Bespoke’s Morning Lineup – 5/10/22 – Turnaround?

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“It always seems impossible until it’s done.” – Nelson Mandela


Below is a snippet of content from today’s Morning Lineup for Bespoke Premium members.  Start a two-week trial to Bespoke Premium now to access the full report.

It’s been a painful three days for US equity investors, and they’re looking to catch a break today as S&P 500 futures are indicating a rally of about 1% at the open.  Investors have been fooled enough times this year already by a strong tape at the open, so you can’t fault them for viewing this morning’s rally with a fair amount of skepticism.

Treasuries are also rallying this morning as the 10-year yield is back below 3%.  The only economic news on the calendar this morning was the NFIB Small Business Optimism report which was unchanged from March and slightly ahead of expectations.

Over in Europe, economic sentiment came in better than expected whole Industrial Production in Italy managed to come in unchanged versus forecasts for a decline of 1.9%.

In today’s Morning Lineup, we recap the recent developments in stablecoins (pg 4), overnight earnings (pg 5), economic data out of Asia and Europe (pg 6), and a lot more.

After breaking below support to close last week, the bottom fell out of the Nasdaq 100 yesterday as the index dropped to another 52-week low and its lowest level since November 2020.

QQQ Turnaround

With the Nasdaq 100 at 52-week lows, we wanted to check in on its valuation and how it looks relative to the S&P 500.  The chart below shows the historical premium in the Nasdaq 100’s P/E ratio relative to the S&P 500. For the last ten years, there has never been a point where the Nasdaq 100 traded at a cheaper valuation than the S&P 500, and the average premium during that span has been 23.1%.

Towards the end of 2019, right before COVID, the Nasdaq 100’s premium valuation to the S&P 500 was right in line with its historical average, but that premium exploded higher during COVID reaching as much as 50% in late 2021.  Through a combination of earnings growth and rapidly falling stock prices, much of the air has come out of the Nasdaq 100’s premium relative to the S&P 500, but it still remains elevated relative to the historical average.

NDX Price to Earnings Ratio

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Stock Market Volatility: It’s Higher Than You Think

“You pay a very high price for a cheery consensus. It won’t be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values.” Warren Buffett

You don’t need us to tell you that 2022 has been a volatile year for the stock market, but in one way it has been even more volatile than you think.  Nowhere in the equity market has the uncertainty and day-to-day moves been higher than in the Nasdaq.  Over the last 50 trading days, the Nasdaq’s average daily move has been a gain or loss of 1.76%, and on a YTD basis, the average remains at a still unsettling level of 1.66%.  To put this in perspective, in all of 2021, there were only 37 days that even experienced a gain or loss of 1.66% or more.  While volatility has spiked this year, relative to other periods in the last thirty years or so, there have been plenty of other stretches when the average daily move spiked even more.  Back in early 2020, the Nasdaq’s average daily move over the prior 50 trading days spiked to more than 3%, and in October 2011, the average daily move spiked to just over 2%.  Those two periods, however, pale in comparison to the Financial Crisis when the average daily move approached 4% per day! That was even greater than the highs from the bursting of the dot-com bubble when 3% daily moves for the Nasdaq were routine.

Nasdaq Volatility

Although the Nasdaq’s average daily move is nowhere near its highest levels of the last twenty years, volatility has still been extremely high.  While this week is only three trading days old, we’ve already had three days where the Nasdaq had a daily move of at least 1%, and as a result, we have now had a total of 12 straight weeks where the Nasdaq experienced at least three 1% daily moves (even including holiday-shortened weeks).  In the chart below, we show weekly streaks where the Nasdaq experienced at least three trading days of 1% moves.  The current streak isn’t over, but it has already eclipsed any streaks seen during the COVID crash or the Financial Crisis. In fact, to find a longer streak you have to go all the way back to September 2002 in the waning days of the dot-com crash.

As noted above, Warren Buffett once said that uncertainty is the friend of the buyer of long-term values, but volatility can be unsettling for individual investors, and as Peter Lynch once said, “Not everyone has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and mutual funds altogether.” Click here to view Bespoke’s premium membership options.

Nasdaq Volatility