Wise Owl Trading

 As the market continues to rally on the back of promising vaccine results from Pfizer and Moderna, the U.S. stock market is becoming more and more overvalued! The stock market's performance has been a wild assent compared to that of its international counterparts: Despite the massive stock market growth, the U.S. has been underperforming its peers with respect to GDP growth, and that trend is expected to continue: The U.S. is projected to see real GDP growth of 3.7% in 2021, while the world economy is expected to grow 5.2% more then a slight disconnect.

Meanwhile, SPX-500 firms are trading at a nosebleed sky-high average multiple of more than 31 times earnings the highest level since the Great Recession, and even higher than levels in 1929 immediately before the Great Depression.

Without Microsoft and the six TFAANG stocks (TSLA, FB, AAPL, AMZN, NFLX, & GOOG), the SPX-500 would be roughly flat over the past several years, making the broader-market indexes highly susceptible to shifts in any of these names.

There has also been sort of a retail trading frenzy that occurred in the aftermath of the $2.2 trillion CARES Act as we have seen through increased retail platform trading volumes, and records being shattered in the number of speculative trades in the options market (especially in call-volume) all of which are a terrible sign for stock-market real fundamentals. The super seven is carrying the whole market on their back, and narrow markets are not sustainable especially in the outsized valuations of Microsoft and the six TFAANG stocks. Measured against earnings, current S&P valuations are above those around the time of the dot-com technology bubble in 2000. The SPX-500 Ex-Technology ETF, which as the name suggests comprises only the 433 non-tech stocks on the SPX-500, is down 3.3% this year, while the SPX-500 is up 11.5% (terrible divergence)...25% is nearly how much of the SPX-500 weight is represented by Microsoft and the six TFAANG firms.

Before Moderna and Pfizer's so-called phase-three vaccine announcements, Microsoft and the TFAANG stocks rallied and posted blowout earnings during the pandemic while many non-technology firms saw their earnings tank. The reinvigorated prospects of a return to pre-pandemic normalcy (like flipping a light-switch as touted on CNBC), this news prompted investors to rotate away from big-technology and into cheaper beaten down stocks, particularly those in industries that have been hardest hit by Covid-19 (such as energy, financials. Travel and entertainment all of which have seen double-digit percentage gains this past month.

 

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 Is this repeatable?    US corporate profits rebounded in the 3^rd quarter as businesses reopened more broadly and overall demand accelerated from a pandemic-induced cesspool in the first half of the year. This is of course the government’s first estimate of earnings for the period showed a record $495.3 billion annualized increase (due to massive 2.2-trillion stimulus through the Cares act) or at a 27.1% annual rate. Remember this improvement followed a 10.3% decrease in the April-June period and a 12% decline in the first quarter that was the largest since the end of 2008. The figures show both the magnitude and speed of the Covid-19 pandemic’s hit to the bottom lines of American businesses, and how firms reversed due to a surge in 3^rd quarter demand. The improvement in profits helps explain a stock market rally that saw the Dow close above 30,000 this past week as the shattered economy expanded at an unrevised 33.1% annual rate from July through September.

The report also showed for the first time that gross domestic income, which measures all income earned in the production of goods and services, increased an annualized 25.5% in the 3^rd quarter after a record 32.6% plunge in the prior three months.