Trade Up

25.05.2020 – Special Report. The world is opening up again after the Corona crisis. Stock prices are slowly working their way up. Perhaps this illustrates the hope for the recovery of the global economy. But perhaps a look at the major indices is also a fallacy: after all, Wall Street is mainly supported by five stocks. There can be no talk – yet – of a broad-based recovery. Moreover, there is a considerable potential for setbacks via politics. We shed light on the background.

The winner gets everything

The stock market is currently only on a thin base. JP Morgan recently warned that the corona shock reinforces a “winner-take-all” phenomenon. Whereby the winners in the favour of the investors are the US mega-caps such as Facebook, Amazon, Apple, Netflix or Microsoft as well as the Google mother alphabet. So the FAANGs or FAAMGs. The winners are all profiteers from an extended shutdown and social distancing. It is therefore no wonder that the big tech stocks are at their all-time high. The losers are the defensive, cyclical small caps.

S&P 500 overvalued according to JPMorgan

Some 40 percent of the firms in the S&P 500 have withdrawn their 2020 guidance, JPMorgan continued. In total, only 310 firms gave an outlook after the first quarter figures – meaning that a large part of the US economy is sailing through the fog without a plan or clear course. JPMorgan warned that despite this bleak outlook, the S&P 500 is currently trading at 20 times expected earnings for 2021 – a historic high.

What do the financial elite wants?

The performance of the top 5 also gives the – perhaps false – impression that there could be a conflict of interest. Namely, that the big high-tech companies are influencing politics against a rapid re-opening of the political arena and therefore recommend new forms of education, vaccinations or contact tracing, warned JPMorgan analyst Marko Kolanovic. So far, so diplomatically. Let’s be clear and illuminate the political aspect.

Billionaires and the Democrats side by side

The billionaires behind the FAANGs, or FAAMGs, could be persuaded by politicians to keep the shutdown going as long as possible so that their own profits bubble up. If that were the case, the top five would have common interests with the Democrats.
It is the Democrats who want to maintain US curfews as long as possible. Their calculus is, of course, that a collapsed economy will hurt incumbent Donald Trump. It is interesting to note that the mouthpiece of the left wing of the Democrats is the Washington Post – owned by Amazon owner Jeff Bezos. Also striking is the fact that Microsoft billionaire Bill Gates favours a long shutdown and recommends opening the economy only after a mass vaccination. From a medical point of view, this would perhaps be the most sensible thing to do – but no economy in the world should survive unscathed. By the way, the Bill & Melinda Gates Foundation in Germany cooperates with “Der Spiegel” and “Die Zeit”.

One-fifth market cap for the Big 5

Goldman Sachs had already pointed out a month ago that the five largest stocks in the S&P 500 now account for more than a fifth of the market capitalization in the index. So the market rested only on the shoulders of Facebook, Amazon, Apple, Netflix and Google’s mother alphabet. As a result, the stock market offered the smallest market breadth since the tech bubble in the early 2000s. The Gold Men’s warning from mid-April: “narrow market breadth is always resolved the same way” – it always ends the same way when the market is narrow. Namely: “narrow rallies lead to large drawdowns as the handful of market leaders ultimately fail to generate enough fundamental earnings strength to justify elevated valuations and investor crowding. In these cases, the market leaders ‘catch down’ – few stocks could not sustain an upswing for long on their own.
The pillars still stand: As of April 30th, the Big Five FAAMGs – now Netflix has been replaced by Microsoft – had gained around 10 percent. According to Goldman, the remaining 495 shares in the S&P 500 had collectively fallen by 13 percent.

Hedge funds have entered

Recently, Bloomberg confirmed this trend with a look at the purchases of large hedge funds in the first quarter. Not surprisingly, investors are looking for stocks that can get through a quarantine well or even benefit from it. Accordingly, funds used the crash of the FAANGs in March to buy – which explains the steady rally. Some examples: D1 Capital increased its position on Facebook by 70% in the first quarter, Soroban and the Baupost Group built up new positions. Maverick Capital and Melvin Capital Management bought the shares of Amazon and Microsoft.

The White House against the oligopoly

Our conclusion: As long as there is no market breadth, there is always the danger of a setback on Wall Street. After all, the top 5 could disappoint with flopped product launches or get caught up in a flop due to internal company problems – fraud, theft, etc.
Moreover, the White House should not stand idly by if the billionaires behind the Big 5 lean too closely on the Democrats. Breaking up monopolies is always possible. The Republicans will not allow the financial elite to drive the rest of the country to the wall: While the top 5 have easy access to investor money, the situation is different for small and medium sized companies – but they employ around 60 million people in the US.
Incidentally, former Trump consultant Gary Cohn – former Chief Operating Officer of Goldman Sachs – recently warned against this development: “The top online groups are penetrating further and further into the territory of small businesses in the course of the lockdown, which must therefore close down – politics should not allow this. So much for the bearish view of the matter.
Bullishly expressed, however, this also means that the rest of the market offers some profit potential – if investors buy the stragglers, the stock market could bounce up. It all depends on investor optimism about the economic recovery – and whether Covid-19 has been deemed too dangerous – or whether there will be drugs or vaccines soon.

The Bernstein-Bank wishes successful investments!


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