Bulls Play an April Fools' Joke on Bears?
The S&P 500 crossed the 4,000 threshold for the first time on Thursday as Wall Street built on a solid March following the rollout of President Joe Biden’s infrastructure plan.
The broad equity benchmark rose 1.2% to a fresh record high of 4,019.87. The Dow Jones Industrial Average climbed 171.66 points, or 0.5%, to 33,153.21. The tech-heavy Nasdaq Composite jumped 1.8% to 13,480.11. Alphabet and Netflix jumped more than 3%, while Amazon and Microsoft gained over 2%.
Microsoft shares advanced on news that the software giant will deliver to the U.S. Army more than 120,000 devices based on its HoloLens augmented reality headset. The contract will be worth $21.9 billion over 10 years.
Tech stocks led the gains as bond yields continued to retreat from recent highs. The 10-year Treasury yield fell 7 basis points to around 1.68% Thursday. The benchmark rate hit a 14-month high about 1.77% last week.
The move in stocks came after Biden introduced his multitrillion-dollar infrastructure proposal. The plan includes spending on roads, bridges, green energy and water system upgrades. This marks the second major spending push of Biden’s presidency after he signed a $1.9 trillion relief and stimulus bill on March 11.
“The reopening of the U.S. economy continues to support equity markets as the light at the end of the coronavirus tunnel draws near,” said Craig Johnson, technical market strategist at Piper Sandler. ” Fiscal and monetary policy support remain unprecedented and well-telegraphed at this juncture.”
The plan Biden outlined Wednesday includes roughly $2 trillion in spending over eight years and would raise the corporate tax rate to 28% to fund it.
Still, some on Wall Street grew worried that higher taxes could pose a threat to rebounding corporate earnings and stock prices.
Bank of America equity strategist Savita Subramanian said that the market may still need to digest the tax hikes included in the plan, creating a potential headwind for stocks.
“I think the market is pricing in the good news of infrastructure ... I don’t think the market has necessarily priced in the negatives, which is how are we going to pay for this,” Subramanian said on CNBC’s “Fast Money.”
On the data front, an index of U.S. manufacturing activity jumped to a reading of 64.7 last month from 60.8 in February, according to the Institute for Supply Management. That was the highest level since December 1983.
Meanwhile, investors digested a worse-than-expected reading on weekly jobless claims. First-time claims for unemployment insurance for the week ended March 27 totaled 719,000, higher than 675,000 expected by economists surveyed by Dow Jones.
The key March jobs report will be released on Friday, although the stock market will be closed for the Good Friday holiday. Economists expect 630,000 jobs were added in March, and the unemployment rate fell to 6% from 6.2%, according to Dow Jones.
In deal news, Micron Technology and Western Digital are said to be exploring a deal to buy Japanese semiconductor firm Kioxia for about $30 billion, according to a Wall Street Journal report. Micron shares jumped 4.7% on the news, while Western Digital popped 6.9%.
Wall Street just wrapped up March with solid gains. The Dow and the S&P 500 climbed 6.6% and 4.3%, respectively, last month, posting their best month since November. The Nasdaq gained 0.4% in March as tech stocks came under pressure amid rising interest rates.
The bulls came out swinging April Fools' Day, closing out the week with solid gains.
Even though tech shares surged today, I caution my readers the Nasdaq remains below the level it was a month ago and it needs to cross back above 13,600 and sustain momentum for a reversal to take hold:
But tech shares (QQQ) did cross back above their 50-day moving average led by the big FAANG names and it's possible momentum continues if rates keep declining or even hold steady:
Will rates hold steady or keep declining? I see them stabilizing around these levels but if Friday's US jobs report for March posts a 'blowout month for reemployment' amid the vaccine rollout and spring weather, then it will put pressure on rates.
We shall see, I've long given up forecasting monthly jobs reports, on any given month it can surprise you either way but I do expect trends in the leisure and hospitality industry to continue showing strength.
What we know is private employers hired the most workers in six months in March as more Americans got vaccinated against COVID-19, pushing the economy towards a broader reopening, which is expected to unleash a strong wave of pent-up demand in the coming months.
This should augur well for nonfarm payrolls but I warn you, it's impossible to forecast even if private payrolls showed strong gains.
Anyway, back to markets, it seems last week's deleveraging fears following the blowup of Archegos have been digested, for now, and stocks keep grinding higher.
For the week, all the major sectors of the S&P 500 posted solid gains led by Tech (XLK), Consumer Services (IYC) and Consumer Discretionary (XLY):
Over the past month, however, these three sectors trailed defensive and cyclical sectors which explains why the Dow and S&P 500 posted solid gains in March while the Nasdaq was flat:
Will FAANG stocks keep outperforming in Q2? Maybe, especially if earnings are solid, but nobody really knows and these markets are entering the "show me the money phase".
What I mean by that is a lot of stocks have run up hard over the last year, many are way above their pre-pandemic levels, so active management becomes more critical here to generate returns.
Stated differently, stocks are at or above fair value, they're not cheap, so if earnings don't propel them higher, it could be another tough slug ahead.
This is especially true for last year's high-flyers like the ARK Innovation hyper-growth stocks (ARKK), biotech (XBI), solar (TAN), Chinese internet shares (KWEB) and IPO stocks (IPO):
I can say the same thing about electric vehicle stocks like Tesla (TSLA) and NIO (NIO):
I don't see them making new highs this year, in fact, I see them being shorted very hard on every pop and it feels like a bear market is developing in the riskiest segments of the market.
I'm not the only one seeing this. Martin Roberge of Canaccord Genuity states this in his weekly wrap-up going over "Stealth De-Risking":
Our focus this week is on the equity market and the stealth de-risking observed since mid-February. As our Chart of the Week shows, the most volatile areas of the market – new IPOs, SPACs and hyper-growth stocks – are down 18%–29% from their February peak. This dynamic should not come as a surprise since these companies are considered long-duration stocks whose value is derived by discounting cashflows that are far in the future. As such, the swift increase in bond yields, combined with the “laissez-faire” attitude of the Fed, has prompted some profit-taking in these high-flying stocks. But to the surprise of many among us, broad equity markets have absorbed this bout of volatility quite well, even pushing the CBOE VIX index below 20 for the first time since February 2020. Call it the magic of abundant liquidity; investors are rotating within the market rather than leaving the market. Now, when we account for record amounts of equity inflows in Q1, it feels like our melt-up scenario for Q2 remains a non-trivial upside risk.
According to Martin, there is a "benign rotation" going on right now, out of the most speculative names, into cyclicals like Financials (XLF), Industrials (XLI), Energy (XLE) and Materials (XME):
Martin isn't the only one who is long "short-duration" cyclical stocks.
Recall, two weeks ago, I explained why François Trahan of Trahan Macro Research thinks we are only in the fourth inning of a cyclicals rally.
But as I explained last week, if deleveraging unhinges the market, then there's a big problem with the "benign sector rotation" call into cyclicals.
What really irks me is this, how many other family offices or elite hedge funds for that matter, are using the very same secret derivatives that blew up Archegos?
The market is suppose to be fair and transparent, but every once in a while we are reminded about how it isn't, especially after a major blowup wipes out a fortune:
One reason is that Hwang never filed a 13F report of his holdings, which every investment manager holding more than $100 million in U.S. equities must fill out at the end of each quarter. That’s because he appears to have structured his trades using total return swaps, essentially putting the positions on the banks’ balance sheets. Swaps also enable investors to add a lot of leverage to a portfolio.It's the Wild West in the swaps market and major swaps regulations overhaul can't come soon enough.
There are so many charts that look exactly like Viacom (VIAC) and Discovery (DISCA) before they got butchered on large bloc selling last week that part of me wonders: who's next to fall and will it have an impact on the overall market?
Having said this, there's a ton of liquidity in the financial system and Uncle Fed is monitoring the situation, no doubt, to make sure they're ready to provide more if a crisis erupts, so maybe there won't be any contagion, at least this is what the market is signalling, for now.
But I just generally feel uneasy about these markets, there's no conviction anywhere, and too many bulls are over-confident that the reopening/ strong recovery/ reflation/ inflation trade will dominate markets going forward.
The rebound in the US dollar and the decline in long bond yields might be an omen of things to come.
For all these reasons, I remain skeptical and will leave you once again with the wise insights of Jeremy Grantham who in late January warned that bubbles don’t burst all of a sudden, first you see the high-flyers get trounced, the overall market keeps grinding higher, but more and more stocks/ sectors start getting hit and then it catches up to the overall market (go to 30 minute mark to hear it from him).
I guess what I'm saying is while the bulls are coming our swinging early this quarter, maybe the joke will ultimately be on them, not the bears, so remain alert and manage your risk accordingly, these markets can easily lull you into a false sense of security.
I wish everyone celebrating a nice Catholic Easter, I will be back Monday or Tuesday.