What Should Valuations be for Tech?

Stocks continue to surge…

Enjoy this run while it is happening – and remember how good it feels for the markets to advance – because when they decide to take a breath and back off – it won’t feel as good… and we know that – because when it happens it is sure to happen quickly and decisively – just sayin’… Recall the headlines in March –

‘Markets in Crisis’

“Turmoil Tears the Dow Apart’

‘Dow Drops 3000 pts as Coronavirus Collapse Continues: Worst day since ‘87’

Specials on every TV station as the media tried to explain the turmoil – markets dove lower –while individual companies got slammed… recall how some of the biggest names on Wall St – were calling for ‘the end of the world’… (ok a bit dramatic – but you get it, right?) while the more main street analysts/market strategists were calling for calm….

Fast forward to August 2020…

The Nasdaq is now up 22% ytd… this on top of the 35% it clocked in 2019 when everyone thought it might be a bit overdone… and just fyi – the Nasdaq is just about to kiss 11,000! Remember – it began the year at 8900 – traded down to 6800 in March and has now rocketed higher since April… the media will tell you that it is all about earnings growth and financial stewardship… OK – some of it yes, but let’s not kid ourselves… the FED has fueled this fire, they have cut rates to zero, they are buying everything that is not nailed down – with the exception of equities (for now) and since you can’t make money in a savings account and the bond market is overdone as well – what do you expect? Earnings this season have blown the roof off the house – part of that as a result of lowered estimates – leaving the bar so low – it is almost impossible not to beat, but also because of how the world embraced technology in order to continue to function… I’m just sayin’ – it might be a bit stretched here… so caveat emptor.

In the end – Jim Paulsen – Chief Investment Strategists at the Leuthould Group asks:

“What valuation is warranted by a sector whose business grows faster for reasons that are less dependent on overall economic conditions, and whose members generate remarkable excess returns with superior frequency, compared to any other sector in the stock market?”

And the virus? How interesting that has turned out… I mean, in March it was the end of civilization and now in August – it appears as if the markets have completely discounted the disruption… I mean – the virus shut down the global economy forcing the world into a ‘great recession’ – Whole countries shut down – businesses forced to close – conflicting data driving the conversation – talk of disaster everywhere – nearly every asset class coming under pressure as global markets spun out of control… What were we to do? And then – we began to figure it out – The answer? Technology. Period. And then it started…

Techs keeps surging higher – immune from the coronavirus – in fact maybe even being fed by the coronavirus as people, companies, schools, universities, businesses all benefit from what technology has allowed us (and the world) to do… The ‘Stay at Home’ theme gaining traction leaving many of the more traditional sectors begging for attention. Once again – the more familiar names – think FAANG and then the newest tech darlings – think Work From Home (WFH) – continue to steal the spotlight – sending shares of this sector even further into the atmosphere – now significantly ‘stretched’ the question remains – Will this ever stop? For those of us old enough to recall – just remember the dot-com bubble and burst in ‘99/’01. And while that was about the DOT COMS – it did drag the Nasdaq down by 60% and the broader market down by 26%… Just some perspective.

The XLK – Tech sector ETF – surged 2.4%, while the WFH ETF surged by 2.8% as the story continues… and a drop in ‘new’ covid19 cases helped to keep the broader market afloat as well.  By the end of the day – the Dow added 236 pts or 0.9%, the S&P added 23 pts or 0.72%, the Nasdaq exploded higher – adding 157 pts or 1.4% and the Russell played catch up – rising 26 pts or 1.8%.

Ian Shepherdson – Chief Economist at Patheon Macroeconomics makes this statement about the role of covid19 –

“A couple of weeks ago – US cases were rising by 40 – 50% on a weekly basis. They’re now falling, not as fast as they might appear, because testing has dropped, but they are still lower and so is the rate of hospitalization.  Markets like that!” 

In addition – the macroeconomic data around the world is showing improvement as well. Manufacturing PMI’s (Purchasing Managers Indexes) all surging up and thru the neutral line at 50 – coming in at numbers that suggest strength… I mean in the US – the ISM (Institute of Supply Management) reported that the manufacturing index rose to 54.2 in July and that is up from 52.6 in June… and it was above the expectation of 53.8… and what this suggests is solid expansion… recall that 50 represents the neutral line… anything below is considered contractionary while a number north of 50 suggests expansion… and what we got yesterday from China, and the Eurozone reflects what we also got here at home. Everyone reported index numbers well above the 50 line and that reflects a strong global recovery – and that is something to celebrate. BUT – even as we celebrate that data point – let’s not lose sight of valuations and what every central bank around the world has done… Just sayin’…

Overnight – Asian stocks rallied… the RBA (Reserve Bank of Australia) kept rates unchanged – no surprise… Retail sales data for June did rise by 2.7% – better than the expectation of 2.4% and that caused investors to buy that market – sending it up 1.8% by end of day. Japan continued its rally – making up all of the losses it suffered last Friday… and then some. By end of day – the Nikkei was ahead by 1.7% – on top of yesterday’s 2.2% rise. Hong Kong also enjoying the latest rally – rising 2%. China +0.09%.

European stocks are churning… weaker earnings from some major European companies are reason for pause… Investors also keeping an eye on what the US is going to do… Will we craft another relief bill today or not? The WHO (World Health Org) cautioning the markets not to expect that ‘silver bullet’ as countries face pockets of resurgence. And while that is not good – what the market is telling the WHO – is that they don’t believe that… it fully expects new and improved treatments if not a vaccine. At 7 am – the FTSE +0.04%, CAC 40 -0.21%, DAX -0.51%, EUROSTOXX -0.13%, SPAIN +0.21% and ITALY +0.24%.

US futures are also churning in the pre-market… Dow futures are -55 pts, S&P -9 pts, the Nasdaq -36 pts and the Russell is -1 pt. Eco data today includes – Factory Orders – exp of +5%, Durable Goods of +7.3%, Ex transports of +3.3%. The debate in DC rages on – and any sign of a relief bill is still far off. Expect to hear a lot about Apple today – it is just $36 (or 8%) away from being a $2 trillion-dollar company… if nothing else – the chatter alone (or maybe all those smart Robinhood traders) could push it there… We patiently wait for Biden to announce his running mate… Trump suggesting that he wants MSFT to pay the treasury a ‘finder’s fee’ if they buy TicTok from the Chinese… and it should be a ‘very big fee’ – because without Trump – the deal wouldn’t happen… oh, boy… just something else to chew on…

Oil also continues to churn in line… at $40.33 – even with all the concerns yesterday morning oil did manage to rally 1.8% yesterday on the better than expected global PMI’s that were reported… because and expansionary global economy is good for oil… Period. Now this morning – someone is floating that surging virus story again and that continues to cause the angst… leaving some to hit the sell button and ring the register. Either way – we will hear from the API today… the market expects to hear about rising stockpiles… (Yawn!). We remain in the $35/$45 range.

Gold – continues to tease with $2000/oz… as it is in a wait and see what happens mode… the relief bill, more macro data, slowing or rising virus cases and what that means – lockdown or not… dollar weakness this morning just offering some support. Pay attention to the macro data and news out of Washington… in any event – I still would not be chasing gold here – just fyi.

The SPX kissed 3300 as expected yesterday morning… in fact it traded at 3302 before backing off to end the day at 3294. This morning – futures are pointing a bit lower in the pre-mkt, but they are not collapsing by any stretch… 3337 is the number to watch… that would close the gap created in February… Will we get there today? Most likely not – unless they talk Apple up… It feels a bit tired here… my guess is that the path of least resistance in lower and not higher… I suspect it will try to test 3300 again but it will not succeed. Again – stick to the plan, talk to your advisor and stay awake.

Take good care –

Kp


salmon

Salmon in a Lemon Dill Sauce 

Here is a great Salmon Filet dish. It is easy to make, and you can eat it either right out of the oven or serve it room temp at a Sunday brunch…

For this you need:

1 ½ cup of mayo, ½ c prepared mustard – not yellow preferably a brown mustard, I tsp lemon juice, 2 tsps prepared horseradish, 2 cloves garlic, ¼ cup Fresh dill – must be fresh, S&P to taste, 2-pound salmon fillet.

Start by seasoning the filet with s&p. Set aside.

In a bowl, combine the mayo, mustard, lemon, horseradish, garlic, salt and pepper to taste and dill. Spread the dill/mayo sauce on the flesh side of the fish. Bake skin side down in a 350 oven for around 15 minutes or so – or until it reaches your desired wellness.

Buon Appetito.

You May Also Be Interested In:

Kenny Polcari

Kenny is the editor of Morning Thoughts and has been with Seven Figure Publishing since 2019.

Kenny is a CNBC exclusive contributor appearing on shows like The Halftime Report, Power Lunch, and Closing Bell. His market commentary has reached audiences across the nation on media outlets such as Bloomberg, Fox, ABC, and more.

Kenny’s...

View More By Kenny Polcari

LEARN TO TRADE LIKE A PRO WITH THE SEVEN FIGURE PODCAST! [CLICK HERE]