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A Few Pertinent Thoughts

By:

Chief Strategist at Interactive Brokers

  • Amazon’s (AMZN) market capitalization increased by about $100 billion yesterday, based primarily on positive comments by two Wall Street analysts.  Not much changed about the company, other than that two price targets were raised.  To put things into perspective, AstraZeneca, which was lower yesterday despite positive vaccine news, has a market capitalization of $155 billion.
  • Market leadership is getting increasingly narrow and indices are becoming increasingly concentrated.  Despite yesterday’s rally, the equal-weighted S&P 500 index (SPW) was -0.5%.   The top 5 companies – Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), Alphabet (GOOG/GOOGL) comprise about 22.5% of the S&P 500 (SPX) and about 45% of the NASDAQ 100 (NDX).  The good thing is that as long as those stocks keep rallying, it drives the indices higher.  But what happens if investors’ mood changes?  These stocks will all be tested in the coming days as they release earnings.  This is not a trivial risk.  They are priced to perfection and will need to deliver.
  • Ask yourself, what makes AAPL worth nearly twice what it was at this time last year?  What makes MSFT and AMZN worth about 50% more?  Much of the rally is simply the result of valuation expansion, when prices rise faster than earnings.   Investors are paying an enormous premium for the seeming certainty provided by the winners.
  • How will markets deal with the fiscal cliff?  It seems certain that Congress will do something, but how much?  Right now, the two parties are far apart, with one proposing about $1 trillion and the other proposing about $3 trillion.  That is a huge gap to bridge.  In the meantime, we have about 20 million people whose “salary” consists of a $600 per week check from the Federal government who are about to be “laid off”.  What will that do to consumer spending until this situation is resolved, or if benefits are cut substantially?
  • The Federal Reserve remains vigilant, but they are no longer actively increasing their balance sheet.  If this rally is reliant upon continued monetary stimulus, it does not appear as though more is imminent unless circumstances become dire once again.
  • Between zero commissions and fractional shares, it’s never been easier to be invested.   Overall, that is a very good thing.  But the immediate concern is that if everyone who might invest is now already doing so, where will fresh money come from?   The old adage is that bull markets end in euphoria.  Have we reached that phase?
Disclosure: Interactive Brokers

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