Markets stocks

Welcome To ‘Blow-Off Top’ 2020

Featuring Google $1 trillion and the best day for Morgan Stanley in years.

“Melt-ups” are so passé – it’s all about “blow-off tops” now.

Cite what you will. Maybe it was solid retail sales spiced with a better-than-expected Philly Fed. Or perhaps you’ll be inclined to point to the Senate clearing USMCA. Or homebuilder sentiment. Or you might suggest that if Wednesday was a “fade the news” day following the signing of the “Phase One” US-China deal, Thursday was a manifestation of lingering optimism around an interim resolution to the trade spat.

Whatever you want to attribute it to, US equities have now reached something that feels like escape velocity after another blockbuster session on Wall Street. With Thursday’s gains, the Nasdaq 100 is up 4.5% already in 2020. Barring a really bad Friday, big-cap tech will log a sixth consecutive weekly gain.

Alphabet vaulted into the elite club of trillion-dollar US corporates amid the surge. It joins Apple and Microsoft in the exclusive group of 13-digit market cap behemoths.

Of course, on a global scale, nothing compares to Aramco, which, even after recent stumbles, is still valued at $1.8 trillion.

Morgan Stanley had its best day in years Thursday following another good quarterly report replete with superlatives. The bank delivered positive commentary on the outlook as well.

One thing that continues to stick out is the inability of Treasurys to meaningfully sell off. That’s something we discussed early Thursday. Yields did end higher, but only by 1bp to 3bp across the curve, which bear steepened tentatively.

Note that small-caps are on track for their best week of relative performance since the early September factor quake, when yields snapped back from the August recession-scare lows, leading to a multi-standard-deviation unwind in various trades tethered to the “duration infatuation”. Now, though, the long bond ETF is actually higher for the week, even as the Russell outruns the S&P by the biggest margin in months.

Of course, other trades linked to low bond yields and a resurgence of “what’s worked” over the past several years are doing well in the new year. A popular Growth ETF has outperformed its Value counterpart for five weeks running, for example, and the Momentum factor is beating Value. This is entirely consistent with renewed flattening in the curve.

“Thematically, this Rates-based reversal has of course then helped drive the ‘back to the future’ moves in US Equities decile-, sector- and factor- behavior YTD”, Nomura’s Charlie McElligott said Thursday. That’s “powerfully flipping the December dynamics and driving a + Momentum / + Growth / – Value trade, as ‘Duration’ sensitives have rallied and ‘Cyclicals’ have struggled out of the gates”.

Of course, most “regular” investors aren’t going to care about the under-the-hood specifics as long as the benchmarks are rising. But, eventually, it would be nice if the long-end could sustain some manner of “gentle” selloff in order to “validate” economic optimism in the new year.


 

4 comments on “Welcome To ‘Blow-Off Top’ 2020

  1. H-Man, the only thing that will run the train off this equity climb will be an “event” which is not flashing on the dashboard. The dashboard is all green, no yellow or orange flashes. Euphoria is gaining by leaps and bounds while waiting for the “event”. As you have noted, the “shorts” are waiting in the wings, cautiously waiting for the “event”. Meanwhile the “longs” own the day until we see that “event’ which is not a burp but rather a full puke.

  2. Which is why most of us should be long equities. You don’t stand in the way of a blow off top. The question is how long?

    If you are normally 70% equity, should you be 80% equity (lean into this) or 60% equity (lean back from this)?. Or just stay your normal 70%?

  3. The “event” could be:

    Effort(s) by foreign govts to embarass trump into the election

    Geopolitical event – Iran, NK, etc

    Bond selloff forcing the Fed to QE

    Earnings disappointing again

    Eco data doesn’t respond – cons pulls back, biz spend stays subdued

    Wage inflation

    Poor jobs report due to biz pulling back

    Talk of monetary policy impotent

    No ability for fiscal policy

    Dem win in Nov

    Some debt issue – car loans, etc

    What can go right?

    Earnings grow more than expected – but do PEs contract?

    More QE with belief it will eventually work

    People believe there is no risk

    No chance of a recession for the next 2 years

    People willing to buy historic margins and near high PEs

    Inflation doesn’t pick up and deflation held at bay

    Trillion $ deficits don’t matter

    Govt chaos remains positive

    Productivity finally picks up

    Lets see earnings estimates are up 6%, PEs near 20 for near all time high margins and 30-40% of the SP500 in secular decline.

    Nothing can go wrong……………….

    Stocks have doubled plus 20% in 12 years with earnings up 60% ex corp tax cut. Rates historic lows.

    Nasdaq has doubled in 19years.

    My best guess is it will take 20-30 years for the SP500 to double from here.

    I think I will trade them around. There will be much better buying opportunities in my mind.

    • Nothin’ but “Blues Skies”…
      Like my rich uncle told me decades ago, “You’ll never go broke taking a profit”.

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