By Hussein Sayed
There seems to be no doubt the strong are getting stronger and the weak decidedly weaker as investors seek higher returns in riskier assets using the abundant liquidity available to them
Sometimes while watching markets day in and day out, you get desensitized to market moves and price action which you tell yourself is now standard fare. Silver plunges 15 percent in one day, no problem; Apple hits a $2 trillion market cap, tell me another. And yet, these moves matter to all investors and traders as more often than not, they are indicative of wider underlying issues and concerns in the markets.
Of course, big tech has benefited immensely from the work-from-home and stay-at-home orders which have kept vast swathes of the world’s population indoors. The digital economy is starting to dominate more and more as both online shopping and cloud computing have converted the tech titans into defensive stocks which can now also shield investors against difficult times.
But the recent record close in the S&P500, which wiped off all the market losses from the coronavirus pandemic, was symbolic of the extraordinary rally we have experienced over the past few months.
On that day, more stocks fell than rose but the five largest companies in the index, as has often been the case, were in the green and those five alone now account for over 25 percent of that historic rally.
The average S&P500 member is down more than seven percent while less than 40 percent of those companies are above the peak level hit in February. Amazon, Alphabet, Apple, Microsoft and Facebook now represent more than a fifth of the index which is the largest weighting for the top five since at least 1980, with Apple seeing its value double in just over 24 months to hit the next magic trillion mark.
There seems to be no doubt the strong are getting stronger and the weak decidedly weaker as investors seek higher returns in riskier assets using the abundant liquidity available to them. This has made equities look expensive relative to earnings and sales, but they do appear less stretched when valued next to bonds, with earnings yields on stocks only a touch higher than the 10-year Treasury yield.
The question we ask ourselves is if this imbalance and speed of growth is just too fast and too far?
Gold has seen some volatility recently too as a rally in those Treasury yields and a rebound in real yields weighed, causing the biggest one-day sell-off in seven years.
Further economic stimulus in the US is still in play, even though lawmakers on both sides of the aisle are at loggerheads, while optimism over tax relief and news of a potential Covid-19 vaccine has prompted investors to take money from havens and move it into riskier assets.
However, all this has come after a 30 percent rally in the yellow metal this year driven by concerns over the impact of the pandemic, especially in the US. The fundamentals for gold are still enticing for the bugs who may have missed the first move above $2,000.
US real yields – the return one can expect once inflation is taken into account – are still trading deep in negative territory so these need to reverse much closer back to zero to see further selling. After such a powerful surge over recent weeks including a stretch of 14 up days out of 15 since breaking out in mid-July, it’s only natural to see some retracement of prices.
‘Standard fare’ some might say?