By David Nelson, CFA CMT
All in Friday’s payroll numbers we’re just what was needed to offset the rising fear that the Fed was falling behind the curve. 559K was a little light and at that pace would take about 16 months for the 8 million still unemployed to return to work getting us back to pre-pandemic levels. Bonds caught a bid and what followed was something of a goldilocks rally led by tech and other long duration equity.
Look, light or not these are still big numbers, and the economy is accelerating. Estimates for the S&P 500 have risen 13% since the start of the year and now stand at about $187. Analysts have been behind the curve all year and I would expect by December we’ll be looking north of $200. The revisions to the upside are greater than 3:1.
VIX 2 Year Chart
The market has been relatively stable all year with the CBOE Market Volatility Index (VIX) living below 20 and today sits just over 16. Despite the benign run up in the S&P 500 beneath the surface battles are raging. Take your pick, Big vs Small, Growth vs Value, Secular vs Cyclical. Struggling to find clarity in a tidal wave of data and media hype investors have rushed one side of the boat to the other searching for the Holy Grail.
The Meme stock fury in the middle of a Crypto Crash throws gasoline on a fire not likely to burn out soon. CNBC’s Josh Brown recently shared his thoughts regarding the risks young investors are taking in frenzy stocks like AMC and GameStop (GME). I’m paraphrasing but he makes the point that it’s difficult for portfolio managers to claim the moral high ground when you’re talking to a young Reddit investor who’s up 2000% since January in a stock that was close to bankruptcy.
The only thing I can say is, in the absence of any reasonable fundamental thesis, what is going to be the data point that keeps you in the name when the selling starts? For most there won’t be one other than hope. I’ve seen this movie before, so I think I’ll pass.
Crypto
The debate over Crypto and whether or not it’s an asset class continues to dominate the news cycle. That train has left the station. In the end, the only thing that matters is that there is a buyer or seller on the other side of a transaction and what the price is.
Gold has been a store of value for the last 5000 years and has some legitimate uses like jewelry but for the most part its role as an alternative currency is well understood.
The U.S. dollar is backed by the good faith and credit of the United States. What does that mean? We’ve been off the gold standard for the last half century. It has value because we perceive it to have value and that’s the basis of all fiat currencies.
Crypto’s decentralized nature will make it difficult for governments to ban but you can expect regulation to follow. Belpointe’s Co-Chief Investment Officer Dean Kasparian points out that technology is often well ahead of regulation. In that mindset it’s not surprising that Crypto Exchange Traded Funds are still about 6 months away.
SEC Chair Gary Gensler previously taught classes about blockchain and other financial technology at the Massachusetts Institute of Technology. He said there needs to be authority for a regulator to oversee the crypto exchanges, similar to the equity and futures markets. He went on to say many of the crypto coins were trading like assets and should fall under the purview of the SEC.
Sure sounds like something is coming soon.
Valuations
Until 10-year yields get well North of 2.3% Equities are still the better asset class. Even today on the heels of a market up 93% off the pandemic bottom investors have a lot of choices.
Dot Com – Today
At the height of the dot com bubble MSFT traded at 32x Sales and today trades at about 11x. Just because your favorite cloud stock has fallen from 40x sales to 30x doesn’t make it a bargain.
Retro Tech
You can move down the valuation curve even in technology. Applied Materials (AMAT) in the Semi-Cap Equipment space trades at a market multiple and is looking at mid-teens’ growth for the next few years. Some stocks in the cloud like Twilio (TWLO) don’t have a multiple and aren’t expected to earn anything on a GAAP basis as far as the eye can see.
Even some FAANG stocks are a value. Look at Facebook (FB). Trades at a market PE with top and bottom-line growth of about 15%. I’ll take that all day long.
Biggest risks – #2 with a Bullet
Any Covid variant where our vaccines aren’t effective is still the biggest risk we face.
#2 with a bullet is easily the cyber threats coming out of Russia. Today it’s a pipeline or a meat factory. What happens when it’s the electric grid or the New York Stock Exchange? How about a military complex or Air Traffic Control?
It doesn’t matter whether Putin is complicit or not, it’s coming from his country and it looks like little is being done to thwart the attacks. At what point is it an ACT of WAR!
*At the time of the article some funds managed by David were long MSFT AMAT & FB
