Diverging market indicators may finally be coming to a head. It is very uncommon to see REITs, Utilities, Gold and the US Dollar indices make new highs while growth outperforms. Typically, safe havens either lead or lag depending on GDP expansion/contraction. Monetary stimulus and money printing has led interest rates down to record low levels which forces money into other markets. The recent narrow leadership by FANG names and richly valued software companies is not a sign of a healthy market. Technically speaking, only 30% of the S&P 500 stocks are in positive trends today. With the market making daily highs and fewer names participating from a technical standpoint, the only real comparison close to these levels dates back to 2000. That was not a timely period to get aggressive.
Low rates increase deal making as well. We have five multi-billion dollar deals announced already this week, capped off by Morgan Stanley acquiring E*Trade Financial for a cool $13B. Cheap money causes misallocation of capital over time. It is anyone’s guess as to what constitutes a good or bad deal, but the metrics point to destruction of capital when too much money is in the system. One can wonder how a high-net worth Morgan Stanley client who operates with an old school commission structure fits with $0 commissions at E*Trade.
Yesterday we saw a massive selling program around mid-morning impact many of the large cap technology names along with the recent high flying momentum stocks. Investor favorites that have skyrocketed on the back of minimal to zero bottom line earnings improvement such as Beyond Meat, Shopify, Tesla, Nvidia#, Snapchat# and Virgin Galactic were down 4% – 6%, in just a few minutes. With past money flows into index funds and ETF’s, a sale program from large investors can bring down the whole market just as fast as they brought it up. The overall market slowly rebounded from the quick sell off but the Nasdaq finished the day down 1% as selling was concentrated in big cap technology and recent winners.
Covid-19 related downgrades from numerous companies also impacted the overall news flow. Procter and Gamble# noted “that Coronavirus will have a material impact on March quarter earnings.” Foxconn announced a similar mantra. Adidas noted they are seeing an 80% decline in store traffic in China. Manufacturing sites are slowly reopening but operating at 50% capacity or worse. Traffic congestion reports are showing 50% – 75% less cars on the roads in China’s industrial hubs. February auto sales are down 92% as well. There is no question first quarter EPS numbers will need to come down. However, monetary stimulus and direct lending by China has kept the market impact muted. Free money wins again!
If this follows the SARS pandemic, a V-Shaped recovery is likely. Most purchases outside of discretionary travel and eating out will be postponed as opposed to cancelled. Low rates and easy lending standards should create a demand scenario where this is a minor, near-term blip. In 2003, this also led to a quick rebound in interest rates, which has been a big driver in keeping money in the stock market and P/E’s elevated. If the 10-year yield can get back to 2.0% over the coming quarters, the list of winners and losers will flip.
On the domestic front, we finally saw what a debate with Bloomberg looked like. It certainly was more combative than previous ones with all contenders going after the rising challenger and causing some damage. They certainly do not like the idea of a billionaire “buying” this election, to use their terminology. Bloomberg came off ill prepared and unable to answer their critical questions but this was his first debate in a long time. At least that was the consensus review offered by the experts. This was clearly not his best showing, but that does not take away his deep pockets and the core of his base. The argument that a socialist cannot beat Trump in key battleground states has merit, albeit anything can happen after watching a novice like Trump beat an experienced Jeb Bush, Cruz and Rubio before surprisingly winning the general election despite his many flaws.
The Nevada caucus, which Bloomberg is not even on the ballot, will be tomorrow, followed by South Carolina next weekend and the big Super Tuesday event. Betting markets showed a massive drop for Bloomberg’s chances with a rise in Sanders’, and to a lesser extent Warren’s after the debate. It is beginning to look like a brokered convention is a real possibility in July as well. The superdelegates are not involved in the primary, initially, anymore. This was a contention for Sanders supporters who feel Hillary Clinton stole his spot in 2016. The new rules have created an environment where getting 50% of the delegates, and the nomination, is quite difficult. If a candidate gets 15% of the vote in any states’ primary/caucus, they get a portion of the delegates. With so many candidates still in the race, getting 50% of the vote in any state is hard to envision. When candidates do drop out, the delegates are not just handed over. They can vote for the leader or defect. The difference between a Biden/Bloomberg supporter and Sanders/Warren is clear to see.
If the first ballot vote at the convention in July does not produce a 50%+ winner, then the superdelegates come in for the 2nd vote to attempt to get someone over the required 1,991 delegate hump. This is where things can get interesting. The superdelegates can vote for anyone. Most of this cohort is comprised of traditional Democrats and are likely to lean towards someone that can garner support from more moderate voters. If they do not support Bernie Sanders, who likely has the most delegates, they risk alienating his base and giving Trump an easy victory with less Democratic voter turnout. However, putting Bernie on the ballot will alienate independent voters who are more central. It will be an interesting few months, especially if the field does not narrow itself by Super Tuesday.
Cheers alumni Kelsey Grammer turns 65 today while Game of Thrones star Sophie Turner is 24.
James Vogt, 610-260-2214