Week In Review, MJ: The Highs And The Lows, Josh Brown: “Valuation Is Junk Science”, Kiddie Technicians: Just The Beginning, Rising Commodity Prices, Rising Interest Rates, VIX Closes < 20
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Stocks continued their relentless rise higher last week as the S&P rose 1.23% to 3,935, the NASDAQ rose 1.72% to 14,095 and the Russell rose 2.97% to 2,289 – all new All Time Closing Highs.
The most interesting action last week was in the marijuana stocks. The main Marijuana ETF (MJ) was +42% through Wednesday before falling 26% on Thursday and Friday.
The most interesting market commentary I heard came from Josh Brown on CNBC’s Closing Bell Wednesday. Brown said that “valuation is junk science” in the sense that it provides “no signal” for stock direction. Stocks have been expensive for years and have gotten more expensive during the pandemic. But Josh thinks it doesn’t matter: “You throw your dart, I’ll throw mine”.
What then are we to base our investment decisions on? Josh talked about how the market had been correctly pricing growth stocks like Salesforce (CRM), Netflix (NFLX) and Tesla (TSLA) at extremely high multiples for years. He also said that “liquidity” is much more important than valuation. Putting it together, it almost seems like Josh is saying to buy the leading stocks at any price as long as the liquidity backdrop is good and hold forever. This is the philosophy espoused regarding The Nifty Fifty in the early 1970s and it didn’t work out very well. It won’t this time either.
The price action is getting The Kiddie Technicians all worked up as well and they are convinced this is just the beginning.
Meanwhile, all the liquidity injected into financial markets over the last 11 months is starting to percolate in other areas of the market besides for stocks. The 10 Year Treasury Yield has risen from just above 0.5% in early August to 1.2% Friday.
This has not been a problem so far for stocks as yields and stock prices have been positively correlated according to Ned Davis Research Strategist Tim Hayes. However, Hayes also said: “If the correlation would return to inversion, it would tell us that the market had started to view rising yields as a threat to economic growth, and in turn corporate profits” (quoted in “The Stock Market Keeps Rising. The Reasons To Be Hopeful Are Also The Reasons To Worry”, Ben Levisohn, The Trader Column, Barron’s, Saturday February 13 [SUBSCRIPTION REQUIRED]).
Liquidity is now also flowing into commodities which is potentially inflationary.
Lastly, the VIX, known as the fear index, closed below 20 for the first time in almost a year Friday as investors become more and more comfortable with the market environment.
Summing up: Massive global central bank liquidity infusions in the wake of the coronavirus pandemic have created a massive stock market bubble that continues to inflate and is now percolating into other areas of the market like interest rates and commodity prices. This is not real economic growth. It ends when the mass psychological mania this has created breaks but nobody knows when that will be – although the level of speculative excess in recent weeks suggests it is close.