Q&A with Blaine: 2020 Market Mid-Year Review

Last week we hosted a 2020 Mid-Year Market Review with Blaine Rollins, CFA, author of our popular 361 Weekly Research Briefing. We had several interesting questions come in from attendees so we thought we would use this week’s blog to share Blaine’s responses.

If you would like to listen to the entire webcast, you can access the replay here.

Question: The market seemingly has not priced in the potential economic impact of the virus. Would you say the market has reacted to the stimulus package in the short term? And, is that why the market has not priced it in the way people think that it should have?

Blaine: If you look at these two charts, they will help explain what is going on with this big disconnect between the stock market going up and the economy still hurting. Everyone wants to know why is this happening? It seems like the stock market should be crashing because many people are still in pain, with 17 to 20 million sitting on the sidelines and not going to work every day. But this comes down to the Treasury and the Fed pouring liquidity and creating money. That leads to, as this chart shows, the money going up, then the economy up, followed by stocks up.

GDP Growth

Source: Deutsche Bank Research

That is what is happening now and it is good because we are still hurting. Someday we will have to put the genie back in the bottle to help pay for a lot of this and that will be a more difficult scenario, but right now it’s good that we have the opportunity to keep things very liquid. We are cranking up the money and we are going to crank up the GDP.

The next chart shows how this is not just a U.S. phenomenon, this is happening around the globe. Even last week, Europe announced a $2 trillion dollar stimulus package for the EU, and it’s been occurring in Asian countries as well. Here again, you turn the money up and typically that is very good for stocks simply because there is a lot of liquidity and a lot of money that is going to be chasing assets.

Money Supply
Source: Macrobond and Nordea

Question: Beyond this year, how does this kind of soaring deficit impact markets down the road?

Blaine: When you keep just printing money, the money is worth less and less. So, at some point the dollar is going to be worth less. We are currently seeing the dollar breaking down. This is somewhat reflective of the fact that the U.S. is doing more to bail out the economy than other countries are doing. As the dollar goes down, that is inflationary. So, we are going to pay for it at some point in the form of inflation and higher interest rates. Unless someday we can somehow shrink the money supply and have the Fed remove some of that liquidity from the selling of all these bonds that they are buying in the market to keep the credit markets operating and stable and very healthy for us to operate on a day-to-day basis right now.

Treasury and Fed
Source: WSJ / @TheDailyShot

Question: How similar or dissimilar is this period to the last tech wave (vis-à-vis valuations, sustainability, etc.)? Also, what are your thoughts around the top 15 stocks driving a huge portion of the returns right now?

Blaine: The difference between now and 1999-2000 is that the technology stocks have earnings now. Twenty years ago, we did not have earnings. Instead we had massive revenue growth and massive upside potential, but we did not have earnings. With that said, the FAANG earnings (the biggest five stocks) have doubled over six years but the stocks are up five-fold in six years.

Mega-Cap US Stocks
Source: @Gavekal

So, a little bit different this time since these companies are generating significant earnings and cash flow but, they can still get significantly overvalued just like they did 20 years ago. It is just different. This time they are making money and they are also much larger. That is not to say I dislike these big technology companies. But on the margin, where are you going to hit your next home run? It is not going to be in one of these big technology stocks versus the world of stocks that are trading at a fraction of these multiples.

This chart below shows the top 10 stocks that are producing a large portion of the returns this year. They have thirty multiples versus the smallest market caps in the S&P 500 Index, which have one-third of those multiples by every measure. The companies at the top have gone up by so much in all measurements; the price-of-sale, price-of-cash-flow, price-of-book. This is starting to get into the silly category. At what point do the top 10 S&P 500 stocks start to buy the bottom 100 companies in the S&P 500?

S&P 500 Median Results
Source: @hkuppy

Last week the big four market caps passed the entire capitalization of the Japanese stock market (see chart below). Japan is a big country, it has a lot of people so is it worth less than Apple, Microsoft, Amazon, and Google? It is interesting to observe.

FAANG and Japan
Source: Bloomberg and @DavidInglesTV

If you want to hear more, we encourage you to view the full webcast for more insights from Blaine including a rapid fire Q&A section that starts around the 64 minute mark in the webcast.

Hear more in latest webcast, 2020 Mid-Year Review with Blaine Rollins, CFA >