Marius Paun | London, UK | Senior dealer | Thursday, 11th June 2020
Last week the tech dominated Nasdaq 100 has become the first major US stock index to reach an all-time record high after the abrupt selloff due to coronavirus. It continued its rally during the current week closing above 10,000 for the first time ever and yesterday touched 10,156. Even the most pessimist investors had to acknowledge the impressive rally – more than 40% since the lows of March.
In comparison, while Nasdaq is now up more than 10% for the year, the Dow and the S&P are yet to reach break-even. Probably the first reason for the surge is the health issue. Most of the countries reported a drop in infections as well as casualty rates and are underway of reopening their economies. From that point of view, it appears the worst is over. Surely, the world does not have a vaccine yet, and if history is anything to go by (Spanish flu a case in point) a second wave cannot be discarded, but for now things are getting better.
The second driver is the economic one which is still open for debate. The reports are still showing some weak numbers but investors seem to care more about the actual data versus expectations, rather than the numbers themselves. Some upside surprises definitely helped in heightening optimism after the lockdown measures were eased. Last week’s US employment report showed 2.5 million job gains vs predictions for over 8 million job loss. Earlier in the week MBA Mortgage Applications report indicated Composite Index up 9.3% with Purchases up 5% and Refinance up 11%. The low interest rates are a big helper, especially when it comes to housing.
On top of that there are trillions in fiscal and monetary stimulus that has already been released and talks of an additional stimulus package potentially in the pipeline. As these measures are dwarfing the intervention of 2008 financial crisis, the traditional saying ‘don’t fight the Fed’ was truly taken to another level … don’t fight the Fed let alone the Fed and the Treasury?
But the primary reason for Nasdaq 100 reaching all-time high lies is in its constituents. The lion share of the recovery has been driven by Facebook, Apple, Amazon, Google, Microsoft and Netflix, stocks that were already the markets darlings. Some of them, like Amazon and Netflix, were actually obvious beneficiaries of lockdown. Others big techs companies (Google, Facebook) were simply not disadvantaged as hard as other stocks.
A weaker US dollar undoubtedly boosted the rally back in stocks as well as contributing to the return of risk-taking attitudes. Reuters reported the greenback is ‘down 6.6% against a basket of currencies from a three year high in late March, the sharpest drop in about 2 years.
Last but not least, the Fed just gave investors last night more reason to be cheerful. At the FOMC meeting Chair Jerome Powell said they will keep interest rates near zero through 2022. If some investors thought the excellent non-farm payrolls data might just weaken the Fed’s commitment to ease the monetary policy, they were left disappointed: ‘We’re not even thinking about raising rates. We’re strongly committed to using out tools to do whatever we can for as long as it takes’.
And now the very interesting bit. Powell was asked about potential bubbles and capital misallocation. And he argued the Fed would not hold back from stimulus simply because there were concerns assets were rising too fast, ‘we’re supposed to pursue maximum employment and stable prices’. So put another way, they can accept bubbles as a side effect as long as the rising of asset prices is done in an orderly, ‘stable’ fashion?
There are however risks on the horizon, the reignition of US-China trade dispute, Europe not doing enough to address its bear market and the dreaded second wave which could prove a big dampener for some industries.
What’s more V shaped than this chart?
It shows the low of 6632 on 23rd of March followed by an incredible rally to over 10,000 this week. Even more impressively, as it made fresh all-time highs, technically, Nasdaq is not in a bear market rally anymore but rather it has resumed its long-term bull run. The short moving averages crossed above the long-term moving averages on 30th March (not bad for a signal) and is now still pointing upwards. The current price remains above both indicators.
Bulls are clearly in control even allowing for today’s retracement. They will be looking to move back above 10,000 mark. On the downside, bears will have in mind support around 9750, the previous record high. If that will be retested successfully, a stronger support could be found at the 9500-9550 handle.