The Nasdaq in Times Square in New York.
Adam Jeffery | CNBC
For the past four years, buying the Nasdaq has been the easiest trade in the world – on an outbreak, on a retreat, as the Federal Reserve slackened, or even at the height of a pandemic panic, investors who bought the dip became plentiful rewarded every time.
The index has made money in four years over the past five years, generating staggering sales of nearly 44% in 2020, well outperforming the S&P 500.
There are, of course, good reasons for the Nasdaq’s strength. The index is full of high tech companies that not only survived but thrived from Covid’s shutdowns. When the economy shifted to “virtual” mode and everything from business meetings to dining and shopping to socializing and entertainment was done online, the high tech darlings made big bucks. From Amazon to Netflix to Zoom, almost all economic activities were conducted through the company’s coffers, generating innumerable cash flows and attracting enormous investment flows.
Living and working from home is not going to change anytime soon. Even if the introduction of the vaccine is accelerated under Biden’s new administration, it is very likely that economic activity will not return to normal levels until the second half of this year. Even then, the consumer habits that arose during the lockdown are likely to persist and change many of those behaviors forever. All of this seems to speak in favor of continued Nasdaq trading, except for two factors: the index is ridiculously overvalued, and the monopolistic gains of its major components could be regulatory threats from new president Joe Biden.
The valuation question is by far the greatest risk to the index, not only because the Nasdaq is trading at nosebleed levels close to 40 times trailing earnings, but because that valuation was justified by the extremely low interest rates that benchmark 10 -year below 1% for most of the last year.
However, the dynamics of the bond market have changed. With President Biden elected and a Democratic majority in Congress, the markets are anticipating a massive new stimulus plan worth nearly $ 2 trillion. In addition, President “Main Street” Biden is likely to channel most of these funds into the hands of consumers and small and medium-sized businesses. In contrast to the Trump-era budget deficits, this spending bill will be labor rather than capital-centered, and that is likely to be far more inflationary.
Although inflation remains low, bond markets have already started pricing in the price hike with returns in excess of 1%. That’s still a very low level on a historical basis, but the financial markets are always a pretty absolute bet, and if the 10-year rate of return only increased 50 basis points it would be an effective 50% increase in interest rates, which in turn is the Heavens high would compress the value of the Nasdaq components as bonds become a better competitor to stocks.
Add to this the possibility of antitrust action against some of the index’s biggest names and at least much tighter regulatory oversight that will no doubt add to the cost of doing business in the future.
For the past four years, the easiest trade on the market has been to buy “High Technology” and sell “Main Street”. The long QQQ (Nasdaq) Short IWM (Russell 2000) spread was the best way to trade the market without exposure to directional risk. But that deal has stalled and with President “Main Street” close to taking power it may be time to go the other way as Main Street may finally begin to surpass high technology.
Boris Schlossberg is the managing director of FX Strategy for BK Asset Management and a frequent CNBC guest. Boris is widely known as a leading foreign exchange expert with over 20 years of experience in the financial market.
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