16.09.2020 – Special Report. So now US equities have corrected: the trend has been downwards for about two weeks. The S&P 500 is dancing pretty much on the 50-day line. The question is whether Wall Street will create a convincing rebound. Or whether the 200-day line will be the next stop at currently around 3100 points. We analyse the currently determining stock market factors.
Tesla Surprise
One of the most important factors for the youngest setback in the broad market index was the surprise in the Tesla matter: contrary to expectations, the mega-share was not included in the S&P 500, the stock lost easily 30 percent since its high. The index operator made no statement, elite clubs never do. Instead, the e-commerce platform Etsy, the test equipment manufacturer Teradyne and the pharmaceutical company Catalent were included. Who?
Exactly – a big surprise. And a beating for Tesla. Many fund managers, hoping for Tesla, had replicated the index by buying other important SPX shares and then disappointedly sold their shares again. Unfortunately, the Tesla boost to the index could be gone for quite some time. The reason is the salary of CEO Elon Musk.
The greed of Elon Musk
Charley Grant of the ever-readable “Wall Street Journal” suspected that the options Musk was indulging in might permanently block Tesla’s path into the S&P 500. After all, the Tesla boss had collected 9 billion dollars in just three years, while his company was sitting on a cumulative loss of 6 billion dollars. In the course of accounting according to US-GAAP (Generally Accepted Accounting Principles), profits are likely to be at risk in the coming quarters. This is because, given the mega-performance of the stock – before the recent crash – the cash box at Musk could keep ringing. After all, he is not paid according to profitability, but according to market capitalisation. However, the index operator demands consistent company profits – and also shuns pump-and-dump stocks that bring short-term speculative bubbles. Thus, the recent fall of the Tesla share is likely to disqualify the stock. As a result, a strong price push for the SPX is missing.
Short warning from JPMorgan
Off Tesla, a quantitative analyst at JPMorgan, Peng Cheng, issued a bearish warning for the market as a whole. This would not be of further interest if he had not already issued a correct sell-off warning for tech stocks on August 18. We have also given you the reasons for this at this point: An increasing concentration of capital in a few shares, the improving chances of US President Donald Trump (which points to the break-up of Big Tech) and increasing tensions between China and the US. In addition, rising yields.
Now Peng has followed suit: These factors continued to have an impact. Cheng sees institutional investors as key players in the recent market correction. Retail investors also played a role. His verdict: “stocks popular with retail investors tend to outperform in the short term but reverse those returns in the long term. In other words: the sell-off is not over yet.
No broad base in the index
Indeed, the question is whether the recent correction has eliminated the over-performance of a few stocks and put the S&P 500 on a broader base. This would make the market more immune to shocks. Probably not – and thus a sell-off of a few stocks is likely to pull the overall market further down. Especially since the feeding frenzy at the White Whale SoftBank seems to have come to an end. The support of a gigantic buyer with deep pockets is therefore missing.
The Bank of America, for example, just found out that in August just ten shares had lost more than half of their 7.2 percent return. Among them Apple, Amazon, Salesforce, Berkshire Hathaway, Facebook and Nvidia. The financial blog ZeroHedge went even further and titled the S&P 500 “S&P 5”. Based on Bank of America’s analysis, it said that only FAAMG represented 23 percent of market capitalisation – Facebook, Apple, Amazon, Microsoft and Google (i.e. the mother alphabet). The situation was similar in 2000, when Microsoft, Intel, Walmart, General Electric and Cisco made up 18 percent of the total market. And then came the crash…
These are the important brands
And what happens next? The Bank of America expects Wall Street to calm down in the rest of September as a new stimulus is due to be passed in the US. Moreover, the money already distributed is slowly reaching the real economy. However, the correction from its all-time high could quickly turn into a severe sell-off. The SPX should hold the 3,300 mark and the Nasdaq the 11,000 mark.
We think: Friday is encouraging – a sharp late sell-off in the S&P 500 was followed by moderate coverage shortly before the end of trading. The bargain hunters dared to move forward again. So the matter remains exciting – the Bernstein Bank wishes successful trades and investments!
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