Big Tech comes marching back for now
After briefly entering correction territory, the Nasdaq came roaring back in the middle of the week as fears of increasing rates took a back seat to the signing of the coronavirus stimulus package. There was some heavy selling Monday, driving the Nasdaq down 10% from its most recent highs.
Tech stocks got hammered due to the spike in interest rates the past few weeks, and rising rates created a rotation of sorts from high-flying internet stocks, which led the rebound and advance in 2020. We also saw a transition from stocks with high beta and weak fundamentals. This type of outperformance tends to last about one year from the start of a market recovery, and then market leadership transitions to stocks with strong fundamentals and high earnings revisions. Higher interest rates make high-potential-but-negative-profit tech companies less attractive because they need to borrow to fund growth. This gets more expensive, and the higher guaranteed rate on government bonds becomes a better option.
Tech stocks had regained over half their correction losses by Thursday (as measured by the Nasdaq). The Nasdaq lost a bit of steam Friday, but the broader market set new records as we blew by 32,000 on the Dow and traded above 32,500 to close out the week.
What’s going on? To paraphrase the Ragin’ Cajun, James Carville, “It’s the stimulus, stupid.” The market is giddy around the new spending bill and the fact that the Federal Reserve has made no overtures to move off its stance to keep rates low for as long as possible. The combination of a huge spending bill and access to easy, low-cost money is an elixir that the market is unwilling to give up. Volatility is pretty low, but we blew up when the 10-year note popped above 1.5%. On Friday, it traded above 1.6%!
Stimulus passed. Now what?
Congress passed the $1.9 trillion stimulus package. I have shared my view that thespending is largely misguided and will contribute more harm than good to the economy by way of inflationary pressures and increased debt service. We still have $1 trillion from last year’s stimulus package that has yet to be spent, and we’ll still be making payments 10 years from now.
Regardless, the additional package is now law, so we’ll have to deal with the fallout as we go forward. The good news for most people is that they will get some money. I have discussed my fears of inflation when you have this much money floating around; I hope I’m wrong and we can manage to avoid higher prices. In my view, this stimulus will go down as the first major policy misstep of the new administration and a leading contributor to a potential recession. Ironically, we were talking about the potential for negative rates because people were afraid of dis-inflation a few years ago, remember?
Near term, the market loves all this easy credit and cash sloshing around. But what’s the next “big” thing to keep this party going? I think in the next few weeks the market will start sniffing around for something new, and that could be in the form of earnings and the economy opening more fully. In last week’s televised address, President Joe Biden said that we should be able to be largely “back to normal” by July 4. I hope not; I hope we’re open sooner. As for earnings, there have already been whispers that earnings will be soft by the second quarter, so that doesn’t look like the next big thing to me.
So the question is, what will it take to get the market moving upward? Where will the next big idea come from? Another stimulus? Here’s an out-of-the-box thought: Federal income tax revenues total around $2 trillion a year. If we let people keep their income tax for a year, wouldn’t that stimulate things a whole lot? In the end, what’s the difference between $27 trillion or $29 trillion in debt?
Coming this week
  • With interest rates in the news, the Federal Reserve’s Federal Open Market Committee meeting on Tuesday and Wednesday will be timely. Given Chairman Jerome Powell’s latest comments around rates, it will be interesting to see how the Fed continues to package its “low rates for longer” message.
  • Business inventories and retail sales on Tuesday should give us a look at what consumers are thinking. Last week’s confidence number was a nice surprise.
  • Leading indicators and U.S. government bond auctions will happen Thursday. These auctions have become much more interesting lately.
  • Despite the February surprise reading, new unemployment claims are still coming in at over 700,000 per week. We need to look for an improvement in that number.
  • Quadruple witching is on Friday, which is the expiration of options and futures on individual stocks and market indices. Things can get messy if conditions are volatile.
Have a great week!
Tom Siomades
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