by Ivan Martchev
May 4, 2021
While there was selling into strength as the Nasdaq 100 crossed 14,000, it has been painfully obvious to those following the tape more closely that this selling has yet to produce any meaningful downside.
Earnings have been good, but the reaction has not been what I would call benign.
Apple (AAPL) is the perfect example. The quarterly numbers were stellar, yet the stock had seen selling into strength from the open of trading on the day after the earnings announcement.
Navellier & Associates does own Apple Computer (AAPL), in a few managed accounts, per client request. Ivan Martchev does not own Apple Computer (AAPL) personally.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.
I think we are headed into another interest-rate-driven rotation in the stock market, similar to what we saw in March. The key to whether it works out the same way – a fast shakeout and ultimately a new all-time high for the Nasdaq 100 – is the U.S. bond market, which is getting ready for another assault on 1.77%, the 2021 high on the 10-year Treasury yield. The faster we make it to 1.77% and beyond, the faster the selling in the Nasdaq 100 will be. I think the rest of 2021 will see upside bias for stocks despite rising long-term interest rates as the economy normalizes after COVID. Despite the upside bias for stocks, I expect we’ll see more rising rate-driven rotations, similar to what we saw in 2018. The key difference is that in 2018 the Fed was pushing rates higher, while now the bond market is doing it for the Fed.
Various measures of inflation have come in hotter than expected over the past few months and, judging by the commodity markets and the simple “wallet yardstick,” the readings on inflation are expected to get even hotter as the economy normalizes. This suggests that the 10-year Treasury yield is headed higher. I expect it to be above 2% by the end of this quarter. The German 10-year bund yield is already higher than where it was when the 10-year Treasury was at 1.77%. and it should see positive territory this quarter.
COVID is a Global Electoral Catalyst
If it were not for COVID, I am pretty sure that even a controversial individual like Donald J. Trump would have won reelection, since Americans tend to vote with their wallets and the economy was humming before COVID derailed it – and I consider myself an independent. There was no Blue Wave in either the House or the Senate, and there is a razor thin margin in both. As a result, President Biden risks repeating the errors of the first Clinton term, which saw significant losses in its 1994 mid-term elections.
Specifically, I find the term “human infrastructure” to be bizarre, not that there does not need to be debate on all parts of Biden’s monstrous spending bill. As the most powerful member of the U.S. Senate, Joe Manchin, correctly points out, those need to be two bills. The Congressional elections are Biden’s to mess up, given his strong start in office with an effective vaccination campaign that delivered on his promises.
It’s not only the U.S. that is seeing electoral upheaval. Angela Merkel’s center right coalition is trailing in the polls with the Greens ahead by 8 points. Merkel, who was supposed to be retiring this year, did a good job as Chancellor, and if it were not for COVID, I doubt that the Greens would be leading in Germany.
The pandemic caused a global economic shock and stressed-out voters. They are acting out at the polls, even though the pandemic is hardly Angela Merkel’s fault – and neither is it Trump’s.
I spoke to a mathematician about the statistical probability of COVID not spreading in China like it did in all other countries, particularly if we assume that the virus got out in late 2019 in the Wuhan population and was not being contained for a month or two. “It is statistically impossible,” is the answer I received.
If it is not statistically possible for the virus not to spread in China, even though it originated there, then the question one needs to ask is: Who benefits from its spread?
As the legendary Chinese General Sun Tzu pointed out many centuries ago, “If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.”