NASDAQ- TINA?Sure, low yield rate alone doesn’t justify the extremely high valuation of NASDAQ, but many investors may have overlooked other factors that may have contributed to NDX's rise.
Quick recap of recent macro events-
THE BAD
Corporate profits in the United States dropped 11.8 percent to USD 1,569.2 billion in the second half of 2020, following a downwardly revised 11 percent fall in the previous period, a preliminary estimate showed. It was the sharpest decline in corporate profits since the last quarter of 2008, amid the coronavirus crisis.
According to association of corporate growth, 81% of middle-sized business failed to get a loan through the Fed’s Main Street lending program. Of course, survey might contain the selection bias.
According to S&P Global Market Intelligence, U.S. bankruptcies are on pace to hit their worst levels in 10 years , with experts expecting even more companies to suffer as the coronavirus pandemic stifles economic activity.
A total of 424 companies have gone bankrupt this year as of Aug. 9. Over 100 consumer-focused companies have gone bankrupt this year already. Industrials and energy combined account for nearly 100 bankruptcies. Overall, 35 companies that filed for bankruptcies year-to-date reported more than $1 billion in liabilities.
THE GOOD
Out of the 35 companies that filed for bankruptcies year-to-date and reported more than $1 billion in liabilities, none came from IT.
Overall, only 17 out of 424 companies that have gone bankrupt this year came from information technology.
Most came from large retail, energy, and transportation. Of course, when a big portion of sectors becomes highly unprofitable, investor's money would appropriately reward ones that remain profitable.
According to the Mortgage Bankers Association, The forbearance rate for mortgages backed by Fannie Mae and Freddie Mac dropped to 4.94% in the first week
of August, the first time it’s been below 5% since April.
Almost all housing indicators are up except mortgage origination rate.
THE INEVITABLE
In my opinion, the potential acceleration of industry consolidation is a bigger concern than dislocation. J&J and Apple, for example, are able to get 40yr loan at 3-4 percent interest rate. Low interest rate encourages big firms to refinance and borrow so they can more easily build up large cash cushion for M&A pursuit which ultimately might hurt consumers.
According to American association of individual investors’s July asset allocation survey, individual investors’ exposure to fixed-income assets declined to its lowest level in 15 months. Again, no one likes low yield rate and I would guess most money go into the equity market especially profitable sectors such as tech.
Some investors are still hoping for the dip back to the March lvl.
According to research note from Bank of America securities, since 1928, the 30% market drawdown happens once every decade and the average time for the market to bounce back after a drawdown of 20% or more is 4.4 years.
The two most similar situations in terms of magnitude of drawdown happened in 1987 & 1968 and it took them 101 days and 543 days respectively before the bottom was reached. Many of us thought this time would be the same especially since rarely has the bottom been reached at the onset of recession.
Well, guess what? Many of us have been fooled into believing that this time would be no different without realizing the underlying condition has changed... There was no QE back then.
Past doesn’t always predict the future especially if the underlying condition no longer applies.
Despite of the string of bad macro signals I listed above, market remains unfazed and marches on.
No party can last forever though. I believe that such a meteoric rise in tech stocks will come at the expense of long-term return as high valuation today leads to weak return tomorrow. Inevitably, valuation mean will one day revert lower to stay in line with historical trends.
However, none of us knows exactly when it will happen.
Therefore, waiting on the sideline, incurring the opportunity cost and missing out on all the gain is not the way to go either.
Time like this is why risk management and asset allocation matter.
