Our move to become “cautiously bearish” on the S&P 500 proved prescient as it recorded its worst week since October. Behind the GameStop excitement, investors are clearly becoming more worried over the outlook.
Brent had another extremely quiet week, finishing at $55.78/bbl. Political pressures intensified as President Biden and the EU prepared for the COP26 Climate Change conference in November.
- Biden’s Executive Order on Climate Change aimed at “putting the climate crisis at the center of United States Foreign Policy & National Security”
- The EU said it would use energy diplomacy to “discourage further investments into fossil fuel-based infrastructure projects in third countries”
- Saudi Arabia announced plans to generate 50% of its electricity from renewables by 2030, displacing oil and natural gas
- GM announced an end to sales of Internal Combustion Engine vehicles by 2035, in a move that is sure to be followed by other majors
Tensions rising at the next OPEC+ monthly meeting on 3 February, as Saudi output restraint has had little effect
The S&P posted its worst week since October, falling to 3714, whilst the VIX volatility index jumped 51% to 33. Earnings numbers disappointed, whilst GameStop developments hit sentiment.
- We expect Biden’s political skills to ensure passage of the $1.9tn package: “We’re not looking to split the package”
- The ‘green-stimulus’ package (potentially $4tn) could be proposed sooner than expected, especially if the economic outlook weakens as we expect
- We assume the Fed’s posture is unlikely to change: “It’s very much appropriate that monetary policy be accommodative”
- But we are concerned by the disorderly market that developed mid-week, as retail investors “mobbed” certain hedge funds
- Cash balances also seemed to be stretched, with some investors needing to sell core stocks to meet margin calls
Volatility to increase further as the earnings outlook erodes and sentiment is hit by GameStop-type developments
The market held at the 1.09% level for a 3rd week, whilst the MOVE volatility index rose 10% to 47 as the 10-year rate traded between 1% – 1.10%.
- Yields have steadied since the successful auction on 12 January
- Low Treasury borrowing rates remain crucial for deficit-financed stimulus packages
- Low rates also continue to underpin equity market sentiment for the short term
- Inflation bulls remain on the back foot for now
Inflation expectations to remain subdued due to the fragile economic outlook.
FAANMGs & Tesla
We update as promised on developments with the FAANMGs and Tesla, since our December series. Using the Graham Value methodology, they remain over-valued and liable to major falls.
- Tesla is the most overvalued, with its current price anticipating implied growth of 627%/year to 2030
- Amazon is next with its price anticipating 43%/year
- Netflix is similarly over-priced, anticipating 41%/year
- Apple is anticipating 14%/year
- Microsoft & Google anticipate 13%/year
- Facebook has the lowest valuation but is still anticipating 9%/year
- Such valuations might make sense for younger companies, but are unlikely to prove realistic for companies of their size and maturity
Market commentary to turn less favourable as the S&P 500 continues to come to terms with the end of Trump’s focus on the market
They say that cats often sense earthquakes before they actually arrive, and provide early warning by leaving town. The Gamestop excitement might prove a similar warning for investors.
Market view today
Our current view
Reversion to mean inevitable
Expect long-term deflation
Neutral 10-year and longer-dated Treasuries
Confidence level: = 100%, = 75%, = 50%, = 25%