This guest commentary was written on 9/30/20 by Chief Market Strategist Mike O'Rourke of JonesTrading.
Many Americans tuned in to watch the Office of the President of the United States degraded in a way that has not been witnessed in decades. Sadly, the debate was a reflection of the mood of the nation. It is disappointing that this is the best the nation has to offer.
In the short term, investors are lucky the Federal Reserve’s infinite printing has broken the market’s pricing mechanism. We suspect if US financial markets were not manipulated by the central bank, the functioning market's discounting mechanism would have equities 30 to 50% lower, and Treasury yields would be hundreds of basis points higher simply based on the political outlook.
For years, we have warned about the significant risks of disrupting the market’s discounting mechanism. Whether its stocks, bonds, currencies or commodities, the discounting mechanism of functioning market pricing serves as the early warning signal that fundamentals or policy are on the wrong track.
Today’s problems are rooted in the Fed’s decisions over the past decade. It started with the post crisis Bernanke Fed, which used monetary policy to compensate for the shortfalls of political leadership.
Instead of forcing Congress and the President to do their jobs and make tough decisions, the central bank facilitated a superficial financial market recovery allowing the elected leaders to evade their responsibilities. The same approach was followed by Chair Yellen, and now, Chairman Powell has taken it to new extremes.
The hollow path of asset inflation over the past decade drowned out the market signals identifying the need to change the policy course. It all culminates in our current predicament. The nation finds itself facing the second consecutive Presidential election where most Americans are not voting in favor of one candidate, they are simply voting against the other.
Today’s concurrent bubbles in equities and bonds is of epic proportions. We are witnessing single stock behavior on par with the most excessive extremes of 1999 and 2000, and in many cases, it is worse. A quick screen illustrates there are currently 85 US listed companies with market capitalizations in excess of $10 Billion and less than $1.5 Billion of forecasted revenues for this year. In all, that is more than $1.5 Trillion of large cap companies trading 17x sales.
The Russell 2000 only has a market capitalization of $2.2 Trillion. It was surprising to see today’s bid to the tape after last night’s performance. The stimulus chatter was laughable after witnessing last night. Who would put money to work in hopes of Washington delivering a stimulus.
A stimulus that has seen talks fail repeatedly throughout the summer. Surprisingly, today’s action was simply month end asset allocation (chart below). Bonds were sold as equities were purchased. Despite mass layoffs being announced every couple of hours, Treasury yields experienced their largest uptick in 4 weeks.
Tonight, American Airlines announced it is furloughing 19,000 workers tomorrow. Of course the futures are higher, failing to send the signal that all of the layoffs announced in the past 24 hours do not bode well for the economy.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor piece written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.
