business
economics
A Speculative Market on Steroids?
President, Rosenberg Research
Founder & CEO, Real Vision
0
2
Genesis
Response
Penultimate
Finale
February 23rd, 2021
Are we in a bubble?
Good grief. We had the Fed change the duration of its balance sheet in 2000. Then we had the Fed change the composition of its balance sheet in 2020. The world’s most important central bank has in effect become a mutual fund, buying everything from commercial mortgage-backed securities (CMBS) to investment-grade credit to junk bonds. The average yield in the high-yield bond market is a record-low 4%, whereas even the lowest default rate you would ever see in the most robust of economic expansions would necessitate an interest rate closer to 6%. We are at 4% for an economy whose sole sources of vitality are vaccines and fiscal stimulus checks.
If HY bonds are mispriced, then all risk assets are mispriced, including equities. We have a situation on our hands where U.S. companies that make no money have seen their stock prices soar 19% year-to-date and outperform those which are profitable by 15 percentage points. Okay. Let’s not hurt anyone’s feelings and call it a bubble. Let’s call it a speculative market on steroids.
Here’s the evidence.
Valuation:
The CAPE smoothed P/E multiple has expanded for six straight months. It bottomed at 24.8 in March at the price index trough, closed December at 33.7, then to 34.5 in January, and now to 34.8 in February. By way of comparison, the multiple was 32.3 in March 2001, as the tech wreck bear market really got going; and 32.6 in September 1929. Investors always think they can get out before the peak is in. History rhymes.
Leverage:
Margin debt has soared 42% from a year ago (+115% at an annual rate over the past three months alone). This is exactly what the trend was in August 2007 and September 2000. Right near the market peaks.
Positioning:
The put-call volume ratio has been below 0.60 with near consistency since the middle of November. It’s a stretch we haven’t seen in over eight years. The BofA survey shows that global portfolio managers are running with the lowest cash levels in eight years, and have the highest exposures to equities and commodities in a decade.
Technicals:
As we published on Friday in Technicals with Dave, our technical chart work is still flashing green on the major averages. That is all very near-term and can switch on a dime. For the traders out there: Our Strategizer models are advising caution and foreshadowing subpar returns on a twelve-month basis. All this means is that selling into the strength that we see ahead makes prudent sense. I should add that from my lens, the fact that the S&P 500 is now 13% above its 200-day moving average is an extreme gap worth noting and monitoring — it was 11% back in February 2000, just ahead of the tech mania bust and 7% in October 2018, ahead of the near-20% drawdown heading into the end of that year.
Sentiment:
What do 56 IPOs in less than two months (+180% YoY) at $21.4 billion (+331%) tell you? Or Bitcoin now with over $1 trillion of market value? Need I say more?
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