After six positive weeks in a row, U.S. equities suffered an overdue pullback last week, driven by the high-flying tech sector. This appeared to reflect the combination of Tesla surprisingly being excluded from the latest S&P 500 Index re-balance, and revelations that a major Asian tech investor, SoftBank, had been a huge buyer of call options within the U.S. tech sector in recent weeks.
Given some of the recent surge in Tesla’s price (up 400% this year) had reflected expectations it would soon be included in the S&P 500 Index (thereby triggering forced buying by index and index-hugging fund managers), its exclusion may well take some further froth from its valuation over at least the short-term.
SoftBank’s buying also has sparked fears that the recent surge in tech prices is somewhat artificial and could be vulnerable if this buying ceased – or worse, was soon reversed.
Either way, as seen in the chart below, single U.S. stock call-buying volumes – which include large retail investor activity – have surged over recent months, perhaps helping explain why some of the largest-cap companies in the world (such as Apple, Amazon, Microsoft and Alphabet) have bobbed around like small cap stocks over recent times.
All that said, the fundamentals underpinning stocks continue to gradually improve – even though some parts of the market have likely moved too far too fast. U.S. economic data last week – including payrolls and services and manufacturing indices – continue to suggest the economy is in large part recovering nicely. And while the pace of the economic rebound could slow in the weeks/months ahead, the Fed has indicated it is prepared to provide further, unspecified, stimulus if need be – which most likely would take the form of a cap on bond yields. So far at least, new COVID-19 waves in both the U.S. and Europe have been associated with much lower death rates and pressure on hospitals – which is reducing the need to contemplate a return to harsh lockdowns.
The biggest risk for the U.S. market these days does not appear to be the economy – or even the COVID-19 – but rather a bitter and inconclusive Presidential election.
There’s little in the way of major global data this week. Of some passing interest, the U.S. CPI on Friday should show core consumer price inflation remains low and steady at around 1.6%. Funnily enough, U.S. inflation has averaged around this level for many years, without much economic detriment – which begs the question why the Fed remains so adamant it needs to be higher. If the Fed accepted a slightly lower (and arguably more realistic) inflation target, the world might not be having to learn to live with near-zero interest rates and a potentially explosive bubble in equity prices.
Last week’s highlight was of course the GDP outcome, which revealed the economy shrank by a whopping 7% in the June quarter. Of course, much of this weakness reflected the forced closure of businesses to contain COVID-19, and the associated virtual collapse in most people-facing consumer service offerings. Where consumers could spend, they did so with gusto – thanks in turn to generous fiscal and monetary support. Sadly, yesterday’s revelation that Melbourne’s harsh lockdown would be extended by two weeks – and restrictions would likely then be lifted only gradually – suggests the Q3 GDP will now likely remain quite soft.
This week we’ll get updates on both business and consumer sentiment through the NAB and Westpac/Melbourne Institute surveys on Tuesday and Wednesday respectively. These may well show improved confidence in most States – apart from, of course, Victoria.
Reflecting our smaller tech sector, lingering COVID restrictions and the stubbornly strong $A, the Australian sharemarket has tended to underperform global peers of late. Indeed, the S&P/ASX 200 recently tried and failed to break through 6,200 – the top-end of its multi-month range – and could well now test the bottom end of its range around 5,700 if the U.S. equity market pulls back further.
Have a great week!
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