Market Note (March 4th)
Trump wins; Frothiness in the markets
Major equity indices are modestly lower this morning after last week’s gains - note that the S&P 500 has been up for 16 out of the past 18 weeks. News over the weekend was fairly muted, however, this morning we did get a major Supreme Court decision leaving Trump on the ballot. Other than that, we did see some rebuttal on comparing the current market situation to past financial bubbles, particularly the dot-com bubble of 1999. More on that below.
Trump wins Colorado ballot disqualification case at US Supreme Court
The US Supreme Court barred states from disqualifying candidates for federal office under a constitutional provision involving insurrection and reversing a judicial decision that had excluded him from Colorado's ballot. "We conclude that states may disqualify persons holding or attempting to hold state office. But states have no power under the Constitution to enforce Section 3 with respect to federal offices, especially the presidency," the unsigned opinion for the court stated. This was widely expected, and the ruling came on the eve of Super Tuesday, the day in the U.S. presidential primary cycle when most states hold party nominating contests. The Supreme Court resolved the Colorado ballot dispute speedily, a timeline that stands in contrast to its slower handling of Trump's bid for immunity from criminal prosecution in a federal case in which he faces charges for trying to overturn his 2020 election loss. Trump's trial has been put on hold awaiting the outcome of the Supreme Court's decision - a benefit for him as he campaigns against Biden.
Meanwhile, major polls and the betting markets continue to show Trump in the lead against Biden. NYT piece highlights some recent poll results.
How Frothy are the Current Equity Markets?
After my post from the weekend, I received some feedback from fellow investors and strategists on comparing the current price action to past bubbles. It was a healthy debate and the major points they raised were (and my rebuttals in italics):
Absence of Speculative Mania: Unlike past bubbles, there is no widespread speculative mania and leverage levels are not at extreme highs. Yes, NVDA is not a sign of mania but CVNA and PEPE meme coin are signs of mania - so there are some signs of frothiness.
Solid Financial Fundamentals: The market's growth is supported by robust earnings and significant free cash flow, especially among leading tech companies, contrasting with the speculative basis of the dot-com bubble. Agreed
Reasonable Valuations: Current tech stock valuations, while high, are not at the unsustainable levels seen in the late 1990s. Price-to-earnings ratios and free cash flow yields indicate more reasonable valuations. Again, it depends if you are looking at Price/Earnings ratio of MSFT (37x) and META (34x) which are still “reasonable”, whereas AI names like NVDA (69x) and SMCI (71x) give me a pause.
Source: GS
