Weekly Market Comment August 28 2020

“The trick is to enjoy life. Don’t wish away your days, waiting for better ones ahead.” – Marjorie Pay Hinckley

Speaking of FOMO

The fear of missing out can be a powerful motivator, even when misguided. Stock market optimism is nearing record levels. So are valuations, with stock prices to GDP above where they were during the 1929 and 2000 peaks while the median P/E ratio of NYSE stocks is at a record high, according to Ned Davis Research. Margin borrowing is high (we recommend clients not use any), while mutual fund cash levels have been depleted to record lows. Especially hot are tech stocks, as the ratio of NASDAQ to NYSE volume is at its highest ever while the ratio of the NASDAQ ETF QQQs to the S&P 500 SPY peaked during the 2000 tech bubble.

To put it bluntly, tech stocks have gone crazy.

An extreme illustration of some of the more misguided optimism out there is Tesla trading at a trailing PE of over 1,000, despite its tepid growth. The Porsche Taycan Turbo looks better inside and out and is faster, though its range is not as strong (but not as bad as Tesla claims).  Overconfidence can run the other way, as was evident with one large retail investor in Toronto that we heard about. The client shorted Tesla again and again and again, convinced it was too expensive. We heard the client destroyed his account.

Our approach in Legacy is pretty simple: no outsized bets in any name (no matter how much we like it), no shorting, no leverage and PE ratios that rarely exceed 30 times.

In Canadian dollar terms, the S&P 500 is down about -2.5%, a little worse than the TSX Composite’s -1.85%.


Chairman Powell Speaks

This week, Fed Chair Jerome Powell gave the keynote address at the Fed’s annual policy symposium.  The biggest take away from his speech was the policy shift by the US Central Bank to no longer have a target of  2%. Instead they would rather see inflation average 2%.  Given that their target number is well below 2% currently (June was at .8% and has averaged around 1% over the last year), they are comfortable allowing inflation to pick up.  This means that we are likely to experience a period of ultra-low interest even if inflation picks up. In the past this kind of talk would have been considered reckless. The Fed’s reasoning is that,  despite years of stimulus post GFC along with record low unemployment like we had in 2019,  inflation failed to sustainably meet the 2% target.  This is good news for borrowers as interest rates are likely to stay ultra-low.  It also means that although not an issue today, inflation (or worse stagflation)  could very well become a serious problem down the road.

Covid Redux 2.0?

Hong Kong reported that a 33-year-old man traveling from Europe to Hong Kong had the coronavirus for the second time. Having recovered in April, he got re-infected without symptoms, this time with the European strain of the virus. The bad news is that it suggests re-infection is possible, this being the first official case. The good news is that maybe subsequent infections are milder. One potential reason is t-cell counts may be much higher after the first recovery.

There have been cases of patients testing positive spanning many weeks but it isn’t clear if the virus lingered or if infection can re-erupt.

In the meantime, progress continues to be made on the science front.

Noteworthy reading:


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