Druckenmiller Predicts Higher Inflation
It's true that the stock market could recover for a few days, but the intermediate term result will be lower. Don’t take your eyes off the prize, just because stocks recovered on Wednesday. To paraphrase Druckenmiller: he said a 10% decline in the stock market does nothing because it’s so far away from reasonable valuations. He called the stock market a mania like many have.
Some disagree with his word choice in that only the momentum growth stocks are way overvalued. About 1/3rd of the market is modestly undervalued. That includes the energy and financial sectors. Normally, most wouldn’t bother with such a distinction, but growth and value stocks are extremely far apart.
As you can see from the chart below, growth has better 10 year returns than value than at any point since at least 1936. He mentioned that stocks are splitting and exploding higher. These are large market cap companies. That’s exactly right.
When the large cap tech stocks fall, they will take down the market like they did in the recent correction. Unloved sectors didn’t rally. If they were to increase, we could see slightly better performance from the indexes, but they will still fall.
Craziest thing Druckenmiller said was that inflation could reach 5% to 10% in the next 4-5 years. If inflation simply went up to 3%, we would see a massive decline in tech stocks and a huge rally in energy and bank stocks. Exxon was once the largest company in the world. It hasn’t declined because it is that poorly run. I
t has fallen because of the macro situation. It’s tough to predict inflation, but we are likely about to see oil prices rise quickly over the next 2 years. Demand is set to increase and many projects have been canceled. It will take a few quarters of high prices to increase supply because so many frackers have been burned in the past few years.
Personally, I’m bearish on tech and bullish on the banks because of valuations. There is little left on the bone for growth investors. Even a small move higher in rates may hurt tech. Growth investors don’t realize how risky their investments are because they have done well for so long.
As you can see from the chart below, falling yields explain tech’s outperformance more than they ever have. This isn’t only about the work from home trade. Imagine what a double whammy of higher rates and anti-trust legislation would do to the FAANG stocks. Current 10 year yield is 69 basis points. Bond market doesn’t believe there will be a strong cyclical recovery next year as many do.
Solid Recovery After Correction
The stock market recovered on Wednesday with the large cap tech stocks leading the charge. That makes sense because they were hit the hardest in the selloff. However, it probably won't last. S&P 500 was up 2%, the Nasdaq was up 2.7%, and the Russell 2000 was up 1.5%.
Cloud index was up 2.5%, while the regional bank index was down 0.6%. Wells Fargo was down 0.5% which puts it up just 5.8% from its May bottom. The stock is down 54.7% in the past 5 years. ExxonMobil fell another 0.6% which puts it down 30.7% since June 8th. It’s only up 20.7% since March 23rd. The small cap value stocks were up 0.8%.
Apple & Tesla Rally (Catalysts Coming)
It’s no surprise Apple and Tesla were up a lot. Apple was up 4% and Tesla was up 10.9%. It’s interesting that they both have catalysts coming up in the next few weeks. 4 new iPhones are set to come out in September or October. Apple is holding a virtual event on September 15th which is next Tuesday.
Rumor is this event will only announce a new iPad Air and new Apple Watches. The iPhone event might occur in October. Since everything is virtual, it’s easier to have multiple events. You don’t need to worry about having 2 events a week apart since no one is traveling. Personally, I don’t think 5G will be a killer feature that will drive iPhone sales growth.
Tesla’s Battery Day is on September 22nd. Hype died down after the stock fell, but it will pick back up in earnest as we get closer to the day. If the stock keeps rallying, it will be a great short idea once we get closer to the event. Latest rumor is Tesla will release the plaid version of Model S and X which cost more. These are a step above the performance versions of these cars, meaning few people will be able to afford them.
Investors are wondering when the Roadster and Semi-truck will come out. Frankly, Tesla can’t unveil a new product until those actually come out. The company can’t hype up a new product when those have been delayed for almost 3 years. That’s important because this stock lives off hype.
Tesla announced the Roadster in November 2017. It might end up competing with the Model S plaid version, depending on plaid’s price. The Semi was announced at the same event as the Roadster which means it too hasn’t been released after almost 3 years. Assuming Tesla can get its act together, 2021 will be the year of the Semi.
Conclusion
The stock market rebounded on Wednesday, but that doesn’t mean the tech selloff is over. A 3 day correction was worse for the banks and energy than many anticipated. It was a general market selloff.
Now, investors looking for a selloff in the momentum growth stocks where the value stocks actually rally, like what we briefly saw in July. We can expect the regional banks to rally modestly in a sharp tech selloff where the Nasdaq falls over 30%.