This morning we were greeted with two pieces of grim news, sadly related. Many of us were in our customary places at 8:30 EST on the first Friday of the month. That is the usual release time for the highly anticipated monthly employment numbers. Investors are usually fearful of any disappointment in either the non-farm payroll or unemployment numbers. Expectations were for a tepid improvement in the payrolls data, with a consensus of a 50,000 increase. Those were dashed when the report showed a loss of 140,000 jobs. The unemployment rate was unchanged from last month at 6.7%, slightly better than the 6.8% expectation. (Remember, the two statistics are calculated with different methodologies, so they can and do differ). While we were digesting those statistics, we also had to reckon with reports of a daily US Covid death toll crossing 4,000 for the first time yesterday. Both should be highly sobering numbers. Yet markets continued their rallies.
This should come as no surprise to faithful readers. We have been stating that markets have been putting a bullish spin on news whenever they can (see below). For better or worse, the increasing Covid death rate has been mere background noise for investors for several months now. Many more people in the US die each day than did on 9/11, a tragedy that staggered the US for years. But worsening coronavirus means a greater likelihood of fiscal stimulus or a Federal Reserve that is less likely to tighten, right?
The disappointment in the payroll numbers was indeed eye-popping, though the drop is indeed less dramatic than it appears on the surface. There are revisions to prior results that receive less fanfare than the headline numbers. While the December figure missed its mark by 190,000, the two-month payroll net revision was a positive 135,000. That means that we only missed the estimate by 65,000 payrolls. That’s not so much, right? Also, average hourly earnings were significantly higher than expected, coming in at a 0.8% jump against a 0.2% consensus. More money in workers’ pockets is indeed welcome news to equity markets, though not to fixed-income investors. Treasury yields continued their recent advance, displeased by the signs of inflation that erode their returns.
As usual, Tesla (TSLA) and Bitcoin remained the stars of the show. As I write this, the bulk of today’s rise in the S&P 500 Index (SPX) can be attributed to TSLA’s 8% gain. For the second day in a row the stock rose on news of an analyst upgrade. Never mind that the upgrades were made by analysts who had underperform ratings on the shares for years, meaning that markets had ignored their analysis for an extended period of time. Their chastened, tepid upgrades now fit the market’s narrative, which made them fresh justification for an 11th up day in a row.
My son asked me a very relevant question today. With the combined market capitalizations of Bitcoin and TSLA crossing $1.5 trillion today, and with both having doubled in value over the past 2-3 months, doesn’t that create a bit of a bubble risk – especially when the rises were more the result of investor fervor than fundamental changes to either asset? The short answer is yes. Over $750 billion of value has been created in just two assets in a remarkably short period of time, with much of the leg fueled by giddy, newly-minted investors. Parabolic moves usually come to a nasty, unpredictable end. But timing that result is nearly impossible, and the catalyst is often something trivial. Bitcoin investors saw this movie in 2017-2018, when the cryptocurrency had a parabolic rise and a subsequent drop of nearly 75%. TSLA investors, however, have seen some large price swings but never a drop like that of bitcoin in 2018. Perhaps they benefit from Mr. Musk being a more charismatic booster than anyone in the crypto realm, and of course there is a tangible product. But the stock is now up tenfold in just over a year. That is a remarkably difficult pace to sustain, even for the best of companies.
There is an old saying, dance while the music is playing. For equity investors, the band is going strong, and there is a festival atmosphere in much of the arena. The problem of course is that the dance floor tends to get very crowded, and you get no warning before the music stops. If you choose to join the euphoria, please remember that risk management gets more critical in giddy markets – not less.
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