Stocks Increase Modestly
Despite the news of worse economic restrictions and record high hospitalizations and cases, the stock market rose on Thursday which signals once again that the stock market is looking past the virus for greener pastures. S&P 500 was up 39 basis points and the VIX was down 0.73 to 23.11. We are a few days away from the VIX ending its streak of recent closes above 21.
As you can see from the chart below, this year the market’s price to sales ratio hit another record high. There are plenty of value stocks. But the expensive growth stocks dominate the index. Growth is rare in a low growth world with record low interest rates, so firms are rewarded for sales growth even if it doesn’t lead to profits.
This Is As Euphoric Market
This market reminds me of late August because of the extreme optimism. That argument is best laid out by Tesla stock which rose 2.6% on Thursday to another record high exactly as predicted. Even intermediate term bears on Tesla based on the fundamentals, recognized that a new record high was coming because of its S&P 500 inclusion. It’s about 1 point above its September 2nd high.
That’s despite the fact that Consumer Reports is no longer recommending the Model S and says the Model Y is unreliable. Overall, Tesla was ranked 2nd to last in reliability. This company has the largest market cap out of any automaker.
Its market cap is $473 billion which is approaching Berkshire Hathaway’s market cap of $539 billion. Tesla is now the 8th biggest company in the world as it has surpassed Visa and Walmart. Look for it to make headlines everywhere if it can rise another 13.8% to surpass Warren Buffett’s company.
Biggest sign of euphoria in the market is the NAAIM fund manager exposure index. It rose from 96.3 to 106.41 which means the average fund is leveraged long again. It is 15 basis points off the late August peak which ended up leading to a short term top in the market. This spike is unlike the last one as it has taken just 2 weeks to go from mildly overbought to a near record high level of froth. Last time there was a few weeks of froth before it peaked.
On the other hand, despite the fact that the S&P 500 hardly changed from last Wednesday to this Wednesday, there was a massive decline in the percentage of bulls in the AAII investor sentiment survey. As you can see from the chart below, the percentage of bulls fell 11.5 points to 44.4%.
Percentage of neutral investors rose 10 points to 29.3%. And percentage of bears hardly changed as it rose 1.5% to 26.4%. Basically, the explosion of bulls dissipated and went back to neutral as uncertainty normalized.
Maybe investors realized that the vaccines aren’t going to heal the economy in 2 months. The economy is going to start to recover in a few months from the slowdown that’s just starting now. Arguable, we can say this slowdown will go from mid-November to mid-March.
Along the way, we need the FDA to approve the vaccines and millions of people to get them which isn’t a simple task. Many believe it will happen, but we can’t put the cart before the horse. Pricing in a full recovery doesn’t make sense. It makes more sense to price in about a 75% chance of a recovery.
Details On Thursday’s Action
Nasdaq was up 87 basis points and the Russell 2000 was up 84 basis points. Small cap value index was up 52 basis points and the Nasdaq 100 was up 78 basis points. This wasn’t a factor day. This was a rare normal day where growth and value were correlated.
As you can see from the chart below, November’s action makes it look like the trend of growth beating value for the past few years might be reversing. There is still a lot of room for the growth/value ratio to fall before it makes up all the outperformance of growth in the past cycle.
Oil services index was up 2.05% which puts it up 47.9% since October 28th. Ever-entertaining Nio stock was up another 7.5% which gives it a $66 billion market cap. It is up 1,944% from its March bottom. We can all laugh at the articles predicting it to rise to $150. It was at $3 earlier in the year. This isn’t a profitable company. It’s a bubble stock.
COVID-19 Update
We are probably a few days away from NYC closing all indoor dining and gyms. It’s an interesting sight because NYC is one of the least problematic parts of the country. If NYC politicians were in charge of Kansas, the entire state would be on a strict lockdown.
Trend this wave has been “lockdown-light” which is lesser restrictions that encourage behavior rather than force it. A problem for the country is the virus is seemingly completely out of control. Cases and hospitalizations hit another record high on Thursday.
There are now 80,698 people in the hospital. If hospitals become overrun, there will be lockdowns like in Europe. The stock market won’t plummet, but there will be a modest correction in cyclical stocks. We could see the small cap value index fall 10% since it is very overbought. There were 1,971 deaths on Thursday which is a massive hit only matched by the worst of the first wave.
7 day average of deaths is at 1,332. Some have been predicting it to get above 1,500. A scary thing is that we might need to revise my expectation for the 7 day average of deaths to not get above the spring high. We can reevaluate that next week. Deaths are the other aspect that could cause lockdowns.
Headlines of over 2,000 people dying per day will scare politicians into acting. It will be interesting to see how either the current or new administration reacts to the pandemic after inauguration day which is in 60 days.