There was no letup in tech stocks’ inexorable ascent on Monday.
Stocks scarcely needed another excuse to rally. After all, what’s better than news that the apocalypse has been called off?
But when it rains bullish catalysts it pours, and the latest good news comes courtesy of reports that the Trump administration is all set to lift the currency manipulator label from China on the eve of the “Phase One” trade deal signing.
Liu He arrived in Washington on Monday afternoon. Much to everyone’s relief in light of recent events, he was not “droned” at the airport.
And so, big-cap tech surged another 1% (if you can believe it) bringing 2020’s gains to 3.7% (already!). That, in just a handful of trading days coming off 2019’s 38% rise for the Nasdaq 100.
Using two of the most popular ETFs as a simple proxy for relative performance, Growth shares have outperformed their Value counterparts in every session this year but one. It marks a stark contrast with Q4, when the tide seemed to turn in favor of Cyclicals and Value as yields rose and the economic narrative brightened.
This is, by now, well-worn territory. The outperformance of the mega-caps and the various and sundry “slow-flation” plays that have dominated for long stretches in the post-crisis era, are a reflection of expectations that if there is a rebound in global growth, it will be modest.
The persistence of that general narrative over the past half-decade has embedded all manner of “bond risk” into markets, as trades tethered to the vaunted “duration infatuation” (e.g., Min. Vol., Secular Growth, Quality) proliferated at the expense of Value and Cyclicals. Q4 purportedly marked a pivot away from that trade, but the first couple of weeks in 2020 have made last quarter’s reflation fascination seem, at the least, overdone.
“We are seeing extraordinary concentration of returns at the very top of the market”, Morgan Stanley’s Mike Wilson wrote, in a note dated Monday.
He continued: “The market internals seem to agree with our view that the rebound will be modest given its preference for large over small, quality over junk, inability of cyclicals to power higher relative to defensives and still low Treasury yields”.
Meanwhile, SocGen’s Andrew Lapthorne warned on Growth valuations. “With stocks performing so strongly, bearish voices are increasingly rare yet there is still plenty to be concerned about”, he said. “Growth stock valuations have only been this high in eight months out of the last 361”.
On the surface, “all is well!” (to quote Trump’s already famous Iran tweet), but under the hood it’s looking more and more like Q4’s reflation trade is probably best described as “false dawn”.
Of course, it’s far too early in the year to draw any definitive conclusions, and with German bund yields back to “highs” (albeit still negative) last seen in May, it could be that we’re just looking in the “wrong” places for evidence.
With that, we’ll simply leave you with a particularly poignant passage from Morgan’s Wilson:
The five largest companies, or the top 1%, currently make up 18% of the market cap of the S&P 500. This is the most extreme this metric has ever been. The last time we saw something even remotely this high was 1999, at the end of the tech bubble…. While we don’t think there is a valuation bubble in tech anywhere near the scope of what we experienced in 1999, the concentration in tech stock performance is unhealthy in our view and arguably unsustainable.