Still Pending

US equities meandered through another mostly meaningless session Tuesday.

Traders were stuck in suspended animation as the “pending” wheel spun ahead of Thursday’s inflation data. You know there’s a news vacuum when every other headline is about a company that makes exercise bikes.

To be sure, Peloton’s trials and tribulations do have some connection to the bigger picture. “There’s a little bit of Peloton in everyone,” Morgan Stanley’s Mike Wilson said, reiterating talking points about potential demand payback. “Over the past few weeks this view has started to permeate the market as several leading companies like Netflix, PayPal and Facebook have disappointed with weaker than expected guidance,” he wrote, adding that “we suspect there will be more surprises on this front.”

Remember, the problem isn’t so much that demand for expensive home fitness equipment is waning or that fewer people are binge watching one of the 300 new shows Netflix debuted last week. Rather, the issue is that these names were crowded.

When the first reports of Peloton’s problems started to emerge last month, Nomura’s Charlie McElligott explained the reason for the palpable sense of angst. The company was “once a private-side holding,” he wrote, noting that from a sentiment perspective, it was (and still is) a bad time for unicorns to be stepping on banana peels. “[U]nicorn books are finally getting an MTM ‘come-to-Jesus’ which is crushing performance for many funds instead of previously carrying it,” he said.

The Peloton news thus injected a new dose of unadulterated fear into richly-valued growth names during last month’s rout. Earnings season delivered a series of additional shocks to perennial secular growth favorites at just the wrong time (i.e., when rising real yields are forcing a de-rating). So, here we are.

“The fixed income selloff has exacerbated the thrashing of legacy Secular Growth ‘Longs’ and their significant Equities index weight, which then came under further pressure from a number of high profile earnings and outlook misses, jarring sentiment during the Corporate buyback blackout, meaning the market is missing much of its decade-long, price-insensitive primary bid,” McElligott wrote Tuesday.

Some of this really is just bad timing, even though you could plausibly call it predictable. Everyone knew the likes of Netflix, Peloton and other big pandemic beneficiaries would face a reckoning sooner or later, but it wasn’t a foregone conclusion that judgment day would coincide with an epoch-making change in developed market central banks’ decision calculus. Inflation was supposed to moderate by now, obviating the need for the kind of abrupt hawkish turn with the potential to pull the rug from beneath a trade that’s worked infallibly for as long as anyone can remember. The figure (below) is still very poignant.

Note the recent underperformance. When a trade wins that big, for that long, it ends up exceptionally crowded. Reversals are thus very painful. Every nascent value rotation has turned out to be a false start. Whether 2022 is an exception remains to be seen. But this helps contextualize the Peloton debacle, as well as Facebook’s historic plunge and similarly dramatic declines for Paypal and Netflix.

“The changing macro landscape is helping internal rotations for which we were positioned,” JPMorgan’s strategists said, noting that “Cyclical Value sectors are still trading cheap relative to pre-pandemic and sometimes relative to a longer window.” Tech, the bank remarked, is still expensive and thus vulnerable to further rate rise. However (and this is interesting), analysts led by Marko Kolanovic noted that on a FY2022 basis, Facebook is now trading at a 19% discount to the S&P, at 16.3x versus 20.1x, respectively. Facebook’s forward P/E is now “lower than any broad market at any point since 2014, excluding-March 2020,” apparently.

But investors are likely to exercise caution. Notwithstanding any rally predicated on corporate actions (or takeout interest), Peloton will probably never trade where it did during the pandemic assuming it stays public. Facebook, meanwhile, is staring at what some analysts have described as an existential crisis, ironic given the existential questions raised by Mark Zuckerberg’s decision to pivot from “Myspace that worked” to “Inception lite.”

In any event, these are all just off-the-cuff musings on a day when I’ve said everything that could’ve been said without straying from the site’s “mandate.”

I’ll give the last word to McElligott. “My larger view remains that US Equities next ‘move of magnitude’ will likely [be] an impulse lower first before any real attempt to test prior highs,” he said. “Particularly because [a] resumption of the rally to that extent will ease financial conditions… pressuring the Fed to increase their hawkish rhetoric and pricing.”