Stocks are crypto, man. Well, that was a shock of recognition, but yesterday, after Powell started speaking, I belatedly made that realization. The U.S stock market is moving entirely on sentiment and fundamentals are being discarded. It's not good, it's not bad, it is what it is. The problem we market old-heads have with cryptocurrencies is that there is no intrinsic value. They are only worth what the market thinks they are worth. Well, in the short-term, so are stocks, and today's move in the Nasdaq is proof of that.
In the longer-term, dividend yields and earnings yields (the inverse of P/E) do matter. Well, according to multpl.com, the current S&P 500 dividend yield is 1.47%, now approaching the all-time low yield of 1.11% reached in August 2000. Also, according to multpl.com, the S&P 500's trailing P/E ratio of 40.26 is clearly a cycle-high. Excluding the massive P/E spike caused by the 2008 crash, the S&P's trailing P/E ratio has only exceeded 40 one other time in history. Again, that was the summer of 2000. The fundamentals are telling you there is no "there there" for this market, and you had better cling to positive sentiment if you want to be long stocks.
I was intrigued to read RM founder Jim Cramer's column yesterday that lamented the current linkage between the bond market and the Nasdaq. In case you missed it, the long-end of the U.S Treasury market is crashing again today, with the yield on the 10-year exceeding 1.75% before pulling back slightly.
But watching that yield on a tick-by-tick basis is a mistake in and of itself, and I believe that was Jim's key point. I was walking through Manhattan yesterday, and saying "if this thing goes through 95 it's Katie bar the door for the Nasdaq." Sure enough, Bloomberg has the 10-year price (as opposed to the yield) quoted at 94.47 as of this writing, and the Nasdaq is getting clobbered. But, as I mentioned in previous RM columns, that's not even the price of a real bond, just one synthetically created so that there are always 10-years left until maturity. So, no bond trader is saying "dammit, I am drawing a line in the sand" at X, Y or Z price. There are too many individual bonds, and the bond math is too easily calculated in these days of AI.
It is advisable to focus on the trends in the bond market, and realize that, in the short term anyway, prices are much more important than yields. Sure, in the longer-term, the interest rate on the 10-year U.S. Treasury note controls the loan rate for cars, houses, b-to-b loans and so much more, so that is incredibly relevant. In the short term, though, bondholders are losing "a lot" in a world where 2%-3% moves are huge, especially when leverage is added to the mix, and you must be aware. Any market crashing anywhere should be on your radar screen, and the U.S. bond market is crashing.
A quick look at SIFMA's page shows why. In February alone, the Treasury issued $342.6 billion of notes, along with $1.68 trillion of bills and $64 billion of bonds. The market is telling you that is too much. I have no idea who thinks it is a good idea to continue to spend so much more than the government takes in, but I am certainly not that person.
The bond market is working efficiently. It is being repriced to a level at which the gross oversupply can find some demand. If you have ever sold anything in your life, you know how that works... you lower the price. The collateral damage here is that the price of the Nasdaq is being lowered... and watch out for that to continue.
Take some profits on your high-flyers here before they become low-flyers. Banks benefit from a steepening yield curve. While no one would confuse Jamie Dimon (JMP) with Elon Musk (TSLA) , portfolio balancing means that you should have as many companies in your portfolio run by hard-core, bottom-line executors as you do companies run by Boy Wonders in your portfolio.
Be careful here. Don't forget about balance and don't forget that the machines will always change equity positioning faster than you ever could. The bond market never forgets.