Rally Since The Top
Investing is all about perspective. If you look at how stocks have done since Christmas Eve 2018, this looks like an unsustainable bubble. If you look at how stocks have done since the peak on September 2018, the returns are much more normal.
S&P 500 is up 13.8% since September 20th which was 16 months ago. That’s slightly above 10% annualized returns. As you can see from the chart below, every sector is up since that peak except energy which is down 20.7% and materials which is down 0.5%. Healthcare has slightly underperformed as it is up 12%. That weakness might because of political uncertainty.
Utilities sector is up 27.9%. Conventional wisdom says the utilities shouldn’t lead the market higher. They have done so because stocks have risen while yields have fallen. That’s a great combination for utilities. This sector has a PE multiple of 20.61 which is 2.51 standard deviations above the mean.
Rates being low counteracts this PE analysis. But it is interesting to see how well this sector has done compared to history. It has the highest PE ratio since at least 1993. Finally, tech is up 30.6% mainly because of Apple, Google, and Microsoft. The market was right to rally because tech has had solid Q4 guidance. Let’s see how the biggest firms do this earnings season.
Yes, Earnings Can Rise & Stocks Can Be Weak
One of my main macro predictions for 2020 was that there would be multiple compression. If multiples rose because of anticipated economic growth acceleration, they should fall as that acceleration occurs. It’s not here yet according to the data I have reviewed, but we have seen the Citi Economic surprise index rise to 8.5 which is the highest reading since April 2018.
If you think stocks should rally just because EPS growth will improve in 2020, the chart below should convince you otherwise. As you can see, the explanatory power of EPS growth on 1 year returns since 1988, when operating EPS history began, is only 11.9%. That’s not a high r-squared. Even the r-squared of 29.8% for 5 year returns isn’t that high.
Review Of Wednesday’s Action In Markets
The stock market was mostly flat on Wednesday as it lost much of its morning gains. S&P 500 was up 3 basis points, Nasdaq was up 14 basis points, and Russell 2000 was down 9 basis points. This was yet another day where the market didn’t move 1% or more. There are only 7 more days for my prediction of a January correction to come true.
VIX was up 6 basis points to 12.91 and the CNN fear and greed index fell 7 points to 74 as it is now in greed. The year of extreme greed is over. Bears are obviously still disappointed as there hasn’t been a significant decline.
Netflix stock fell 3.58% even though it had rallied after hours on Tuesday. That’s not a surprise as domestic subscribers and revenue guidance missed estimates. This wasn’t the disaster quarter some feared when Disney+ was announced. But it’s rally in the past few months suggests most already knew Netflix would survive the competitive onslaught.
Best 2 sectors on Wednesday were utilities and tech which increased 0.29% and 0.37%. Utilities are on an absolute rampage as the sector is up 5.79% since January 8th. Real estate and energy were the worst sectors as they fell 0.79% and 0.89%.
Utilities love the recent decline in the 10 year yield which is now only at 1.75%. The yield doesn’t imply there will be an uptick in nominal GDP growth like stocks suggest. 2 year yield is at 1.52%. There is a 12.7% chance of a rate hike on Wednesday and a 62.9% chance of at least 1 cut in 2020.
Tesla’s rally has been remarkable. Even though the stock fell 3.95% from its peak late in the morning, it still increased 4.09% on the day. The stock is up 118.92% in the last 6 months and 36.15% year to date. We are a couple months from the launch of Model Y which excites investors.
Shorts have covered in this massive squeeze as the days to cover has fallen from 6.64 on August 30th to 2.26 on December 31st. It’s current days to cover has probably fallen further. Now if the stock drops, most of the shorts won’t even benefit.
As you can see from the table below, Tesla’s market cap has risen above Volkswagen’s. It’s the 2nd biggest car company in the world. The impossible has happened!
Sanders’ odds of winning the Democratic primary increased on Wednesday as a few national polls were good for him. We’re used to seeing him do better in early state polls, but lately the reverse is true as Biden has taken the lead in Iowa and Sanders had a very good national poll. 4 national polls came out on Monday. They have Biden up by 5,7, and 7 points. Sanders is in 2nd in 2 of them.
In a CNN poll, Sanders was winning by 3 points. Now in the average of recent polls, Biden is only up by 6.5 points. The race is tightening as the first voting starts next month. Next Democratic debate is February 7th, which is after the Iowa caucus. Because of the great CNN poll for Sanders, his odds of being the nominee increased to 31%. He’s 10% behind Biden.
It’s very possible for EPS to grow strongly without the stock market doing well. Tesla and the utilities have had a great few weeks. What an odd combination! Tesla is the 2nd biggest automaker for now.
CNN national poll makes it look like Sanders isn’t sliding in the polls like some of the Iowa polls implied. Both Iowa and New Hampshire are a tossup. Investors think the 2020 U.S. election is the biggest fat tail risk.
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