Central Banks Backstopping Madness?
Stocks rose on Friday as traders wrapped up a strong week amid decreasing political uncertainty and positive vaccine news.
The S&P 500 gained 0.3% to end the day at 3,638.35, notching a record closing high. The Nasdaq Composite advanced 0.9% to 12,205.85 and also closed at an all-time high. The Dow Jones Industrial Average closed higher by 37.90 points, or 0.1%, at 29,910.37. Friday’s session ended at 1 p.m. ET.
The Dow and S&P 500 rose 2.2% and 2.3%, respectively, for the week. The Nasdaq, meanwhile, posted a weekly gain of nearly 3%. Earlier in the week, the Dow jumped to an all-time high, breaking above 30,000 for the first time and hit an all-time high.
“What we’re witnessing today, this week and this month, is a continuation in the rise of optimism,” said Mike Zigmont, head of trading and research at Harvest Volatility Management. “The environment for risk assets has been getting better and better” as drugmakers release more positive Covid-19 vaccine data and the risks on the political front ease.
The Cboe Volatility Index (VIX), Wall Street’s preferred fear gauge, briefly dipped below 20 on Friday for the first time since late February. It later rebounded to trade at 20.84.
Retailers led the early gains as investors bet on a strong holiday shopping season. The SPDR S&P Retail ETF (XRT) rose 0.9% and hit an all-time high. Etsy shares popped 10.7%, and Gamestop advanced 9%. Amazon shares gained 0.3%, and Shopify climbed 1.5% after Adobe Analytics said Thanksgiving Day online sales rose to a record $5.1 billion.
Also helping sentiment were comments from President Donald Trump, who said he would leave the White House if the Electoral College votes for President-elect Joe Biden.
“Certainly I will. Certainly I will. And you know that,” Trump said. He added, however, it would be hard for him to concede because “we know there was massive fraud.” Trump did not offer any concrete evidence of widespread voter fraud, however.
Historic month for stocks
Friday’s gains added to the market’s surge this month, which was sparked in part by a slew of positive coronavirus vaccine trial data.
Earlier In November, Pfizer and BioNTech said their vaccine was more than 90% effective. Moderna also said its drug was highly effective in a trial.
That data helped push the Dow up 12.9% in November, putting it on track for its biggest monthly gain since January 1987. The S&P 500 and Nasdaq are up 11.3% and 11.9%, respectively, in November. Meanwhile, the small-cap Russell 2000 is on track for its best month ever, up about 20%.
November’s sharp gains were led by beaten-down value stocks as the positive vaccine news sparked hope for a strong economic recovery.
The iShares Russell 1000 Value ETF (IWD) is up 14.6% this month. Its growth counterpart, the iShares Russell 1000 Growth ETF (IWF), has gained 10.1% in that time.
“As we inch closer to that ultimate health solution ... we’re starting to see market participation broaden out and rotate into some of the more impaired sectors through the course of this pandemic,” said Bill Northey, senior investment director at U.S. Bank Wealth Management. “As we turn the coroner, that is going to allow pent-up economic activity to return.”
It was a short week in markets but there's a lot to cover.
Stocks had another great week boosted by the fact that Janet Yellen is Joe Biden's pick to head the US Treasury, an appointment which I have no doubt will pass confirmation hearings.
Remember what I keep telling you, read C. Wright Mills's classic, The Power Elite, it will help you become a much better long-term investor knowing how the elites are shaping policy in the background.
Appointing a dove like Yellen to head the Treasury sends a strong signal to Wall Street, corporate titans, tech moguls and ultra high net worth families: we will do whatever it takes to fight the specter of deflation.
I think the only other candidate who would have made Wall Street equally jubilant is Ben Bernanke, the man who unleashed QE back in 2008 and opened Pandora's box to unorthodox monetary policy, for good.
Central bankers across the globe can thank Bernanke for their new found power to digitally print trillions, monetizing debt at a record clip and unleashing a liquidity storm like nothing we have ever seen, propelling risk assets higher.
I was amused earlier today when I read the Governor of the Bank of Canada brushed off claims our central bank was not financing the massive federal deficit:
Tiff Macklem brushes off accusations the Bank of Canada is financing Justin Trudeau’s deficits, but acknowledges there are limits to how much government debt it can buy https://t.co/opWlXMdWAS— Bloomberg Australia (@BloombergAU) November 27, 2020
I have a lot of respect for Tiff Macklem but I think David Rosenberg set the record straight on monetizing federal debt:
So the BoC's Tiff Macklem told a parliamentary committee that he isn't funding Ottawa's massive deficit. So please, educate us. Since March, the BoC has added more than C$200 billion of GoC debt to its balance sheet to C$327 billion... oh, only a 220% surge.— David Rosenberg (@EconguyRosie) November 27, 2020
Anyway, despite record low rates, central bankers are now more involved than ever in keeping the economy/ financial system afloat.
Had a chat with a friend of mine earlier about "central bank communism" and he raised a good point, "What is the end game? They're going to monetize all this debt and then governments will cancel it?"
We basically concluded with rates at record low levels, central bankers across the world will do whatever it takes to support asset inflation and housing inflation, hoping it will translate into real sustained inflation (spoiler alert, it won't. it's just sowing the seeds of the next deflationary disaster).
Amazingly, some in the media think central bankers should be paid big bonuses like Wall Street pros for delivering "big returns":
If Japan’s central bank governor were a Wall Street investment manager, he would be in line for a bonus after his excellent timing of big stock buys https://t.co/WCigRX0rdx— Real Time Economics (@WSJecon) November 27, 2020
Love the part of "some think he shouldn't play the market so much."
Interestingly, when the Bank of Japan took its controversial equity-buying program deeper into uncharted territory back in March, doubling its annual purchasing target to ¥12tn ($112bn) while also rolling out a new lending facility, some thought the the BoJ had "effectively reached the limit of monetary accommodation."
Little did they know how successful this program would be. That's why some think the Federal Reserve will eventually follow suit, buying stock ETFs as part of a QE program.
Of course, the expectations of the Fed backstopping markets at all cost aren't unfounded and if you really think about it, why own bonds if you know the Fed and other central banks will keep pumping trillions into the system to support risk assets?
In fact, if this year taught us anything, short of a global nuclear meltdown, keep buying stocks, the Fed and other central banks stand ready to do whatever it takes to keep inflating the bubble.
Like my buddy stated earlier: "Even if stocks get clobbered 30-40%, you know central banks will step in, so over the long run, you're better off investing in stocks."
And not just any stocks, growth and highly speculative stocks. Sure, you'll need to live with crazy volatility and get dinged from time to time, but you'd be stupid not to keep going out on the risk curve.
In fact, this has been the same message since 2008, stick with stocks, especially growth stocks, you'll trounce returns from Treasuries but you'll need to accept crazy volatility.
The Fed is meeting on December 15 & 16 and although some Fed watchers are expecting an easing before this meeting, I'm not so sure.
If the Fed stays put, it might unnerve these liquidity-driven markets, so that's a meeting you need to pay attention to as everyone gets giddy about stocks making record highs all over the world.
Of course, any pullback in stocks, especially tech stocks, will be bought hard.
"There's too much money out there looking for returns."
True, but when everyone jumps on the same bandwagon, that's when things become dangerous.
On that note, some people are asking me how low can the VIX go, and I reply a lot lower:
We might get one more Santa rally spurred on by the Fed and that would be great for stocks and other risk assets, or the Fed can stay put and markets will sell off hard, and we can get a bad Santa selloff like in 2018.
Nobody really knows, I'm prepared for anything over the next three months, a melt-up or meltdown, but looking at the way some highly speculative stocks are trading, I'd say there's little fear of the Fed taking the punch bowl away.
Check out three stocks I've been tracking lately:
Despite the pullback today, these stocks have been in beast mode lately, surging higher and higher, and they're all up huge this year.
I discussed Palantir (PLTR) last week when I went over top funds' Q3 activity.
Elite hedge funds can't get enough of tech stocks, mega cap, small cap and everything in between.
Why not? Central banks are injecting trillions into the financial system, so it's risk on baby!
The global risk on trade has hammered the US dollar but I happen to think it's a big buy here:
Is the US Dollar about to break? #USD Index (#DXY) pic.twitter.com/Tw9ADWS6do— jeroen blokland (@jsblokland) November 26, 2020
Why? Things are getting too bubbly out there, risk isn't being priced in right, there's way too much speculative activity but admittedly, it can go on longer than you think.
Today, QuantumScape (QS), a battery developer for electric vehicle use, began trading on the New York Stock Exchange following a SPAC merger. Shares of the San Jose-based company closed up 57%:
And judging by the way some of these electric vehicle stocks have been trading, I expect there to be a lot of speculative activity in this name and others (AYRO, BLNK, LI, NIO, NKLA, SOLO, WKHS, XPEV).
Just look at the juggernaut in this space, Tesla, where the market cap eclipsed that of Berkshire today:
Boom!— Brian Roemmele (@BrianRoemmele) November 27, 2020
Tesla has just surpassed Berkshire Hatahaway in market cap at just over $550 billion. pic.twitter.com/hmwp13Samv
Of course, we shall see how long this will last:
Berkshire Hathaway back in 1999 was also laughed at as being old economy as tech stocks with absurd valuations were called a new paradigm. https://t.co/psIOpgYD53— Thomas Thornton (@TommyThornton) November 27, 2020
But with central banks going all in, it can last a lot longer than you think, which is why speculation remains hardy and some stocks continue to defy gravity and keep zooming higher and higher:
No wonder short sellers are retrenching at a record rate:
Zoom shares have soared 552% in 2020—an astonishing gain given it was a highflying stock even before the pandemic https://t.co/aro6OYiCnL— MarketWatch (@MarketWatch) November 27, 2020
To whomever it may concern: Short interest in S&P 500 stocks continues to hit new lows: pic.twitter.com/Br0SiKyCX4— Ronnie Stoeferle (@RonStoeferle) November 27, 2020
And no doubt about it, this is a November for the record books:
November @markets so far:— Sarah Ponczek (@SarahPonczek) November 24, 2020
- Dow up 13%, passes 30k, best month since 1987
- Russell 2000 up 20%, best month EVER
- S&P energy up 37%, best month EVER
- S&P financials up 19%, best month since 2009
- S&P industrials up 18%, best month EVER
Best EVER! Maybe it's also the best time EVER to start shorting this pig of a market, but I'm not sure there's a vaccine for stupidity:
All Iknow is while the markets are melting up, the real economy is melting down:
Why Moderna and Novavax Shares Are Racing Higher Today https://t.co/j6m3Z4Ud4u— Leo Kolivakis (@PensionPulse) November 27, 2020
US #equities: Market capitalization to US Nominal #GDP. pic.twitter.com/pq0repioLP— jeroen blokland (@jsblokland) November 27, 2020
"Over one-third of Americans say they live in households where it is difficult to afford household expenses, including food, rent or mortgage, and student loans — the highest share in six weeks..." https://t.co/QmJ0f74dN4— Nomi Prins (@nomiprins) November 27, 2020
And that never ends well.
Alright, let me wrap up this November to remember. Here are this month's top-performing sectors:
No surprise, Energy (XLE), Financials (XLF), Industrials (XLI) and Materials (XME) came roaring back in November as positive vaccine news boosted them and many other re-opening stocks:
But if you look at the list above, you'll see a lot of the speculative names rallied hard this month.
This becomes even more evident when you look at the top performing small cap stocks this month:
Bonds? Who needs bonds when central banks are backstopping this liquidity madness?
Below, CNBC's Jim Cramer said Tuesday morning that some of the stock gains in the market are "insane," with investors recently buying certain names from Tesla to Royal Caribbean seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them.
Second, Rob Sluymer, Fundstrat, on whether we're headed higher or lower from here. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Brian Kelly.
Sluymer is very bullish and thinks the next move is higher and he might very well be right but I'd be careful here as these markets can move on a dime.
Third, Morgan Stanley's Mike Wilson on why he thinks the S&P is running out of gas. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Steve Grasso.
Fourth, CNBC's Kelly Evans discusses markets as the Dow hits a milestone 30,000 with Rebecca Patterson, director of investment research at Bridgewater Associates. Listen carefully to her comments.
Lastly, this week we lost one of the greatest soccer players of all time, if not the greatest. I always loved this clip of Diego Armando Maradona delighting fans in Napoli during an epic warm-up. The great ones make it look effortless.
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