This market rally may be as fake as some of the bootleg hand sanitizers being hawked on Amazon and eBay at crazy prices to the worried quarantined masses.
Despite 26.45 million Americans having filed for unemployment claims the past five weeks and first quarter earnings season so far being as painful as being forced to watch “Tiger King” for the third time, the S&P 500 has rallied about 27% from the March 23 lows. The S&P 500’s forward price to earnings multiple of 21 times or so is at its highest level since right before the tech bubble back in December 2001.
One would think we are amidst a solid economic expansion in the U.S. and accelerating EPS growth among businesses, not something as debilitating as the coronavirus pandemic.
“All the data is horrific. But it’s getting less bad than it was say a couple weeks ago and that’s especially true with jobless claims. So markets are focused on that marginal rate of change and and they think that the worst will be behind us when we move to May and June,” said Sevens Report Research founder Tom Essaye on Yahoo Finance’s The First Trade.
Point well taken.
But the question right now the bulls should be asking themselves is how strong is the rally from the March lows, really? Are the bulls truly buying into the view the U.S. economy is back to its job creating, growth self this summer? Or, is the rally a mirage being fueled by heavy-hitting speculators (we see you, hedge funds) going back to tried and true winning trades in big cap tech? And in turn, this is creating the momentum that lures in the suckers just before the bottom drops out of the entire market again.
The data supports the latter observation.
The five big cap tech stocks
Coming into 2020, the five largest S&P 500 stocks comprised 18% of its market cap, matching the share at the peak of the tech bubble in March 2000, Goldman Sachs strategists note. Since then, those stocks — Microsoft, Apple, Amazon, Google and Facebook — have risen to account for 20% of the S&P 500’s market cap.
Looked at another way, all five of those big cap tech stocks have handily outperformed the S&P 500’s 14% drop, according to Yahoo Finance Premium data — led by a 30% pop in Amazon. In effect, investors have pretty much forgotten about the other 495 stocks in the benchmark index because they have less belief in their ability to navigate the coronavirus situation for whatever reason.
A healthy market rally, however, would be under-pinned by a belief that more than five companies will successfully come out the other side. Where are the bets in industrial names? How about taking a stab at battered oil stocks — if the economy is going to burst back into gear later this year, surely we will need greater oil than the present right?
“Many market participants – ourselves included – have expressed incredulity at the fact that the S&P 500 trades just 17% below its all-time high amid the largest economic shock in nearly a century. Below the surface of the market, however, the median S&P 500 constituent trades 28% below its record high. This 11 percentage point gap is one measure of market breadth, which now stands roughly a standard deviation below its historical average,” the Goldman Sachs equities strategy team writes.
Such narrow breadth in the market comes with a warning from Goldman, as it should.
Says Goldman, “In addition to the Tech Bubble, breadth narrowed ahead of the recessions in 1990 and 2008 and the economic slowdowns of 2011 and 2016. Historically, sharply narrowing breadth has signaled below-average 1-, 3-, and 6- month S&P 500 returns as well as larger-than-average prospective drawdowns.”
And who is to say Microsoft, Apple, Amazon, Google and Facebook are worthy of their even more premium current valuations? None of these companies have reported first quarter earnings yet.
You mean to tell me 26.45 million jobless Americans doesn’t equate to reduced spending on cloud computing upgrades this year (it does)? A severe economic downturn in the U.S. like we are experiencing doesn’t mean sharply lower consumer spending (it has already, per retail sales data) and downside financial risk for Amazon? Small businesses going under will pressure advertising on Facebook.
The market will do what it wants to do in the end. What’s right though is a pause in the upward momentum in stocks, especially five enormous tech stocks.
Author: Brian Sozzi
Source: Finance. Yahoo: Coronavirus unleashes insane bubble in these 5 stocks and it could end badly for the bulls