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This is one of the most disconnected stock markets in history. The lesson we have learned in the past 10 years is if stocks are up and the economy looks weak, trust stocks. That might not be bad advice this time because the economy is set to receive another stimulus, interest rates are at zero, and the vaccines are being distributed. There have now been 6.25 million vaccine doses given out in America and 17.5 million worldwide.
The state with the highest percentage of citizens vaccinated is West Virginia at 4.13%. Unfortunately, the COVID-19 data still looks bad and there will be a new record total of deaths for a month in January. The 7 day average of people in the hospital is at a record high of 128,349. The 7 day average of deaths is 2,758 which is also record high. The data has normalized after the holiday.
The Russell 2000 is up over 6% in 2021 already. The only other year it rallied more than 6% in the first 4 days of the year was in 1987 when it rose 6.8%. It rallied another 23% through August 1987. However, it crashed later in the year. We could easily see a massive crash this year (not a forecast), but it’s much more likely to happen in the Nasdaq 100 than the small cap index due to high large cap growth valuations.
Small caps are spiking enormously to start the year despite the decline in the economy. As you can see from the chart above, the Oxford Economics recovery tracker index has taken a turn for the worse in the past few weeks with the Pacific underperforming. It will be interesting to see if the states with the highest vaccination rates have the quickest recoveries. It’s too soon to tell now.
Massive Crash In PUA Claims
This wasn’t a good initial unemployment claims report, but PUA claims fell by almost half. PUA claims have been very volatile. This latest decline was because 8 states reported zero (1 reported 3) PUAs because of uncertainty over the extension of these benefits. These results will be updated higher next week since the stimulus passed. Specifically, PUAs fell 149,000 to 161,000 in the week of January 2nd. This pushed total NSA claims down 6%. They only fell 6% because NSA initial claims were up 77,000 to 922,000.
Seasonally adjusted initial claims fell 3,000 to 787,000 which was below the consensus of 803,000. Given the economic weakness due to this wave of COVID-19, you can argue this wasn’t a terrible report. It all depends on your perspective. On the one hand, January will probably be the trough of this slowdown. On the other hand, initial claims this week were higher than they were at the start of October. They are 20,000 higher than the week ending October 3rd, yet somehow the S&P retail industry index is up 32.8% since October 2nd.
Continued claims fell from 5.198 million to 5.072 million in the week of December 26th. In the week of December 19th, total claims fell from 19.6 million to 19.2 million. 12.9 million people would have lost their benefits if it wasn’t for the stimulus. Does anyone really think all these people will be employed in just 11 weeks? Another stimulus will be necessary to help these people again. If we’re lucky by March this total will be a few million lower.
Who Needs Profits?
As we mentioned, there is a lot of euphoria in the Nasdaq 100 which is dominated by tech (large cap growth). You probably notice your friends and family are talking about stocks more often than usual. The names they mention are likely money losing tech firms. There is nothing that motivates interest in stocks quite like a strong bull market. The interest in FANMG stocks has petered out as investors are looking for the next big thing which is dangerous because euphoria can boost prices before we even know if the firm will be a success. If a company is priced for success, the upside is limited and the downside is large if it fails.
Now is probably one of the worst times ever to be looking for the next great tech stock. As you can see from the chart above, there is almost $1 trillion worth of IT stocks with negative earnings. That’s more than in the tech bubble of the 1990s. Growth investing isn’t bad. It’s just not a good time in the cycle to do so with rates rising so quickly. The 10 year yield is at 1.121%. That’s not exactly high, but it’s the highest level since March 2020.
Elon Musk Richest Man
Elon Musk is the richest man in the world as he is now richer than Jeff Bezos of Amazon. Usually, when these types of landmarks happen, it’s a sign speculation has gone too far. Another landmark is seen in the chart below as Tesla’s market cap surpassed Facebook’s making Tesla the 5th largest company in America behind only Alphabet, Apple, Amazon, and Microsoft.
At the peak of the 1990s tech bubble in March 2000, Cisco had a market cap of $569 billion. If you inflation adjust Cisco’s market cap to today’s dollars, the market cap peak would be $864.9 billion. That means at $836.5 billion, Tesla is closing in on Cisco’s peak. Surely this is a similar bubble regardless of whether it actually hits that level. Tesla has not only created millionaires among its shareholders, it has created decamillionaires which means some can retire with this wealth. As an aside, the crypto space has a $1 trillion market cap because overall speculation is very high.
Conclusion
The recovery is going backwards, yet small caps have gone parabolic. Initial jobless claims rose sharply on a non-seasonally adjusted basis. The labor market is stalling out because of COVID-19. There is almost $1 trillion worth of IT stocks that lose money. Those are still better investments than crypto which is also worth $1 trillion. Elon Musk is the richest person in the world and Tesla has a larger market cap than Facebook. Markets are acting in a manner not seen in decades.
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