Written by The Investor
31 July, 2020
Vaccine, V-shaped, Volatility AND Victory
All news is now focused on vaccine trials and with it a V-shaped recovery and possible election victory for Trump. These high hopes in an extremely unpredictable environment also spell volatility. The lack of sports and betting has switched on many new investors to the share market pushing up tech stocks to levels just prior to the tech wreck of 2000.
The destiny of the US economy and perhaps the rest of the world relies on this racetrack to vaccine deployment. The rate of new infections in the US has now reached more than 60,000 people per day with the daily death toll also breaking new records with over a thousand deaths a day. The sun-belt states are shouldering the brunt of infections with hospitals in Texas, Florida and California all near capacity and the system near breaking point. Upstate in New York city they are reopening and almost back to normal having barely survived the same fate just months ago.
Australia’s epidemic is also breaking new records led by the Victorian outbreak, but the government here is taking a different approach. Prime Minister Scott Morrison confirmed that the goal was “no community transmission” of COVID-19, a goal that is aligned with an elimination strategy. This “affirmation of the suppression strategy” among federal, state and territory leaders is at complete odds with what is going on the US.
Financial markets awash with liquidity from the massive QE stimulus across the globe – trillions to date and more to come – have also recruited a new army of investors who cannot bet on sports. The creation of new money has found its way into the share markets forcing fund managers worldwide to buy the big stocks or be left behind. Now circa 50% of the world’s savings are invested in share strategies that replicate the market up from 25% a decade ago and suggests a large part of the investing public is chasing the market up or down.
The disconnect of markets from the reality of the economy, company earnings and general consumer sentiment has never been so great.
Yelp has confirmed that more than half of US business closures that were initially temporary will now be permanent closures. Of the 132,580 closures listed on its website on July 10, 55% are permanent, up 14% from the end of June 2020. The Q2 2020 Yelp Economic Average Report cites that “many businesses that eagerly reopened doors in June were forced to scale back operations, and in some cases shut even down again”. Their survey focuses on retail businesses such as restaurants, shopping malls, bars and gyms and reflects an unstable US economy.
“As people began resuming common pre-pandemic activities across states like Florida, Nevada, South Carolina, Texas, Georgia and others – specifically, frequenting restaurants, bars and nightlife, and gyms – a clear spike in COVID-19 cases within those locations quickly followed.”
Yelp data shows a statistically significant correlation between an increase of consumer activity and an increase in COVID-19 cases. Similarly, in states where consumer activity was low the incidence of COVID-19 cases was suppressed.
What this data also shows is that the fate of the US economy relies heavily on a vaccine being developed and then deployed rapidly. According to Goldman Sachs “the chances of success in 2020 are enhanced further by four vaccine programs slated to enter into the final research phase of testing sometime this summer. Experimental inoculations from Pfizer in partnership with BioNtech SE, AstraZeneca Plc with University of Oxford, Inovio Pharmaceuticals Inc. and Sinovac Biotech Ltd.
The timelines being discussed are all record breaking, again unchartered territory for science, the economy and financial markets.
Let’s take a closer look at the US stock market in this recent rally.
- Much of the index performance has come from the 10 stocks – Microsoft, Apple, Amazon, Google, Facebook, VISA, Mastercard, Nvidia, Netflix and Adobe. As a group they are up 35% since the beginning of the year.
- As a group the other 490 companies are down more than 10%
- Europe shows a similar pattern.
- Three companies make up 16% of the S&P 500 Index and over a third of the Nasdaq 100 Index – Apple, Amazon and Microsoft.
- These three stocks are now worth $US 5 trillion which is larger than the entire German economy and nearly as big as the Japanese economy.
- Relative to their cashflow these three companies are trading on 45 x cashflow but are only growing cash-flow marginally.
- The only other time these companies traded on 45x cashflow was in the 2000 dotcom boom just prior to the bust, but then they were growing cash-flow by 80%pa! (see chart above)
- Either their sales are about to explode or their share price is going to crash or a combination of the two.
- In technical terms this price to cash-flow valuation is a three standard deviation event which is extremely rare.
The other dynamic in play behind the share market hype is punters who used to bet on sports are now betting on stocks. Now the billions normally staked on sports outcomes is now being applied to shares, specifically tech shares. Together with the government hand-outs means that many people had a lot of cash to play with. When we look at the google search for key work “tech stocks” there is a clear break out with the search for this phrase up 5 times (see chart).
Enter Robin Hood. This is commission free stock trading system that is quickly accessible over a mobile device and in small spend amounts. Apps like Robin Hood make investing simple and affordable.
A large number of inexperienced investors with not insignificant dollars have joined the share market since Q1 2020 with an App that look like a video game and feels like betting on sports.
Other contributors to the stock market rise are new small investors looking for a feel-good moment, bored gamblers looking for action, large institutions with loads of cash post the Fed bond purchases program, and momentum traders or hedge funds capitalising on short term trend investing.
COVID-19 will eventually ease with the development of a vaccine or the reaching of herd immunity. Once this happens people will return to some normality and a refocus on fundamentals like company profits.
For now, V is the word – vaccine development, v-shaped economic recovery and perhaps even for victory for the Trump camp.
Short term the market will continue to be a place for feel-good investors and punters alike. The “lunatics have taken over the asylum” and with them V will no doubt stand for continued volatility.
Please consult your advisor for specific recommendations. This general advice does not take into account the client’s objectives, financial situation or needs as we do not and cannot provide personal advice. Any views written about in this article are the views of the author who has no holdings in those companies or investments mentioned in this article.