miss expectations in the context of a Federal Reserve preparing for the cut.
Today the question is whether there is any appetite for a such rotation again if the technology stagnates. To some extent, it looks like it. The 10-year yield - until Tuesday's CPI print - was up from its summer lows, and travel stocks have held dead since June. COVID casesare slowing in summer hot spots, and the Fed has laid out a plan to slow bond buying without stepping on the economy's toes. This all sounds like a reasonable recipe for higher yields and higher turnover.
If this does not happen, it probably means that COVID is out of our control again, or that merchants are 'have more free money to deploy in the market. I'm more worried about the latter, as the rate of new money supply in the economy peaked earlier this year and it's unclear when the next round of stimulus will come from DC Mega-cap tech stocks are doing abnormal legwork again, and the number of companies hitting new highs has been declining since February. Anyone who bought ARKK style companies fromstrong growth in the first quarter is still underwater as the bear market persists in sectors such as electric vehicles. Not to mention the fact that inflation has also eaten away at consumers' cash flow this summer.
Yes, that may sound familiar - this is essentially the bearish case I described in April. My take is that the summer Covid surge has been a net positive force for the stock market as it kept the Fed vague on its cutback schedule and re-launched big tech quarantine trading. If the case curves come back down from here, the market is again exposed to a potentially problematic combination of central bank rotation and pullback.
The Nasdaq looks untenably expensive again. Apple expects little to no profit growth from here on out. If this summer's mega-cap tech meltdown cools, haUss stock markets will need great effort to reopen trading to keep the market at new highs. There are good fundamental reasons to think these companies should rebound, but the technicalities do not look encouraging.
The market does not have a good track record of breaching the breach. t distinguish between age-old technology and cyclical themes smoothly. Expect tremors.