Strange Trade News
On Fox News, Peter Navarro announced the trade deal with China was over. This sent the futures market into a tailspin. S&P 500 fell from 3,120 to 3,066. This was shocking. It came completely out of left field. We didn’t expect trade news on a Fox News talk show at 9PM. Almost immediately after this decline, the President clarified that the trade deal wasn’t over. Peter Navarro has strong opinions against China which causes him to speak out of line.
It’s always worth treating what he says with a grain of salt. However, he wasn’t just negative. He said it was over. It makes sense stocks fell. Then, after the update was given, the futures market recovered almost all its losses. The chart below shows the U.S. soybean exports to China. It’s not a surprise China is buying more agricultural products from America because it needs them.
Navarro wasn’t mad about soybeans though. He was mad about how China handled COVID-19. That’s going to be a long term sticking point for a relationship that’s already strained. There was recently a military scuffle on the India/China border. If stocks would have fallen on that news, you would have heard more about it. The relationship between India and China will probably worsen as India becomes more of an economic powerhouse.
Currently, Prime Minister Modi is aligned with President Trump. Let’s see how Biden treats this relationship if he’s elected. It's good to focus on the coming higher corporate taxes, but geopolitics will obviously be important in the next 4 years.
Review Of Monday’s Rally
Monday was a perfectly normal day for markets. If you would have teleported from 2019, you would have thought nothing had happened if you just looked at the index tickers especially since they haven’t performed terribly this year. S&P 500 was up 0.65% which puts it at only -3.5% year to date. It's not surprising that it rose because much of its decline on Friday was related to quadruple witching and index rebalancing at the end of the day.
Commentators are already saying the market is in no mans’ land because it hasn’t hit a new high since June 8th. That’s not even a long time. It’s only long if you compare this recent run to the run from mid-May to early June. One of the potential scenarios many have been calling for is for the market to stay range bound with intermittent bouts of volatility because of COVID-19 and politics.
Russell 2000 was up 1.05%. It’s still down 6.7% since June 8th which is a lot more than the other indexes. Regional banks haven’t recovered. However, Triumph Bank was up 4.88%. Financials and healthcare were the worst sectors as they fell 0.48% and 0.36%.
Best sectors were technology and utilities which rose 1.93% and 1.34%. Tech is in a bubble and the utilities made up for their rebalancing decline on Friday afternoon. Biotech and work from home/online shopping tech stocks are in a bubble. The chart below shows the Nasdaq biotech index has been outperforming the Nasdaq which is hard to do.
7 Day Nasdaq Winning Streak
Nasdaq is now on a 7 day winning streak as it increased 1.11%. The index is up 12.08% year to date as if we are in a great economy. Apple was boosted 2.62% because it had its worldwide developers conference. It's unclear why this caused the stock to move higher as it simply added some new features to its operating system. There wasn’t anything game breaking announced.
However, we are in the most loved tech environment I’ve seen in my 14 years of following markets, so it rallied. It’s now a $1.56 trillion company as it is up 19.5% year to date. This performance is great for a normal year, let alone one with a recession. It’s by far my least favorite big tech stock. It has an enterprise value to EBIT multiple of 21.78 which is by far its highest valuation in the past decade. FAAMNG stocks now have a record 24% of the S&P 500’s market cap.
Apple isn’t the only historically expensive tech stock. As you can see from the chart above, NVIDIA’s price to sales ratio has hit 20 which is more expensive than it has ever been in the past 20 years. That’s despite its mediocre sales growth rate which is in the high teens.
CLOU cloud ETF was up 2.24% on Monday as it is now up 17% since its February peak. The index is up over 10% since sevearl went bearish, so we can safely say that was wrong. Shopify stock was up 2.7% as it is up 25% since June 11th. It now has a market cap of $106 billion. It was very wrong to be bearish. You could have ridden it higher in the past 2 weeks.
Fastly is the new champion among the work from home stocks as it was up 14.9% on no news. It takes amazing performance to be the champion of the hottest industry of an extremely hot market. And it doesn’t disappoint as its stock is up 558% since March 16th and 241% year to date.
These are 1999 tech bubble like returns. This stock has a 29.34 price to sales ratio which is slightly below Microsoft’s at the peak of the tech bubble. Shopify has a price to sales ratio of 59.98. I think it will fall over 50% in the next few months.
Conclusion
We could see the market narrowing in the next couple weeks as the tech bubble reaches its fruition. This is an historic moment in market history as the cloud stocks have reached extreme valuations. It's a mini late 1990s tech bubble. We can expect massive declines in Fastly, NVIDIA, and Shopify in the next few months. This won’t go on for much longer.