This week’s stock focused on the bond market, not the stock market, as Treasury yields soared in response to the progress of a new stimulus package, as well as the global launch of the COVID-19 vaccines.
The S&P 500 SPX,
fell for three consecutive days, but by just 0.5% – suggesting that the stock market did not panic over the moves that sent the 10-year Treasury yield TMUBMUSD10Y,
about 1.30%, and the 30-year yield TMUBMUSD30Y,
up to 2.10%.
Dhaval Joshi, chief European investment strategist at BCA Research, said for some time that low yields mean rising stocks and other assets, make sense – a rational bubble if you prefer. “Rational, because nosebleed assessments are justified by a fundamental driver. And not just any fundamental driver, but the most fundamental driver of all – the yield on the title, ”he writes.
But not now. Term price / profit multiples have increased, even as earnings have increased. The yield on profits in the sector most focused on growth, technology, has now been surpassed by the yield on bonds plus a fixed amount, as shown in the graph.
There are three ways to resolve this. One, is that stock prices fall; another is that bond yields decrease; a third is that neither move, but profits increase, to improve stock valuations. (This third factor seems unlikely, for the time being, at the end of the earnings season.)
“Our current recommendation is to remain tactically neutral in the coming weeks to see if risky asset valuations can revert to rationality. This means maintaining existing investments in the market, but containing fire in new cash investments ”, says Joshi. “If the valuation reverts to rationality in any of the three ways listed above, investors can safely implement new cash on the market.”
What if it isn’t? Joshi says that if the market becomes irrational, the key will be to see if investors with long-term horizons join the party. “As investors with increasingly longer time horizons join the irrational bubble, there will be well-defined moments of high fragility, when the risk of correction increases. This is what burst the irrational bubble in 2000 and will burst any new irrational bubble ”.
The buzz
Uber Technologies UBER,
it fell into pre-market trade after the UK Supreme Court ruled that its drivers are workers and not self-employed, giving them the right to a minimum wage and paid holidays.
Facebook FB,
Chief Executive Mark Zuckerberg was due to speak to Australian treasurer Josh Frydenberg after the company imposed a block on sharing Australian-produced news, a response to measures to make online companies pay publishers. Facing the same potential law, Alphabet’s GOOG,
Google has made deals with publishers, including News Corp., which owns MarketWatch, the publisher of this report.
The computing giant IBM,
is considering selling its deficit unit IBM Watson Health, according to The Wall Street Journal.
Roku ROKU, manufacturer of streaming devices,
reported a surprise profit with stronger than expected revenue. Dropbox DBX from cloud service provider,
reported stronger earnings and revenues than expected for the fourth quarter. AMAT Applied Materials,
the microchip equipment maker surpassed the first quarter’s fiscal profit estimates and moved towards better estimates for the current quarter than analysts had estimated.
French car manufacturer Renault RNO,
crashed in Paris and discarded its dividends after reporting a loss of € 8 billion in 2020. Renault also said that the peak of the microchip shortage that automakers face should be reached in the second quarter.
The flash version of the Markit purchasing managers’ indices is due at 9:45 am, followed by the existing home sales data.
The latest development about Senator Ted Cruz leaving Texas without electricity for Cancún, Mexico – for which he apologized – is the news that he left his poodle, Snowflake, at home in Houston.
The markets
US stock futures ES00,
NQ00,
advanced.
Oil CL.1,
fell below $ 60 a barrel, and the US dollar DXY,
slipped.
Random readings
Now that NASA’s Perseverance rover has landed safely on Mars, it will be tasked with collecting rock samples that may contain evidence of past lives.
A 3-D printer producing vegetarian steaks? That’s the goal of this startup that just raised $ 29 million.
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