Below we explain the case for rising markets despite a tanking economy.
In particular, we shed light on the case/argument that such a “decoupling” between the real economy and the equity markets is due to rational market pricing and tech-based leadership.
As you may guess, I’m not buying this view, and dive deeper as to why below.
The Great Question: Is There a Rational Defense for Rising Markets?
The short answer is simple: No.
At Signals Matter, we’ve written a long list of data-confirmed reports detailing the now undeniable disconnect between the stock market and the core principals of genuine capitalism, traditional valuation metrics and, of course, the real economy.
We don’t see anything rational, safe or “normal” about these rising markets.
Toward this end, we’ve also shown: 1) the direct correlation between Fed Support and a “doped stocked market,” 2) the skewed data that masquerades as profits and earnings, 3) the sickening power of stock-buy-backs to skew earnings-per-share data and 4) even legally-sanctioned but openly fraudulent accounting tricks used by the CIO’s and the sell-side to distort genuine earnings reporting.
In short, as Wall Street insiders, Tom and I know how the game is both played and rigged, and have been less than shy in revealing the otherwise cleverly hidden tricks behind this game as bluntly as possible to those who make their livings outside of the market playing field.
Indeed, this was the very reason we formed Signals Matter: To bluntly share inside insights with those otherwise outside of this increasingly distorted financial world.
We’ve also been less than shy in our open criticism of how the financial media is less than exceptional when it comes to transparent reporting on the key issues and risks that lurk beneath the surface of the daily price swings and macro realities which impact your portfolios and financial future.
As always, we endeavor to reveal such themes based upon data rather than just bemused opinions so that readers can make their own common-sense assessments, conclusions and financial plans.
And when it comes to the issue of a “fairly priced or resilient stock market,” the data is simply dispositive and clear: The currently rising markets are more of a casino than a platform for clear and rational price discovery.
Or to be even more blunt: The rising markets are not reality.
But law school taught me to look at both sides of any debate or fact pattern, and humor as well as a natural cynicism has equally taught me to laugh at just about every published apology or defense for any claim that these post-Greenspan, Twilight Zone markets are in fact rational or easily explained.
Giving a Voice to the Market Apologists
Recently, for example, Barry Ritholz of Bloomberg Media gave an impressive defense for the notion that the current and rising markets are not in fact “decoupled from reality.”
Let’s give him a fair hearing, shall we?
Ritholz recognizes, for example, that at first glance there seems to be good reason to question how rising markets could be on a tear in the backdrop of an economic recession, a global pandemic, horrific GDP levels, millions of unemployed workers and daily bankruptcy headlines, with Lord & Taylor being just one among many recently added to this sad list.
Furthermore, Ritholz admits from the onset that the stock market is not the same thing as the economy (kudos for that).
In essence, Ritholz’ core argument (and defense for the S&P and rising markets) boils down to this: The stock market is a reflection of just a select key players/industries and is in fact indifferent to the real economy.
He even offers some compelling evidence to support his case for the rising markets, as any good defense lawyer might.
For example, Ritholz reveals (accurately) how the most visible (and vulnerable) industries getting crushed today are in fact only a small component (based upon market cap weight) of US stock exchanges like the S&P.
As a result, when these industries tank (as they are today), this has little impact on the over-all direction of rising markets.
Ritholz observed that the “30 most economically damaged industry categories could be delisted before tomorrow’s market open and it would hardly shave more than a few percentage points off the S&P 500.”
Nor does the relative decline in the US Economy vs the European growth data scare Ritholz or these rising markets, as he correctly reminds readers that overseas strength is actually a plus for the S&P, given that half of the revenue of the S&P’s leading companies is derived from overseas customers.
Again, all fair and good points.
Will Tech Save US?
Mostly, Ritholz’ defense for the rising markets current defiance and disregard for economic disaster rests upon his faith in the FAANGs (along with Microsoft).
The lockdown, he argues, has been more of a sales and profits tailwind than a headwind for names like FB, Amazon, Apple, Netflix and Google.
This too would explain why the NASDAQ Composite 100 Index is up more than 25% this year, as it is composed mostly of big tech names.
And big tech, Ritholz basically argues, is all these rising markets need.
In fact, Ritholz argues that even with 450 of the 500 companies listed on the S&P 500 doing terribly, this too does not impact rising markets, so long as the remaining 50 highest weighted (and mostly tech-based) companies continue to shine during this obvious market storm.
In short, even with department stores tanking by 62%, airlines down 55%, travel services down 50%, resorts and casino’s down 45% and just about every other leading (and non-tech) sector down by 30% to 40%, none of these harsh facts impact rising markets.
Because taken as a whole, these sectors hold a relatively small percentage weight in terms of market cap weightings. That is, their portion of the market pie is basically a sliver not a slice.
In short, they are just “little guys” and the rising market, as shown above, is driven by the “big tech boys” and four key industry groups in particular, namely internet content, software infrastructure, consumer electronics and internet retailers.
Combined, these “saviors of the S&P” make up $8 trillion in market value, or nearly 25% of the total $35 trillion US stock market value.
Hallelujah for the big boys, right?
The Prosecution Speaks
I’d argue that Ritholz’ very argument is the key to its own weakness and runs the risk of giving readers a false sense of safety.
First, to rely upon a concentrated grouping of industries as a “salvation” is in insult to both risk management (i.e. concentration risk) and market history.
I would remind Mr. Ritholz that a similar argument in favor of “tech salvation” was made just before the dot.com bubble of 2000 blew to shreds, a delusional time when faith in names like Cisco, Yahoo, Microsoft and Juniper were heralded as “bullet proof” leaders of an unsinkable market.
But those very leaders soon tanked in value by greater than 50% when the real economy sank deeper into a recession in 2000.
For more on the blind (and dangerous) faith in tech names, please read my 2019 report here; or better yet, just re-read the cash-flow statements (i.e. debt covenants) of the 50 stocks which Ritholz actually thinks will save us.
Far more importantly, Mr. Ritholz should have taken a moment as well to fact-check basic macro realities like debt, central bank balance sheets and even basic recessionary forces, for they do in fact impact stock markets, regardless of his faith in “strong industries” like big tech.
In short, when (not if) even the big boys of the S&P see a sharp decline in price, the S&P, based on the very concentrated nature of its market cap weightings, is in fact more dangerous, rather than safe, than Ritholz would otherwise have readers believe.
He seems to think that because those names are strong today, they can never disappoint and shock you tomorrow. That is a very dangerous assumption for any who have traded through market cycles and market bubbles.
And as for the rest of you, always read the financial media with your own dose of skepticism, as their “be calm, carry on” message may be comforting (and market supporting), but this doesn’t make it accurate.
Such de-contextualized pride (and misinformation) often commeth just before the fall.
In short, stick with market signals rather market journalists, and facts over clever opinions. Or perhaps best of all, stick with us and our hundreds of market-signaling tools by signing up here.
Matt & Tom