Is the Nasdaq about to “crash”?
No. I suppose the answer depends on your definition of “crash,” but no.
Tech shares might correct, though. In fact, big-cap US tech was down ~4% in two sessions through noon on Thursday, as geopolitical jitters collided with a burgeoning momentum unwind to drag down consensus longs.
But a correction’s something different than a crash. Corrections happen all the time. Or at least they used to. Crashes (real ones) happen almost never.
One person who’s seen a few crashes in his day (and seen plenty more in his dreams) is SocGen’s Albert Edwards, who on Thursday speculated about a macro-market apocalypse, as he’s wont to do.
“As time marches on, there are few of us left who were in the industry during the 2000 Nasdaq crash let alone the 1987 crash,” he wrote. “I was there, and the one thing I have learnt is not to be complacent.”
I take his point, but… well, suffice to say that in the post-GFC world, central banks made complacency mandatory. It’s easy enough to carry on week after week about the necessity of remaining vigilant, it’s another thing to burn up other people’s money on insurance premiums.
For the better part of a decade, you had two choices: “Harvest the carry or run a risk of gradually going out of business by resisting,” as Deutsche Bank’s Aleksandar Kocic put it, half a dozen years ago. “Not much of a choice, really.”
Albert knows that, of course. “[A]ny equity investor positioned for what would be the first full-blown bear market since the 2008 Global Financial Crisis has been crushed between the jaws of the Fed put/pivots and the incredible price momentum in the US Tech sector,” he said Thursday. The figure below gives you some context for that momentum.
Info Tech now comprises a ridiculous 35% of index market cap. As Albert’s always keen to point out, only three of the vaunted “Magnificent 7” names are technically classified as tech stocks, which makes the 35% figure all the more remarkable.
Edwards is suspicious of the euphoria, even as he conceded that earnings growth for the market leadership might justify at least some of the premium.
But forward profit estimates are “running well ahead” of actual EPS growth, he cautioned, pointing to the figure below.
“To what extent is this EPS growth enthusiasm similar to the over-investment in cabling by the Telecoms in the late 1990s, fueled by ‘free’ money?” Albert wondered.
He took note of this week’s biggest market story: The rotation that’s seen US small-caps outperform big-tech by the most in a decade (or much longer than that, depending on your lookback).
The question, Edwards said, “is whether a rotation into smaller-cap stocks as the Fed cuts rates will be benign or whether the loss of price momentum in Tech and the Magnificent 7 pulls the rug from under the sector and panic selling ensues.”
The charts above are crowdpleasers. They illustrate the gargantuan tech valuation premium, which Edwards called “a ticking timebomb.”
If you’re wondering whether Albert’s subject to the same kind of career risk that compels virtually everyone else working as a Wall Street strategist to turn bullish if correction calls don’t pan out sooner rather than later, the answer’s “no.” Or, more aptly, “NO.”
You’ll never — never — get a bullish call out of Edwards. It’s all recessions, all crashes, all the time. Which is to say it’s entertainment. Or “alternative” strategy, if you like.
SocGen’s house call on US equities, which belongs to Edwards’s colleague Manish Kabra, sees the rally broadening out and the S&P shuffling mostly sideways for the balance of the year.
Writing Thursday in the same note, Albert summarized the thinking behind his unshakable penchant for doomsday prophecies. “Bad stuff happens,” he said. “The warning signs are there if you look for them.”
“Do Androids Dream of Electric Sheep?” – Philip K. Dick (1968)
To quote Men in Black: “There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they DO NOT KNOW ABOUT IT!”
Speaking is a pretty newbie investor here, but it looks to me as a consumer of finance news like overall the shape of the curve of various economic commentators and professional forecasters’ accuracy is about what you would expect from simple random chance. Some people get it right a lot, some people get it wrong a lot. Some people get it so right they seem almost prescient at times, but then fail to ever get it right again. A few outliers seem to consistently do exceptionally well or poorly. None of this, and I say this as a newbie’s subjective impression and not the result of any kind of rigorous analysis, but none of this appears to me to be much different than you would get by pure chance if all of them were just pulling random guesses out of a conveniently situated part of their anatomy. There doesn’t seem to be any sort of definitive science or skill in economic forecasting and, like investment returns themselves, a prior track record of successful forecasts appears to be not to be predictive of future success at it. It almost reminds me of studying cultural anthropology back in high school, where they would talk about why cultures would adopt certain rituals that they claimed produced certain results, and stick to them even though they didn’t, because the rituals fulfilled other underlying needs. It almost feels maybe like the need isn’t really for economic forecasting, so much as for the feeling of clarity that comes from having some sort of class of priests to put our faith in.
I mean, is there anybody who’s got a strong track record of making calls about the market over the long term, outside of the number of outliers you’d expect to keep getting it right over time just by pure chance?
I know I could be wrong here, I’m about as far from an expert on any of these things as possible, just looking at them and trying to figure them out in my own mind for the first time. I’d certainly be open to getting schooled by someone more knowledgeable. But these are the impressions I have so far after a small handful of years developing an interest in this.
A good trader can be wrong 70% of the time and still make money. A strategist that is consistently right or consistently wrong more than, say, 55% of the time can add a lot of value to that trader.
All that said, a lot of the time strategists are read to test one’s own hypothesis or to find things one hasn’t considered.
I read strategists for their data, insights, thoughts, arguments, correlations, theses, etc. They challenge my ideas, bring data and relationships to my attention, help me see where consensus is. Thus, a thoughtful contrarian strategist is useful even when the market makes him or her wrong.
The responsibility for each investor’s “market call” belongs to that investor, and to him or her alone.