Coming Off The Boil?
Summary
- The tech-heavy NASDAQ index has lost lift relative to the older-economy Dow Jones Industrial Average since April 21.
- Other recent risk-market leaders are also showing weakness.
- The risk rally has had one hell of a run, but if "reopening" mania is finally coming off the boil, we should have another good opportunity to add some Treasuries.
A handful of the world's most expensive tech companies helped pushed US stock indices to record-high valuations this spring. However, as shown here since 1986 (courtesy of my partner Cory Venable), the tech-heavy NASDAQ index has lost lift relative to the older-economy Dow Jones Industrial Average since April 21, and a similar leadership reversal marked the secular market top in the spring of 2000.
Other recent risk-market leaders are also showing weakness. Bitcoin's so far down just 10% from its April 15th high. But as shown below in red, the 7-month-old SPAC ETF is abruptly -40% from mid-February. Here, we can see that the NASDAQ index (in blue) rolled over with SPACs to the end of March, double-topped to April 21, and has faltered again since.
To be sure, inflation mania has revived some aggressive commodity speculation over the past year, but with the CRB Index (below since 2004) already having doubled amid government-subsidized consumption, a good deal of future demand has surely been spent.
Treasury yields are, so far, not buying the hype. As shown below since 1998, after bouncing to 1.776 percent on March 30, 2021, the US ten-year yield closed on April 30th at 1.64. It's 1.559 this afternoon.
Canadian Treasury yields are sporting a similar trend, having peaked at 1.68% on March 18, 2021, and closing April (below) at 1.56%; today, they're back at 1.50.
The risk rally has had one hell of a run, but if "reopening" mania is finally coming off the boil, we should have another good opportunity to add some Treasuries. A little more time will tell.
Disclosure: No positions.
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Comments (7)
In a constantly changing economic and technologically innovative world, equity related assets don't necessarily have to decline significantly ( on an annual basis ) in order to "reset" back to some arbitrary valuation level. History shows that prices may in fact "consolidate" a recent string of positive double digit years, by declining a modest amount ( such as the minus -3.8% in 2018, minus -1.8% in 2011, minus -3.2% in 1994, etc. ) or even produce a modest positive return for the year ( 1977, 1986, 2005 ).For "accumulation" stage investing, a portfolio of companies representative of "water related" industries ( as "proxy" for an allocation of duration assets ), small cap value, and large cap "non financial growth ( Nasdaq 100 / QQQ ) has produced excess returns above benchmark since 1986 ( inception of NDX ) https://tinyurl.com/c39hr65k The water industry stocks have tended to "negatively correlate" to movements of the other two equity asset classes, a feature similar to that which duration assets have provided. Small cap value has robust evidence of producing "highest" excess returns of all equity factors, and the Nasadq 100 also has a proven, 35 year track record of performance.A decent, simple arithmetic and data driven method towards identifying periods when the odds of equity assets having produced a "significant" decline were high, has involved the use of a simple observation of the SP500 price in relation to its "moving average", and where this lies within the continuum of the four year "Presidential term".Using a measurement of market returns starting from the month of July, since 1933, some of the most negative 12 month market returns have been "July through June" periods commencing within "first" years of Presidential terms - this when the market "trend" was negative ( applying the SP price / moving average mentioned, ( Table 2 https://tinyurl.com/yyf48e4q )). Conversely, July through June periods commencing within "2nd" years of Presidential terms have produced some of the best forward 12 month returns ( Table 4 ). With this strategy, the "holding" of equity assets ( "offensive" portfolio allocation ) occurred over 85% of the 90 year historical sample, and the periods identified as "high risk" ( "defensive" allocation periods ) occurred 15% of the time ( Table 7 ).At present, the SP 500 price resides "above" it's monthly basis moving average. So, with less than two months to go, a positive SP500 / moving average relationship into June 30th seems likely. And, as strategy conditions describe in the study, if the moving average configuration has been positive in June 30th of the 1st Presidential year, the market in the second and third Presidential term years, has a significant chance of producing positive returns also ( see Appendix, Table 1 ).This table https://imgur.com/a/tYPOcnL provides a perspective on past three year returns of the SP500 and the portfolio of 3 asset classes mentioned when incorporating the strategy, with the 3rd Presidential term year June 30th market trend being "positive", these periods occurring over a variety of economic and geopolitical environments, inflation levels, Presidential administrations, etc.
