Did Elon Musk just signal a market top?
The dangers of complacency in an overvalued market
There are some occasions when observers can point to a particular event and say “That was when a major change occurred.” While they don’t come along very often in the world of investing, with the benefit of hindsight they become obvious. An economist forecasting a permanently high plateau for stocks just ahead of the September 1929 Wall Street Crash now can be seen to have signalled a dangerous level of complancency. Citigroup’s CEO Chuck Prince in 2007 said of over overvalued markets, “As long as the music is playing, you have to get up and dance.” That was right before the subprime crisis exploded. Are there lessons to be learned now?
The recent appearance of Tesla Inc. CEO Elon Musk as guest host on the venerable late-night comedy show “Saturday Night Live” (SNL) might in retrospect be seen as marking the peak in the long-running bull market that began in March 2009 and, with only a brief pandemic-related interruption last February, is still running today.
During that 12-year period, the broad-based S&P 500 Composite Index has risen over six times, climbing to 4,186 in mid-May 2021 from 666 in March 2009. The Nasdaq Composite Index has done a little better, up over six and half times. But as a reminder of how long bear markets can last, it took it until 2015 for the Nasdaq to regain the 5,000 peak at the height of the tech bubble in 2000.
After such enormous gains, especially in the last 12 months with the S&P 500, the Nasdaq, and the venerable Dow Jones Industrial Average up 43%-45%, some pullback or pause for breath would be normal and anticipated. This is all the more expected as long-term bond yields on the benchmark U.S. 10-year Treasury bonds have more than doubled in the last year, to 1.6%from 0.7%, meaning that the competition from this perceived as the “risk-free” default asset has become a lot more attractive.
A dangerous complacency?
Yet stock markets have kept motoring upwards, seemingly unworried by rising interest rates and commodity prices, which some observers feel indicates the likelihood of the return of inflation. Despite 10% drops late last September as large-cap technology stocks sold off, the Nasdaq has kept moving upwards for the last six months, rising 28.5% from the low of early November.
This is despite some of the technology and momentum favourites such as Tesla, e-commerce play Shopify, and the FAANG+ stocks (Facebook, Amazon.com, Apple, Netflix, Google parent Alphabet, and Microsoft) actually being lower for the year to date. Tesla itself is down almost 11%, Uber and Shopify 10%, and Netflix 9.3%, while Apple is off 4.4% and Amazon.com 2%, despite delivering very strong earnings for the most recent quarter.
The Musk effect
Tesla’s slide began almost to the week when Mr. Musk announced he had invested $1.5 billion of the company’s funds in Bitcoin in February, and the most telling section of his appearance on SNL was when he was quizzed on cryptocurrecny Dogecoin, which was started as joke a few years ago. Musk admitted that “basically Dogecoin is a hustle,” an admission that led to a 30% selloff in the value of the cryptocurrency.
When cryptocurrencies, whose underlying value is opaque or undiscoverable, are shooting up by several thousand percent in a few months, then it appears that one of the major conditions for a bubble has been satisfied. This occurs when traders throw their money at speculative assets not because of their underlying value but because they’ve been going up, hoping that sometime later someone else will pay more for their coins than they did (the greater fool theory). Mr. Musk’s admission that one of the cryptocurrencies is essentially worthless may lead holders to question the value of other cryptos. It is notable that Coinbase, the exchange for cryptocurrencies, which listed in April and briefly traded at $429, has fallent to as low as $224 recently.
Cathie Woods’ ARK Innovation ETF, the best performing fund in the U.S. last year, came to be seen as the poster child of the new era technology stocks. Its assets rose to $28 billion early in 2021. But with its 10 largest holdings including Tesla, Shopify, and Coinbase, along with such hot names as Teladoc Health, Roku, Square, Zoom Video, and Spotify, ARK’s price has dropped 33% in the last three months as profit-taking investors rotated out of the pandemic winners. ARK’s assets have fallen below $20 billion at time of writing.
Whether Elon Musk’s appearance on SNL will be seen as marking the top of this particular bull market remains to be seen, but there is strong evidence that when a trend has become so prevalent that everyone is at least aware of it, if not invested in it, then the best days for its performance are gone.
A lifeline in lower valuations
On my Indepth Investing podcast, I and several other contributors have been advising listeners to lock in some of their gains on the large-cap FAANG+ stocks. Reinvest in industries and markets with lower valuations that have lagged the market leaders as well as in alternative asset classes, such as precious metals, that are not correlated with major indexes.
The strong performers since the start of the year have been the sectors that were the laggards of 2020, namely energy, commodities, and financials as well as economically-sensitive sectors that will benefit from the reopening of the economy after the easing of lockdowns. Investors would be well advised to consider some of these areas, after consulting with their financial adviser, of course.
Gavin Graham is a veteran financial analyst and money manager and a specialist in international investing, with over 35 years’ experience in global investment management. He is the host of the Indepth Investing Podcast.
Notes and Disclaimer
© 2021 by Gavin Graham. This article was originally broadcast as a podcast on Indepth Investing, hosted by Gavin Graham. Used with permission.
The commentaries contained herein are provided as a general source of information based on information available as of 29, 2021, and should not be considered as investment advice or an offer or solicitations to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Investors are expected to obtain professional investment advice.
The views expressed in this post are those of the author. Equity investments are subject to risk, including risk of loss. No guarantee of performance is made or implied. The foregoing is for general information purposes only. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.