Very Rare Day
Friday was a rare day because large cap tech and small cap value were highly correlated. This is rare for this summer, but normal in most markets other than the late 1990s and early 2000 before the tech crash. Cloud index was up 1.2%, small cap value stocks were up 0.8%.
Nasdaq 100 was up 0.6%. Regional banks were down 0.1%, but obviously that’s not terrible since they were up a lot on Thursday. Friday was very rare in another way. It marked yet another day of gains in August.
This has been the most positive month many have ever seen. In fact, there has never been a more positive month in my life. We entered Friday with 83% of the days in August up and the index increased again as the S&P 500 was up 0.67%. The stock market has increased almost every Monday this summer. We can expect another rally to end the month.
S&P 500 is up 5 straight months and 5 straight weeks. This has been the best August since 1986. Everyone expects there to be volatility in September and October because of the election. We already know either Donald Trump or Joe Biden will win. The potential for a surprise is minimal. Given how well stocks have done under President Trump, it doesn’t seem like him winning re-election would cause a correction. PredictIt shows Trump has a 46% chance of winning. Again, if this year is anything like 2016, most polls had Trump's chances highly underestimated.
High VIX & High Stocks
VIX was down 1.5 to 22.96. The chart below shows examples of the VIX being higher than 24 while the S&P 500 is at a record high. Obviously, Friday’s decline ended that run, but it was very rare. Only prior times were right before the tech bubble peak and before the 1987 crash (March 1986 and January 1999).
If this trend continues, we could see a few more months of upside before a crash occurs. There have only been 30 trading days when the S&P 500 was at a record and the VIX was above 22. Those readings were before the crashes I just mentioned. VIX is so high because the stock market has rallied so quickly. This is a simple speed test on the bull market. It has gone up too far too fast.
There is no question in my mind that there will be a major crash led by growth stocks sometime in the next few months. Investors keep expecting it to occur sooner than it does, but are aware there might a little bit left in this rally. We could see the market rally unexpectedly right up to the election, leading everyone to ignore any risk. Then there might be a crash when people least expect it. A crash is because of valuations and euphoria, not because of the election.
Another Crazy FANG Chart
Apple and Tesla both fell slightly on the eve of their stock spits being shown in the market. Frankly, it's ridiculous that anyone thinks small investors buying 1 or 2 shares of Tesla will move the stock since the company is now worth $412.5 billion. Plus, many investors can get partial shares.
If they really wanted to make Tesla affordable, why not do a 20 for 1 split? Either way, this isn’t the main reason Tesla’s stock is up anyway. Tesla is up because of the hype surrounding battery day on September 22nd.
Apple might be up on hype surrounding its new 5G iPhones. Personally, I don’t see this upgrade cycle being any different from the prior few. Long term Apple investors should worry about the next big thing. 15 years ago, no one had a smartphone and 7 years ago smartphones weren’t capable of replacing people’s desktop computer.
Do Apple investors really think 7 years from now that the smartphone will look the same? It will likely be dramatically different. For example, we are in the early stages of folding smartphones. Folding phones are in their infancy, but 12 months from now product development will improve dramatically and Apple still won’t sell any.
FANG+ stocks are just like the nifty 50 stocks in the 1960s and 70s. This would have been a complement if you said this 7 years ago, but now it’s a negative because they have done well for so long. We are certainly closer to the end of their reign than the beginning.
As you can see from the bottom chart above, in the past 6 years the FANG+ stocks have outperformed the S&P 500 by almost 400%. S&P 500 is up 74% and the FANG+ stocks are up 455%. Without FANG, the S&P 500 wouldn’t be up much in the past few years.
Higher Yields
Long term bond yield is hugely important to determining the stock prices of speculative stocks like Tesla and Apple. Fed’s statement caused yields to increase on Wednesday and Thursday. However, the 30 year yield fell 1 basis point on Friday. As you can see from the chart below, the 30 year yield was up 31 basis points in August which was the most since November 2016.
Yields spiked after Donald Trump was elected, allowing bank stocks to do well. It’s interesting that tech has still had a good August even with rising yields. I don’t that will last if yields rise again in September. A 2% 30 year yield probably scares some tech investors. A 1% 10 year yield is likely coming soon. It fell 3.5 basis points on Friday to 0.72%.
Conclusion
The stock market quite literally almost never fell in August. It’s interesting that yields rose and tech stocks rose. That’s probably because yields started from a low base. Imagine if the 30 year yield rises above 2% and increased COVID-19 testing allows people to go back to normal, using technology less. That would be a double whammy for tech. Those catalysts are more important than the election.