S&P 500 is still in its trading range 2’800 – 2’950, meanwhile bad news is interpreted as good news

In the last 4 weeks the US markets have traded in a sideways channel after the strong recovery rally. If, however we dive deeper into the details we see that 495 stocks of the S&P 500 have lost value, but 5 tech stock are up more than 10% and have mainly driven the recent recovery rally.

Fig. 1: S&P 500 has not broken out of its resistance zone (2’850 – 2’950)

Another way to look at it – the total market capitalization of the Nasdaq Composite index is larger than the entire market cap of the MSCI World (excluding the US)!

New technology and bio tech companies are dominating all other sectors.

We continue to believe that the best risk return for USD asset will be (in the short run) achieved with US equities and US corporate bonds. Although both are very expensive.

Based on Shiller PE emerging markets do over much better value. However, that is a medium-term theme. Remarkably, recent market recovery was accompanied by large inflows into money market funds and outflow from equity funds.

Fig. 2: US bonds and equities are very expensive

Fig. 3: Record inflow into money market fund

Fig. 4: Outflow from equity markets continues

We see another interesting phenomenon: bad Q1 earnings are treated as good news. We all knew they would be bad, but the future is going to be better. When? Nobody knows but also nobody cares!

Today’s nonfarm payroll figures were bad. Until the mid of April 20.5 million employees lost their job and the unemployment rate is at the highest level since WWII.

But the S&P future jumps up. The chart below summarized the mood of investors and it is pretty good. No index target for the short run. Probably we see lower prices, but the key message is that in 2021 we are going to be more than 20% higher than today.

Fig. 5: Some strategists have already given out targets for 2021 (not for 2020)

Not only FOMO (fear of missing out) is back but also “the most hated rally in history” has been called several times during the last trading sessions. We have heard that already in 2014.

The sad thing is that in those times we saw same thing as today – outflows from equity funds and large cash holding. In 2014 the message was simlillar to today’s message. Markets were expesive but the “Fed Put” would save the day.

But this time the Fed buys not just treasuries and mortgage back securities, they also buy junk bonds and give credits to smaller and mid-size enterprises.

As a result, the fed balance sheet has doubled since March.

Fig 6: The Fed has never bought so much MBS

Therefore, the message is still “Don’t fight the Fed”. Also, this sentence is hated but so far it would have work out for those who would have followed the simple advice.

Published: 08/05/20 by Blackfort CIO Dr. Andreas Bickel

Disclaimer

This Blackfort Insights (hereafter «BI») is provided for information purposes only. This document was produced by Blackfort Capital AG (hereafter «BF») with the greatest care and to the best of its knowledge and belief. Although information and data contained in this document originate from sources that are deemed to be reliable, no guarantee is offered regarding the accuracy or completeness. Therefore, BF does not accept any liability for losses that might occur using this information. BI does not purport to contain all the information that may be required to evaluate all the fac­tors that would be relevant for entering into any transaction and anyone hereof should conduct their own investigation and analysis. In addition, the BI includes certain projections and forward-looking statements. Such projections and forward-looking statements are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the control. Accordingly, there can be no assurance that such projections and forward-looking statements will be actualized. The real results may vary from the anticipated results and such variations may be material. No representations or warranties are made as to the accuracy, or reasonableness of such assumptions, or the projections, or forward-looking statements based thereon. This document is expressly not intended for persons who, due to their nationality or place of residence, are not permitted to access such information under local law. It may not be reproduced either in part or in full without the written permission of BF.

© Blackfort Capital AG. All Rights reserved.