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Written by: Leo Kolivakis
Shawn Langlois of MarketWatch reports that investors could be looking at a ‘lost decade’ in the stock market:
Even if overall profits recover, some companies will die or their shares will devalue along the way. Left with lower levels of profits and cash shortfalls, companies are likely to come out on the other side of the coronavirus more indebted. ~ Ray Dalio
That’s part of the reason why Bridgewater Associates, the world’s biggest hedge fund, issued a warning to clients this week that equity investors could be facing a “lost decade” in terms of returns.
“Globalization, perhaps the largest driver of developed world profitability over the past few decades, has already peaked,” Bridgewater said in a note obtained by Bloomberg News.. “Now the U.S.-China conflict and global pandemic are further accelerating moves by multinationals to reshore and duplicate supply chains, with a focus on reliability as opposed to just cost optimization.”
Intel Corp. and Taiwan Semiconductor Manufacturing were cited in the note as two examples of high-profile technology companies that plan to build their production facilities in the U.S., despite the higher costs that will pinch margins.
It’s been a rough stretch for Ray Dalio’s Bridgewater, which has earned an estimated $58.5 billion for clients since its launch in 1975. The fund took a 15% hit in assets under management during March and April, dropping to $138 billion from $163 billion at the end of February.
Here’s Dalio’s infamous “cash is trash” call that preceded the market’s big drop earlier this year:
Of course, it didn’t take long for those words to come back to haunt him, considering that just one month later the global economy would essentially shut down and the U.S. stock market would get rocked by its biggest retreat since the financial crisis.
The Dow Jones Industrial Average closed slightly lower on Thursday, while both the S&P 500 and Nasdaq Composite ended in the green.
So is Ray Dalio right? Is it a lost decade in the stock market?
The answer is nobody knows. You might have made the same argument back in 2009, a lost decade in the stock market, and been spectacularly wrong.
Also, I'm not sure "globalization has peaked", memories are fleeting, people tend to forget but it's clear that COVID-19 has scarred many companies that are deciding to onshore some of their production despite higher costs.
If there's a significant shift to bring production back to the US, no doubt, it will pinch profit margins.
And people tend to forget, liquidity drives stocks in the short run but it's profits that drive them over the long run. Without profits, stocks can't keep melting up indefinitely.
In fact, with central banks pumping massive liquidity into the global financial system, there has been a huge disconnect between stocks and some investors are warning to prepare for a day of reckoning, as Shawn Langois describes elsewhere on MarketWatch:
Those betting against this “absurdly overvalued” stock market are about to get paid, if Kevin Smith, Crescat Capital’s chief investment officer, has it right in his gloomy assessment.
“Speculation is rampant and being championed by a bold new breed of millennial day traders,” he said. “The mania is based on a widespread hope in Fed money printing. The catalysts for reckoning are numerous as a major cyclical economic downturn has only just begun.”
Smith, who recently talked about learning the ropes from a stack of Berkshire Hathaway shareholders letters his dad gave him long ago, said, in a very un–Warren Buffett fashion, that shorting stocks “is worthy of a significant allocation today.”
Smith used this chart of plunging S&P 500 profit margins to show “how insanely disconnected equity prices are from their underlying fundamentals.” He warned that buy-the-dip investors are “not paying attention and have simply been too eager to call the bottom.”
Smith reiterated his “macro trade of the century” call that there’s never been a better set-up for rotating out of overvalued stocks and into undervalued precious metals.
“Markets driven by euphoria never end well,” he explained in a note to clients this week. “The U.S. stock market today is in la-la land. It is discounting a new expansion phase of the economy at the same time as a major recession has only just begun.”
Smith took some lumps in his funds when the market was soaring early in the year, but his returns ballooned in March as the coronavirus pandemic arrived. Here are his historical numbers:
The severe “reckoning” Smith has been warning about hasn’t arrived as of Thursday’s trading session, but the Dow Jones Industrial Average, S&P 500 and tech-heavy Nasdaq Composite were all under pressure, at last check.
Will there be a day of reckoning? I think so but it's clear the Fed and other central banks are doing everything they can to backstop risk assets, petrified of what will happen to the financial system when defaults start soaring.
But all this central bank intervention has led to another dangerous pandemic where daytraders engage in foolish speculative trades and I agree with those who warn it will "end in tears" or worse and that "we are truly getting to a place of moral hazard".
"It is about momentum and it is about the Fed supporting the market right now," Bianco states.
That prompted me to reply this to Jim on LinkedIn:
"Jim, I love you and your research but when it comes to stocks, you’re a bit of a contrarian indicator to me. I remain bearish, this is nothing but a huge bear market rally, the mother of all bear market rallies as the Fed cranked up its balance sheet by $3 trillion and governments gave everyone a stimulus check. It will end and even though the Fed is trying to backstop risk assets, there will be another violent leg down. Nobody sees it yet because everyone thinks the worse is over. It isn’t, the worse is coming when defaults start to pile up."
Seriously, I do love Jim and remember when I brought him to speak at the Caisse years ago at an offsite retreat for senior VPs. It was right after the 1999 tech bubble and he dazzled them with charts and insights. He provides excellent research and really offers unique perspectives but I don't think he's right throwing in the towel and going bullish on stocks.
Luckily, some bears are sticking to their guns on this overvalued stock market which is being fueled by liquid cocaine:
Speaking of stocks, the S&P 500 ended a roller-coaster session lower, but eked out a gain for the week, per CNBC:
Stocks finished Friday lower, after swinging wildly throughout the session due to technical factors. A number of headlines also raised concern about a resurgence in the coronavirus and a slowdown in the economy’s recovery.
The Dow Jones Industrial Average ended the day down 208.64 points, or 0.8%, at 25,871.46, after gaining as much as 371 points earlier in the session. The S&P 500 traded 0.5% lower, or 17.42 points, at 3,097.92, after dropping 1.0% at one point. The Nasdaq Composite finished the session just 3.07 points higher at 9,946.12.
All three major averages posted modest weekly gains. The S&P 500 gained 1.8% on the week, its fourth positive week in five. The 30-stock Dow rose 1% this week, while the tech-heavy Nasdaq outperformed, rising 3.7% this week.
A slew of negative news surrounding the pandemic knocked stocks to their session lows earlier in the day:
Apple said it’s reclosing a total of 11 storesin Florida, Arizona, South Carolina and North Carolina. All of the stores had been re-opened since Apple initially closed them in March amid the outbreak. Shares of the tech giant traded 0.5% lower.
Shares of cruise line operators took a leg down after the Cruise Lines International Association announced suspension of cruise operations from U.S. ports, citing the ongoing situation with the pandemic. Norwegian Cruise Line and Carnival dropped more than 5% each, while Royal Caribbean fell 6.8%.
Arizona and Florida reported record spikes in confirmed Covid-19 cases on Friday as states continue their phased reopenings and ramping up testing. Meanwhile, California on Thursday reported more than 4,000 new cases in a single day, the highest daily number ever.
Trading was highly volatile ahead of the S&P 500′s first rebalancing of 2020, which came more than three months after the market’s wild swings forced S&P Dow Jones Indices to delay this traditional quarterly event. Friday also coincided with the so-called quadruple witching, when options and futures on indexes and stocks expire.
“COVID cases have been spiking higher in certain US states …the issue is becoming too much for the market to ignore,” Vital Knowledge founder Adam Crisafulli said in a note Friday. “The problem has more to do with market expectations (way too complacent/calm) and psychology (with the consensus embracing the “V”-shaped narrative).”
Stocks benefiting from the economy reopening were also under pressure following Apple’s announcement. Nordstrom dropped 6.3%, while Kohl’s fell 4.7%. United Airlines slid 6.3% and Delta dropped 4.1%.
Stocks started the day with strong gains after a report by Bloomberg News said that China was set to up its purchases of U.S. farm products to comply with the phase-one trade deal. The report eased concerns about U.S.-China trade relations as the two countries exchange heated rhetoric regarding the coronavirus
Earlier this week, a record surge in U.S. retail sales and the Federal Reserve’s extra stimulus lifted the market.
“Moving forward, odds of periods of volatility are likely to remain elevated as earnings must meet expectations given the strong rebound in valuations and continued uncertainties,” Larry Adam, chief investment officer at Raymond James, said in a note.
If you ask me, the stock market is running out of steam:
Having said this, there's still way too much bullishness and speculative activity remains high in some areas, like tech and biotech:
Seriously, it's as if the Fed and its Swiss surrogate, the Swiss National Bank, are buying every dip in tech and CTAs are only too happy to jump on the latest trend:
God forbid the Nasdaq goes down 60% in any year and Bezos, Gates, Page and Zuckerberg see their net wealth sliced in half.
Right now, the Nasdaq is the only thing holding this market up. "Tech is defensive, tech is offensive, tech is the future, buy tech, tech, tech and more tech no matter what!".
And it’s not daytraders driving tech shares higher, it's large mutual funds, hedge funds, quant funds and large trading outfits at banks.
This is why some think in these markets, normal rules do not seem to apply:
Lastly, for all of you who think central banks will save the day, take the time to read this important macro comment from Jean Boivin of BlackRock:
I personally don't think the Fed is even contemplating an exit strategy but the market will get the last say and if the Fed loses control, it will get very ugly.
Alright, wish everyone a great weekend, please remember that this blog isn't a charity and if you like the daily comments, feel free to donate and/ or subscribe at my website.
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