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Feb. 22, 2020, 10:16 a.m. EST

Tesla, gold and the dollar soar—an ‘everything rally’ has some stock-market investors fearing how it all ends

‘Some of the largest stocks in the world have entered the manic phase’: strategist

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By Mark DeCambre, MarketWatch

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“We know that China is basically sitting idle right now. Once the pandemic slows a bit more I’d expect to see some really massive injections both fiscally and monetarily from the Chinese,” Antonelli told MarketWatch.

“They can’t let this pandemic threaten economic growth because if it did, that could threaten political stability,” he said.

Fresh stimulus from China and an accommodative Fed may not provide much comfort, said Vincent Deluard, global macro strategist at INTL FCStone.

He paints a picture teeming with potential excess, where newly minted “traders share screenshots of their extraordinary gains on Reddit and Twitter and savagely roast anyone who is not leveraged long their favorite highflying tech stocks.”

Deluard says one of his bigger concerns is that the rally isn’t supported by solid fundamentals.

He argued that by one measure, tracking stock price gains compared against a number of measures, illustrated that equity valuations are historically rich.

The chart below shows the market value of the S&P 500 in aggregate compared against its replacement cost, or Tobin’s Q; stock-market capitalization relative to gross domestic product; and the Shiller P/E, or price-to-earnings, ratio. Based on those measures, stock market caps represent 230% of GDP, Shiller P/Es are at their loftiest since 2000 and Tobin’s Q is at a level last since in 1999, Deluard noted.


Source: INTL FCStone

On top of that, the profits of small-capitalization Russell 2000 index /zigman2/quotes/210598147/delayed RUT +0.59% companies, meanwhile, have shrunk in each of the past four quarters, Deluard wrote.


Source: INTL FCStone

“Even large-caps are not immune to the earnings recession: profits for the S&P 495 index (which excludes Facebook /zigman2/quotes/205064656/composite FB +1.52% , Apple /zigman2/quotes/202934861/composite AAPL +0.64% , Amazon.com Inc. /zigman2/quotes/210331248/composite AMZN -0.40% , Microsoft /zigman2/quotes/207732364/composite MSFT +0.04% , Google-parent Alphabet Inc. /zigman2/quotes/205453964/composite GOOG +0.54% /zigman2/quotes/202490156/composite GOOGL +0.46% ) declined by 3.9% in the past quarter.

It’s impossible to say how long this tandem rally can last.

Legendary mutual-fund manager John Templeton once said that bull markets don’t succumb to old age, but die in a bout of euphoria.

And that notion may be swirling in a number of investors’ minds as this bull market that began March 9, 2009, heads toward its 11th anniversary.

Matt Forester, chief investment officer of BNY Mellon’s Lockwood Advisors, told MarketWatch that all this apparent optimism may evaporate if the coronavirus’s impact is greater than investors are betting. “A number of strategists are playing amateur epidemiologist and I think that’s a little bit of a challenge,” Forester said.

He also said some investments bets being placed currently also reflect that investors are playing defense, buying Treasurys as well as assets they think may grown in value.

“I think it’s a function of investor positioning and sentiment. There’s only been a few days of actual weakness so far in 2020, which means people have to keep chasing to keep up,” Cappelleri told MarketWatch.

Indeed, Chris Senyek, chief investment strategist at Wolfe Research, in a Wednesday note, said that there were four distinct trading buckets in which investors are currently assessing the market: recession scare, defensive growth, momentum growth and value trade (see attached chart):

Deluard said that what he describes a “manic phase” for stocks will eventually pop and lofty valuations and central bankers could be the cause. “The main value of these examples is to illustrate that some of the largest stocks in the world have entered the manic phase, where mobs of leveraged individual investors have hijacked the normal price discovery process,” he wrote in his research report. “What could end this irrational euphoria?”

Deluard speculates that ultimately companies may significantly pullback on repurchasing stocks, which has been one of the key drivers of stock-market multiples. “Buybacks, the single-largest source of demand for stocks in this cycle, will become the transmission channel through which irrational prices finally adjust to rising cost pressures,” he wrote.

Read: Here’s what you really need to know about stock buybacks

/zigman2/quotes/210598147/delayed
US : US Composite
1,355.53
+7.97 +0.59%
Volume: 1.46M
May 22, 2020 7:51p
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/zigman2/quotes/205064656/composite
US : U.S.: Nasdaq
$ 234.91
+3.52 +1.52%
Volume: 33.93M
May 22, 2020 4:00p
P/E Ratio
32.19
Dividend Yield
N/A
Market Cap
$669.39 billion
Rev. per Employee
$1.57M
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/zigman2/quotes/202934861/composite
US : U.S.: Nasdaq
$ 318.89
+2.04 +0.64%
Volume: 20.45M
May 22, 2020 4:00p
P/E Ratio
25.00
Dividend Yield
1.03%
Market Cap
$1382.18 billion
Rev. per Employee
$1.98M
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/zigman2/quotes/210331248/composite
US : U.S.: Nasdaq
$ 2,436.88
-9.86 -0.40%
Volume: 2.87M
May 22, 2020 4:00p
P/E Ratio
116.41
Dividend Yield
N/A
Market Cap
$1215.46 billion
Rev. per Employee
$359,671
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/zigman2/quotes/207732364/composite
US : U.S.: Nasdaq
$ 183.51
+0.08 +0.04%
Volume: 20.83M
May 22, 2020 4:00p
P/E Ratio
30.56
Dividend Yield
1.11%
Market Cap
$1391.64 billion
Rev. per Employee
$902,473
loading...
/zigman2/quotes/205453964/composite
US : U.S.: Nasdaq
$ 1,410.42
+7.62 +0.54%
Volume: 1.31M
May 22, 2020 4:00p
P/E Ratio
28.46
Dividend Yield
N/A
Market Cap
$769.02 billion
Rev. per Employee
$1.39M
loading...
/zigman2/quotes/202490156/composite
US : U.S.: Nasdaq
$ 1,413.24
+6.49 +0.46%
Volume: 1.43M
May 22, 2020 4:00p
P/E Ratio
28.52
Dividend Yield
N/A
Market Cap
$769.02 billion
Rev. per Employee
$1.39M
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Mark DeCambre is MarketWatch's markets editor. He is based in New York. Follow him on Twitter @mdecambre.

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