Ginger’s NASDAQ in sync with Fred’s Bond Buying.
Ginger Rogers and Fred Astaire, attribution Getty.
Just like the perfect dance pair of Fred and Ginger, the share price growth of the top 100 NASDAQ companies has recently been in almost perfect lockstep with the rate of bond buying (or QE) by the the U.S. Federal Reserve.
But, it’s not entirely the same story with the Industry 3.0 laden companies of the DOW which have taken longer to respond to stimulus.
This provides more evidence that QE Infinity and Guarantee Infinity is driving the equities market.
I believe big tech is now seen as a safe haven investment (or maybe just a trading opportunity) for a market that would prefer to look through COVID-19 and invest in risk-on growth, versus the risk-off safety of gold.
Millions of new share trading accounts have been opened in the U.S. (Robinhood alone opened 3 million) and a different sector of the market now appears to be piling in.
It does not mean that it will stay this way, in fact the bond market seems to be suggesting this should not be happening, but currently it’s definitely a thing and worth a quick mention, today.
What’s Fred been up to?
Fred’s been out there buying up big time.
Exhibit 1 is the latest Fed balance sheet. You will note the eye popping US$7.1 trillion as of last Wednesday. $2 trillion over the past couple of months.
The Fed has said it will do whatever it takes and buy whatever it takes if no one else wants to buy it.
QE Infinity and Guarantee Infinity.
Exhibit 1: NextLevelCorporate extrapolation from Fred data base.
Fred’s dancing a little slower for now.
And, here’s exhibit 2, the weekly percentage change in QE or bond and mortgage backed securities purchases by the Fed, since the 9th of March 2020.
Notice the Fed is still buying, but at a slower pace.
Exhibit 2: NextLevelCorporate extrapolation from Fred data base.
Ginger just caught up and is now stealing the show (as usual).
Exhibit 3, overlays the percentage change in performance of the NASDAQ-100 (green line) and the DOW Jones Composite index (brown line) with the Fed’s buying activity (blue line).
Chart created by NextLevelCorporate using Fed charting tools.
You can clearly see the market correction in the third week of March.
It then only took one week for equities to bounce.
The bounce came as Jerome Powell brought new hope to markets with the Fed’s boldest move ever, when he hijacked the Death Star and fired trillions of QE into the market.
By the first week of April the weekly percentage increase in equities growth had caught up with the percentage increase in bond buying.
Joined at the hip.
What’s most remarkable is that since the 20th of April, the Fed and NASDAQ have been joined at the hip in an almost perfect lockstep like Fred and Ginger. The green and blue lines have merged.
One squirt of QE Infinity liquidity equals one squirt of NASDAQ share market growth.
This is a lockstep of confidence and guidance. Two dancers, same music beat, in sync, with each party knowing the other will support it.
It’s also remarkable but understandable to note that while we see the DOW moving in the same general trend, it’s not in lockstep, and the reason is the predominance of Industry 3.0 companies in the DOW.
The NASDAQ index is highly dominated by the five big technology companies, each of which have large net cash positions. Whereas the DOW is more of an Industry 3.0 dance class dominated by old economy, capital heavy and debt laden transport, utility and industrial businesses.
Understandably, it has taken a good few weeks more for the Fed to inject confidence into the DOW, and a lot of this has had to do with the perceived reopening of economies and eventual return of oil, copper and growth (plus two of the world’s largest big tech companies are also included in the DOW).
Sitting at home with a day trade account and funding.
We look to be in an emotional ‘me too’ leg of the COVID-19 relief rally.
I don’t imagine anyone thinks that GE or Boeing are ever going to be great companies again, but the opportunity to trade a discounted dinosaur when the Fed says go and do it and if you get it wrong we’ll bail you, must be compelling to most of the U.S. Let’s not forget most of the U.S. is still in lock down and receiving trading money from the government.
And, with Fred and Ginger now in lockstep, what now gives as the PPP program extends and the massive spray of chimney money continues to finance employees to stay home and play the casino?
Robinhood, a popular fractional share trading app added 3 million new accounts in the first quarter of 2020. On top of that, most online brokers in the U.S. broke new account open records in Q1.
With buybacks curtailed, it seems to me that Fred and Ginger are leading a massive chorus line of first time traders and punters (and who can blame them).
Dance lessons?
I don’t think so. With millions of people in the U.S. opening day trading and fractional share accounts for the first time, I think they’re more interested in just getting onto the dance floor.
Will spending further decrease as households divert more money away form goods and services and into the market - share price inflation versus consumer price inflation? Probably. Rates will stay low.
We are in a bit of a waiting room at present as the rioting, trade war, U.S. elections, ECB deliberations, Brexit, COVID-19 and other forces play out.
In the meantime, there’s a pretty awesome disco going on at One Liberty Plaza.
Mike.
NextLevelCorporate is a leading financial and strategic corporate advisory firm with a multi-decade track record of delivering transformative corporate finance solutions, in and out of Australia.