Markets Remain “Oblivious To Risk”

Authored by Sven Henrich via NorthmanTrader.com,

Another week another Fed save as Jay Powell’s 60 minute interview aborted the market weakness from the week before resuming in a weekly market gap up which was further fueled by yet another conveniently timed false hope vaccine headline. Markets remain a Fed chase operation as the Fed’s balance sheet has now exceeded $7 trillion, an 87% increase since the summer interim lows of 2019.

Yet markets, the Nasdaq tech monolith aside, have yet again rejected at the previous technical resistance zone as the larger market has so far failed to reach the April highs. Reality is markets have played a range ping pong for the better part of the last month making little progress but seeing valuations again reach the higher end of the range at 140% market cap to GDP as now close to 39M people have lost their jobs in the past 2 months while American billionaires have gained $430B in wealth in the same time frame.

Not only do the technical divergences keep mounting the wealth inequality curve keeps exploding to ever more extremes.

When will any of this matter? To some it won’t and it doesn’t matter, as retail in particular keeps chasing the free money liquidity equation into a highly priced market with a 23 forward multiple while for others the risks keep mounting and the sustainability of the rally remains highly questionable.

Two old market adages come to mind: Markets can remain irrational for longer than one can remain solvent (trying to fade it) and don’t fight the Fed. All these things were said in January and February 2020 right before the crash as well, yet had little predictive meaning about the future.

So the battle for control continues and investors have to weigh the risk/reward between chasing a highly valued market in face of a still disastrous global economic backdrop.

Yes, the economy and growth will bounce back, but to what level? Already companies are announcing layoff by the thousands seemingly every day. The latest being IBM, Nissan, Roll Royce, even the Trump resort in Miami, and of course bankruptcies are starting to dominate the headlines, Friday’s announcement of Hertz filing for bankruptcy being the latest example and surely not the last.

There is no V shape. High unemployment will remain with this economy for a long time no matter how much the Fed prints. No earnings growth in 2019, a very possible -20% earnings decline for aggregate 2020 and yes, a bounce from a lower base of earnings in 2021, but soon you are looking at an aggregate of 3 years with no earnings growth and suddenly are looking at an economy $30 trillion in debt, a Fed with a balance sheet of $10 trillion dollars with no vision or hope of ever raising rates again with unemployment still north of 10%.

And that’s the rationale for paying a 23 forward multiple on markets at 140% market cap to GDP, a figure that is likely to rise even if markets would remain at currently levels as GDP is declining.

Not an attractive investment environment, but people feel the need, the need for Fed speed.

Markets remain oblivious to risk as the equity put/call ratio is back to the lows of February before the crisis hit right at a time when markets are repeating a historic technical script entirely consistent with the 2000 and 2008 bear markets and right at a time when the political rhetoric between China and the US is increasing during a highly contentious political election year.

And for Wall Street the outcome of this election may have consequences. The presumed Democratic nominee Joe Biden is talking about repealing the recent corporate tax cut, raising taxes for Americans earning more than $400,000 per year and for Amazon to pay its taxes.

Not to mention companies already streamlining their operations and work at home or offsite looking to extend well into 2021 for many companies.

Not to mention a shift in supply chains and changing consumer behaviors.

All changes with potential profound impacts not only on the long term employment picture but also on commercial real estate, the culture all unfolding as states and countries are working to reopen their economies in not an uniformly aligned matter, but rather with different approaches and attitudes. All assumptions will be put to the test in the months to come.

We are discussing a lot of these things in depth in our third extended Memorial Weekend edition of Straight Talk including answering some of the questions you have sent to us.

Please join Guy Adami, Dan Nathan and I for the latest episode of Straight Talk:

Note: Following the recording of this Zoom session we noted some Zoom audio issues for Dan and I while Guy’s audio is just fine. We apologize for any distractions and we’ll make sure the next episode won’t have these issues.

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