Updated: Jul 25, 2020
STOCKS BEYOND THE THUNDERDOME
Unlike many strategists, TPA has stopped scratching its head and throwing up its arms at a market that seems to ignore the apocalyptic environment in which it lives. TPA told clients two months ago that asset managers will continue to do what they are paid to do, INVEST, until money under their management has been taken away.
J.P. Morgan's Joyce Chang in Barron’s explained that large investors understand that with interest rates near 0%, normal allocations between bonds and equities will not get them the performance that they need. They have done the only logical thing; allocate more capital to equities. Managers are simply doing what is logical to achieve their goals.
Does that mean stocks will go up forever as managers reallocate money? No. At some point, the major reallocation is complete and those that act on fundamentals, news, and price movements (traders and hedge funds) will have more of an effect on the market, but until there are liquidations, large asset managers will stay invested.
The other thing that managers have done is to find other places to invest for “safety.” Bill Callahan, investment strategist at Schroder Investment Management, was quoted as saying that large TECH stocks are “the new Treasurys…any hint of bad news sends the tech stocks soaring.”
In fact, TPA has been saying this for months. In the past 6 months, the S&P500 is down 1.9%, but the TPA BIGTECH Index (AAPL, MSFT, AMZN, FB, GOOGL, GOOG, TSLA, NVDA) is up 42%.
In the 6/10/20 World Snapshot entitled TPA clients should still be in the winners in 2020, we wrote, “Although stocks have staged a historic rally since 3/23, when TPA did tell clients the markets were historically oversold, it will still be a tough climb for the economy from here. TPA would advise clients, especially after the recent huge rally, to stick with stocks that will be less affected by the crisis. For example, TPA would still rather own AMZN than AAL, HD over KSS, and NFLX before HLT.”
The charts below show the stark performance separation between the “winners” and the “losers.” Since our report on 6/10, AMZN is up 17% and AAL is down 33%, HD is up 4% and KSS is down 10%, and NFLX is up 12%, while HLT is down 3% (see the charts below).
Wall Street bears like Larry McDonald, who writes the Bear Traps Blog, are discussing ideas like the “Cobra Effect” as the market continues to rally. The Cobra Effect tells an old story of Dehli, India. “As the story goes, there were once so many cobras in Delhi that there was a bounty placed on each dead one delivered to the government. At first, it worked. But then, entrepreneurs began breeding cobras for the income, and the authorities had to cancel the program. The breeders then released their snakes — whoops! — and the cobra population exploded worse than ever.” In other words, the actions now being taken to sustain the economy that are buoying stocks will eventually cause a much bigger problem. The cure will be worse than the disease.
Larry may eventually be right, but for now, asset managers will do what they are paid to do. They will continue to be invested in ways that reap their clients the best returns.