The two underpinnings of this rally — the Trump Rally, and the Reflation Trade — are both very much intact. » Read More
Oil is likely to remain in the low $50s for the rest of the year. » Read More
Stocks rallied this morning as President Trump, meeting with retail CEOs at the White House. » Read More
The major indices opened at record highs yet again on Monday, with cyclicals like Financials, Industrials, and Materials all leading. The Dow Industrials have moved about 270 points or 1.3 percent since Thursday morning, when President Trump said he would have more news on a tax cut in the next few weeks. House Speaker Paul Ryan already said that no action would be forthcoming before spring at the earliest, but no matter. Just word that the president might have something soon is sending markets higher.
The S&P 500, the main index watched by professionals, topped $20 trillion in value for the first time this morning. The S&P 500 is the 500 largest stocks in the U.S., but there's about 4,000 companies that are actively traded. The Russell 3000, which is the largest 3,000 stocks that trade, has a market value of about $25 trillion. So the top 500 stocks have a value of about $20 trillion, and the remaining 2,500 have a value of only about $5 trillion more.
That tells you that the biggest stocks really are getting bigger.
Why is that? Partly, it is the triumph of indexing. The three largest ETFs that track the S&P 500—the SPDR S&P 500 (SPY), iShares Core S&P 500 (IVV), and Vanguard S&P 500 (VOO), collectively have about $358 billion in assets under management, about 14 percentof the $2.5 trillion in assets for the entire ETF industry. Because it's easy to push money into indexes, and the S&P 500 is the most well-known index, the big keep getting bigger.
After today, any lingering doubts about what moves the market—namely, talk of tax reform—should be laid to rest.
The S&P 500 Index moved almost 8 points in the hour after President Donald Trumpsaid he would have the outlines of a tax reform package in a couple weeks. In particular, bank stocks moved because bond yields rose.
The small-cap Russell 2000, which has been underperforming since mid-December, also rallied. Small companies would be among the biggest beneficiaries of a tax cut.
Never mind that House Speaker Paul Ryan indicated that Obamacare would be a priority, and that tax reform wouldn't come until the spring at the earliest.
"It's just the way the budget works that we won't be able to get the ability to write our tax reform bill until our spring budget passes, and then we write that through the summer," Ryan said last week. He added that an infrastructure package "comes out of our spring budget, as well."
Never mind all that! The president said we will have more on tax reform—very soon.
The most hotly debated issue on trading desks right now is the mini-rally in bonds and bond funds we have been seeing in the past few days. What's behind it?
Likely, not too much. At least not yet.
Here's what traders have focused on:
1). A modest uptick in prices in bonds and bond ETFs in the last several days, but particularly in Treasury ETFs. Other bond ETFs like iShares Investment Grade and iShares Core Aggregate, the largest bond ETF, have also seen modest price hikes. Volumes have not been particularly strong until Wednesday, when many bond ETFs saw heavy inflows.
2). Bond ETFs were also well-represented in January fund inflows. Not surprisingly, plain-vanilla stock ETFs like the Vanguard S&P 500 Index saw inflows, but surprisingly bond funds like Vanguard Intermediate Term Corporate, Vanguard Short-Term Bond and iShares Investment Grade Corporate all saw notable inflows.
What's going on? First, regarding the recent rally, the rise in prices has been pretty modest, and the volumes (other than Wednesday's) have been small. There has been no countervailing move in stocks. What fits with these facts? Seems to me that some modest short covering is the answer. We do know that traders heavily shorted bonds after the election and maintained those shorts. Modest covering could easily account for the price rise, and the fact that stocks have not reacted.
Second, it's perfectly reasonable to assume that some investors surveyed the landscape after the first of the year and came to a simple conclusion: Interest rates have already risen, but they are unlikely to go through the roof.
"My hunch is that there is no panic that 10-year yields are going to 4 percent anytime soon," said Dave Nadig, CEO of ETF.com. "There's also the added yield play. Investors can see that they are getting 70 basis points more yield than they were getting in October."
Wall Street traders have notoriously short attention spans, and it's showing in the latest round of whining, this time around the idea that the Donald Trump "reflation trade" is winding down.
It goes like this:
Here's a typical example of this kind of concern, coming from Cannacord Genuity: "Should February fail to bring a market pullback, we believe the odds of a bigger correction this spring will mount as the valuation of cyclical stocks prematurely overshoots."
The firm cited high investor complacency, a widening in credit spreads (particularly in Europe due to anti-globalism political developments), and another drop in China's foreign currency reserves, despite various capital controls. They argue that "the 'reflation trade' is tiring" and are neutral on stocks.
Really? It doesn't show up in the markets. A lot of people are confusing short-term trends with intermediate and longer-term trends.
It's true there has been some modest weakness this month. Crude is down. Bond yields are down. This has put some pressure on energy and bank stocks.
The German stock market closed today at its lowest level of the year. That may sound surprising, given that that the European economy is showing clear signs of improvement. ECB Chief Mario Draghi said the European recovery was "resilient." The Eurozone PMI rose to its highest level in 69 months.
Yet there it was: The German DAX down 1.2% to a new low for the year, with the rest of Europe down as well.
What gives? It's obvious that political fears are trumping economic optimism.
Now they are beginning to realize that they could be wrong on the direction of European politics, and they are trying not to get surprised again.
No one is laughing anymore at the populist candidates who have been making provocative statements for years.
No one is laughing anymore when Marine Le Pen, the leader of France's populist National Front party and one of the front-runners in the upcoming French election, says she will pull France out of the eurozone.
If they leave, what does it do to the eurozone experiment? That is a clear negative for bond prices. Right now, sovereign debt is priced with an implicit backstop from the ECB. But under Le Pen's plan, the French government would be the sole backstop, with a bunch of Socialists in charge! How would you price the credit spread? I bet you'd cut the price of French bonds.
Snap has investors hoping that the IPO market may finally be taking off, after a virtually lost year in 2016.
One small detail in the announcement caught my eye. What's amazing to me is that this may be the largest IPO since Alibaba — with an estimated market capitalization between $20 and $25 billion — and it has only 1,859 employees.
That may seem like a lot of people, but compared to other companies with a similar market cap, it's pretty small.
Employment at companies with market cap between $20 billion and $25 billion
If you want to narrow the focus to just technology companies with a similar market cap, there is still far greater levels of employment among what could be called "old tech:"
Employment at technology companies with market cap between $20 billion and $26 billion
It's easy to understand why a company like Snap employs fewer people: the nature of most new software/social media companies is that they don't need that many people.
My point? These companies — the software companies of the future — may be great engagers and they may have a great business model, but they are not going to be employing vast numbers of people.
Of course, Snap is still growing. They only had roughly 600 employees the year before. So getting to 1,859 was quite a feat and they will undoubtedly add more.
But not that much more. They are unlikely to ever have the 31,000 people Micron has.
"If the goal is job growth, it's not going to be coming from these companies. They just don't need that many people," Cindi Profaca from IPOfinancial.com said.
Fewer employees, of course, means higher productivity, and that's one of the reasons these companies are so attractive to investors.
"That's why there is such high multiples for these software companies. The profit margins are really high because they can scale very easily without adding that many employees," Kathleen Smith from Renaissance Capital said.
Let's hope Snap finally puts the IPO market into high gear. President Donald Trump's emphasis on cutting regulations is music to the ears of those in the small-cap universe that makes up most IPOs.
Just don't expect many of these companies to move the needle on the jobs report.
America's largest banks are to propose a complete overhaul of how financial institutions investigate and report potential criminal activity.
It's the "Buffett Effect": Berkshire Hathaway has nearly quadrupled its Apple stake. USA Today reports.
Active managers have been taking a beating through the bull market, and Munger thinks the pain isn't going to stop soon.