July 5, 2020

The past week’s market was a good week that was followed by a pretty bad one, which was preceded by a good one, which was preceded by a bad one. In fact, the S&P 500 has advanced just 1.6% since June 2, a reflection of the compelling forces buffeting markets right now. On the negative side of the ledger, Covid-19 is still rising. On the positive side, central banks are still pumping money into their respective economies and governments are passing more fiscal stimulus bills. Positive U.S. economic signals, particularly about the labor market, and positive vaccine trials, also seemed to support sentiment as the week progressed. For the week, the Dow and S&P rose by 3.3% and 4.0% respectively, our 50/50 Nasdaq/Russell benchmark gained 4.0%, European bourses advanced either side of 3%, and Asia Pacific stock markets diverged (with the Chinese mainland advancing 3.7% while the Japanese stock market slipped 1.6%). Your BSD Global Tech Hedge Fund gained 0.2% last week. We have positioned the BSD Global Tech Hedge Fund with the expectation of more market volatility; the Fund is 87% invested across a couple dozen tech vendors and tech end-users, with a 61% short equity indice hedge that will incrementally grow if the market deteriorates. Our BSD Global Tech Hedge Fund will be protected from downside market drawdowns, but if global stock markets continue to defy the ‘actual economy’ and climb higher, we will marginally participate in those gains. We’re still up over 22% year-to-date, versus -3% for the S&P 500 and -1% for the 50/50 Nasdaq/Russell benchmark.

It’s a light week coming up for corporate earnings that will see more attention turn to economic data. Reports of interest include the global PMI prints for June, U.S. wholesale inventories, the producer price index and another update on jobless claims. Economists expect jobless claims to be unchanged from last week at about 1.4M, although there is a warning that the claims number will look better than it actually is because of seasonal factors that don’t apply this year (i.e. because of automaker shutdowns). It is a light week for Fedspeak, with just San Francisco Fed President Daly and Richmond Fed President Barkin participating in a NABE talk on the economy. On the political agenda, a trilateral summit in Washington between President Trump, Mexican President Obrador and Canadian Prime Minister Trudeau is on tap. As for stocks, investors will continue to watch COVID-19 developments and start prepping for the Q2 earnings season. While U.S. heavyweights in the $1T market cap club like Alphabet, Apple, Microsoft and Amazon might cruise along just fine, the spotlight on profits could burn brighter elsewhere with analysts forecasting earnings for S&P 500 companies to have dropped by 43.1% Y/Y.

We’ve been cautious throughout this rally, as it was artificially induced by enormous central bank stimulus, and we saw an evident disconnect between the real economy and the stock market. This stock market rally over the past 12 weeks has driven the P/E on the S&P’s forward 12-months earnings above 23X, which is a 40% premium to the average since 2000 (i.e. averaging 16.5 times). Excessive valuations don’t indicate when markets will correct, but in combination with today’s ominous technical backdrop, it’s a foreboding sign.