The inventory market rally on stimulus and vaccine hopes has little leeway
Traders on the floor of the New York Stock Exchange.
Source: New York Stock Exchange
What will happen to the markets after the inauguration of Biden – and the risk of disruption?
The S&P 500 has soared 15% to historic highs since the November 3rd election. This is due to a number of macroeconomic hopes that have pushed sentiment, technical level and earnings expectations to very high levels.
The good news: So far, these hopes are being realized.
The bad news: the stock market has grown and there is very little room for error.
The macro: a lot of hopium
The foundation of the market rally to historic highs is the trifecta of additional impetus for the winter in Covid, a smooth and effective introduction of vaccines and a significant reopening of the US economy in the second half (the so-called “reflation trade”).
Everything has to go well with markets at these dizzying heights, but there are pitfalls everywhere. President Joe Biden could not get a stimulus plan big enough to keep markets happy. The introduction of the vaccine can stall. New strains can become resistant to the vaccine. Recovery can take much longer than expected, with unexpected vulnerabilities.
“Right now, the entire history of reflation, stimulus and vaccine is intact,” said Alec Young, chief investment officer at Tactical Alpha. “But any change in this narrative will cause stocks to stall.”
Markets in the extreme
It’s not just stock prices that are at extreme levels.
Noting that traders were “extremely optimistic”, Ed Clissold of Ned Davis Research wondered, “Are there still bears?”
The technical level is also extreme. The 200-day moving average for the S&P 500 is a standard metric for measuring momentum. The S&P 500 is now 16% above the 200-day moving average, twice as high as even in bullish markets. Other technical levels are also overbought.
Revenue at a crossroads
The S&P trades in the nosebleed area: almost 23 times 2021 profit, well above the historical norm of about 15-17 times future profit. Bulls insist that a higher market multiple is appropriate if the economy is expanding as dramatically as it is expected in the second half of 2021, and that analysts are likely to underestimate corporate earnings as they did in the third quarter.
Others are not so sure. Among them is short seller Jim Chanos, who joked to CNBC that some stocks are way, way ahead of themselves: “The stock market is clearly looking ahead – at this point I think it is looking to 2022, 2030 or 2050, depending on inventory levels . “
The good news: the cops have been right so far. Early earnings reports far exceeded expectations. The 43 companies reporting earnings in the fourth quarter beat expectations by 18%, similar to the third quarter by 19%, according to Earnings Scout.
The bad news: Aside from Netflix, most of the companies that have reported are not recovering from strong earnings reports. This is a sign that while earnings have been excellent, stocks have risen sharply and there is little room for error.
Everyone in the pool
Perhaps the biggest worry is that reviews are getting stretched everywhere – there’s nothing cheap out there, noted Chanos.
“Many of the reopening games that people have been buying hand over fist since June, when the first glimmers of the vaccine available in the fall came out, are way above 2019 cap value again in terms of the overall market … whether traveling or leisure or what you have. And on top of that, stocks that stay at home are doing reasonably well too, so the market both has its cake and eats it. too, ”he said.
Young insisted the market is at risk because of this: “The pain trading – the trade that would cause the greatest number of investors the greatest burden – is declining.”
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