The market is showing some signs of exhaustion, and with good reason. Most major parts of the market have run up significantly in the past month.
But there is a growing chorus warning that we are at "peak everything." That is, peak earnings growth, peak economic data and peak reopening.
Michael Batnick, director of research at Ritholtz Wealth Management, addressed some of those concerns, in a recent post entitled "It Gets Harder From Here."
Noting that the S&P 500 is up 76% from a year ago, Batnick notes that "we've had bear markets before, but we've never had this type of rally in such a short period of time."
His advice: "Now is probably a good time to do some spring cleaning in your portfolio."
That notion is not yet consensus.
"We're talking about peak growth, but the idea here is that this reopening is just getting started," Franklin Templeton senior portfolio manager Mike Labella said on CNBC. "We just hit a major milestone with 50% vaccinations in the United States, and that number is only going to get better in the United States and in Europe, which is a couple of months behind. So there's really more room to run in this rally, but it's probably going to come more from value and cyclical sectors than from the tech trade, which is more of last year's."
JPMorgan chief strategist Marko Kolanovic has also pushed back against the "peak valuation" story, insisting the reopening/reflation trade is not done yet. Reopening "will resume with a move that will be bigger than we saw early this year," he told clients. He says there is a rolling recovery that is starting first in the U.S., and will then proceed to Europe, and then to emerging market countries. That rolling recovery trade will prolong rotation and prevent yields from rising too fast, he says.
What happened to SPACs, pot and clean energy?
Judging by recent market action in the speculative parts of the market, many investors are taking Batnick's advice and doing some "spring cleaning."
The appetite for the riskier parts of the market has dropped significantly even as the broader market has advanced.
Formerly hot areas for investors such as IPOs, SPACs, cannabis, clean energy, electric vehicles/lithium, and "thematic tech" in general are all well off their highs:
Speculative sectors take a hit
(% from 52-week high)
- SPACs (SPAK) 32%
- IPOs (IPO) 20%
- Cannabis (MJ) 42%
- Clean Energy (ICLN) 32%
- 3D Printing (PRNT) 25%
- Lithium/batteries (LIT) 18%
- Cloud Computing (WCLD) 18%
Cathie Wood's Ark Investment portfolio has been especially hard hit:
The Cathie Wood Portfolio
(% from 52-week high)
- Ark Innovation (ARKK) 26%
- Ark Fintech (ARKF) 20%
- Ark Genomic Revolution (ARKG) 26%
- Ark Next Generation Internet (ARKW) 23%
- Ark Autonomous Technology (ARKQ) 20%
Peak trading, peak speculation, and the bottom in interest rates
Does the lack of interest in pushing these speculative parts of the markets to new highs indicate some concern about broader market valuation?
That is hotly debated, but traders note these "speculative" parts of the market have one important component in common: They all peaked in mid-February as interest rates began to rise.
Rising yields traditionally put pressure on high-multiple stocks because the higher rate reduces the present value of future cash flows those companies might throw off. However, more speculative parts of the market that often have little or no earnings can also suffer when rates rise.
"Some of the selling that got put in motion by the higher rates" has continued, GenTrust chief investment officer Jim Besaw told me, but he also noted that the mid-February sell-off of these sectors corresponded with the peak in speculative trading fever: "Most of those charts looked pretty parabolic before they came down in February," he said.
That combination — the cooling of intense speculative fever and a sudden change in interest rates — has proven to be a headwind for that "speculative" corner of the market.
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