Monthly Market Monitor – August 2020

Many of the weak dollar trends I noted in June’s update have moderated – even as the dollar has weakened further. US stocks surged over the last month, with growth indices leaving their value counterparts in the dust… again. About the only exception on the equity side was China, which outperformed for much the same reason as US growth – technology stocks. Generally, we expect foreign stocks to outperform in a weak dollar environment but so far any outperformance has been underwhelming. Just one more oddity in this oddest of stock markets.

In January of this year, when stocks were surging to new highs, I wrote that stocks had entered the “silly season”. Oh, if only I had known how wrong that was. I am always loath to use the term bubble because we can’t know the future and today’s asset prices could look perfectly reasonable with the benefit of hindsight. Okay, it might take some theoretical, many worlds alternate reality for that to be true of today’s market, but still, it could be true. You just have to have an imagination more imaginative than mine, I guess.

Tesla (TSLA), the poster child for overvalued stocks, has fallen 17% over the first three trading days of September and it is still the most valuable car manufacturer on the planet, by far. Its market cap exceeds its next four largest competitors (Toyota, VW, Daimler & Honda) combined. It’s revenue, on the other hand, is a mere 3% of those big four. It trades for over 1000 times trailing earnings and at least 100 times forward earnings. I could go on but it’ll just rile up the Elon Musk fanboys so suffice it to say that justifying Tesla’s valuation is difficult. Could Tesla grow into its valuation? I hesitate to say no, which probably says more about today’s market than any metric I might cite.

I’ve heard a lot of comparisons to the dot-com mania that gripped America in the late 90s and there are some similarities in behavior. But at least today’s absurdly valued tech stocks largely have earnings and some real growth. And while they are expensive, the spread to the rest of the market isn’t nearly as extreme as it was back then. Of the 11 economic sectors of the S&P 500, only three have P/Es less than 20. The technology sector is 25% of the S&P 500, but that is still well below late 1999 when it was about 35%. Which means that yes, it can get crazier.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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