Goldman: "The Last Time The Market Acted Like This Was At The Tech Bubble Peak"

Yesterday's dramatic "rotational" divergence between tech stocks and the rest of the market, which as Sentiment Trader pointed out the only time in history when the Dow Jones closed at a new all time high while the Nasdaq dropped 2% was on April 14, 1999, stunned many and prompted Bloomberg to write that "a crack has finally formed in the foundation of the U.S. bull market. Now investors must decide if any structural damage has been done."

This year’s hottest stocks, companies from Facebook Inc. and Apple Inc. to Netflix Inc. and Nvidia Corp., buckled Friday, spurring losses that sent the Nasdaq 100 to its biggest drop relative to the Dow Jones Industrial Average since 2008.

An alternative explanation is that the purge in tech stocks, responsible for half the market's gains in 2017...

 

... was long overdue, and followed not only virtually every hedge fund piling into tech stocks in the first quarter, resulting in the tech sector becoming the "most overweight it has ever been" according to Bank of America, but also followed the biggest weekly outflow from the tech sector XLK ETF in over a year.

Ten days ago we highlighted a quote from Miller Tabak's Matt Maley who said "everybody remembers 2000, so they might be getting a little nervous with this development. I just wonder how many people have said to themselves, ‘If AMZN gets to $1,000, I’m going to take at least some profits.’” to which we said "and another question: now that the first sellers have emerged, will the herd follow..."

Just over a week later, it did, resulting in Amazon flash crashing by nearly $50 from its intraday highs, and dethroning Jeff Bezos from the rank of world's second wealthiest man.

So what prompted the unexpected tech crash rotation, and AMZN flash smash?

There were plenty of theories, some pointing to a bearish tweet by Citron's Andrew Left who complained about “frenzied casino action” in Nvidia. A previously discussed report by Goldman Sachs which warned about an "air pocket in tech valuations" did not help, although the most likely reason was a long-overdue rotation out of growth/momentum stocks which as we showed one week ago, has trounced the "value" factor in 2017.

Incidentally the right question is not what caused the selloff, but what prompted the unprecedented pile up into tech stock to begin with, something RBC's Charlie McElligott has been warning about for months.


Overnight, Goldman's chief equity strategist also opined on the matter, piling on some more gloom for tech bulls, and warning that while the "economic environment has proven just right for Technology and other secular growth stocks" the "perfect fairy tale scenario for tech is unlikely to last" amid signals inside the market point to slowing growth.

Discussing the shifting economic outlook in 2017, which started off with a bang on hopes of a Trump-driven reflation, which has seen been fully unwound amid fears of a deflationary bust, Kostin says that the unexpected mix of healthy growth and declining rates represents a Goldilocks scenario for US equities.

Growth data has certainly not been too cold, supporting S&P 500 EPS growth of 14% in 1Q and consensus expectations for 11% growth in both 2017 and 2018. Nor have conditions run too hot and caused the rise in rates that we expected would constrain equity valuations this year. Instead, the economic backdrop has proven just right.

However, the current "Goldilocks" scenario - not only for tech stocks but the broader market - also carries with it the seeds of its own destruction according to Goldman, which maintains its year end target for the S&P at 2,300 or 5.5% lower from here.

As Goldman cautions, "just like in the fairy tale, this perfect scenario is unlikely to last. With the economy at full employment, an easy Fed risks the possibility that wage pressures build and weigh on corporate profit margins. Our base case is that above-trend economic growth will eventually push inflation higher, prompt an accelerated pace of Fed tightening, and lead to higher bond yields that will reduce equity valuations. As the cycle matures, we expect US equity prices will continue to rise, but we think that the trajectory of price gains will be slower than the pace of earnings growth as monetary policy and valuation multiples each normalize."

That's the upside scenario. Goldman also concedes there is an alternative world in which it is wrong about growth and inflation picking up:

Conversely, if the current market outlook for low rates and inflation is proven correct, it will likely accompany a significant slowdown in the pace of economic growth. This scenario is potentially less friendly for equities given the negative earnings revisions that likely would result from a weakening economic environment.

Kostin admits that so far the market finds itself in the latter camp, as "the outperformance of NDX, “FAAMG” (FB, AAPL, AMZN, MSFT, and GOOGL) and other growth stocks also supports the idea of decelerating economic growth" and explains "growth stocks typically outperform when there is a scarcity of economic growth. This cycle’s prolonged length and slow economic growth help explain why value stocks have underperformed growth stocks to such a large extent during recent years and YTD in 2017."

There is more confusion. Last week we again showed that, in a paradoxical outcome, the Fed's 2 recent rate hikes have resulted in the loosest financial conditions observed since 2014.

As Deutsche Bank calculated, the Fed's "tightening" since the December 2016 FOMC meeting is the equivalent to one 25bp rate cut, even though the Fed has raised twice over this period.

Kostin touches on this divergence too, and writes that "perhaps most remarkable is the outperformance of stocks with strong balance sheets alongside a rallying equity market and extremely easy financial conditions. Falling rates, tight credit spreads, a slipping USD, and high equity prices have brought the Goldman Sachs Financial Conditions Index to its lowest level in two years."

To Goldman this is a puzzle, as its basket of S&P 500 firms with Strong Balance Sheets (GSTHSBAL) has outperformed its Weak Balance Sheet basket (GSTHWBAL) by 520 bp during the last six months.

As Kostin explains outperformance of strong balance sheet companies - usually tech-linked names that have little or no debt and substantial cash flow - in a 10%+ equity market rally is rare; occurring in only 5% of six-month stretches in the last 30 years.

The punchline: "the last such notable episode was in 2000, at the Tech Bubble peak."

Of course, it is worth noting that Goldman is axed in this trade because if there is anything that will send the S&P sliding and hitting Goldman's year end target of 2,300 it is a selloff in tech (and other strong balance sheet companies), which as noted above, are responsible for half the market's YTD gains.

And while normally we would caution that the Fed may simply step in during any concerted selloff amid the broader market (catalyzed by the tech sector) as it has every single time in the past, this time it may let gravity take hold: after all, not only did the Fed caution during its last FOMC minutes that elevated asset prices have resulted in "increased vulnerabilities" and that "asset valuation pressures in some markets were notable", but as Goldman also warned recently, Yellen may be looking for just the right "shock" with which to reaffirm control over a market which is now interpreting a rate hike as an easing signa (see "Goldman Asks If Yellen Has Lost Control Of The Market, Warns Of Fed "Policy Shock").

It is hardly a secret that most Goldman recommendations in recent years have a been a dud, but just maybe this time it is different. The bank's long-suffering clients - most of whom find themselves on the opposite side of the bank's prop trading desk - will certainly be grateful.

Comments

Soul Glow Sat, 06/10/2017 - 12:24 Permalink

Initially the Fed will BTFD, which will give you a window to make a quick 2%, just as the Fed will continue to sell gold, and you could make a quick 2% shorting gold for the next couple days....Or you could go to your local coin shop, purchase something that was considered money for thousands of years until a group of ruthless bankers decided they wanted it all for themselves, put it under your bed, and know that by keeping gold for yourself it will help put a stake in the global cabal and maintain your wealth in the long run.The choice is yours....

Soul Glow FreeShitter Sat, 06/10/2017 - 13:04 Permalink

Good luck trading, but I'll stick to investing in something that is finite.  I mean, sure, there is a "certain amount" of bitcoin, but now that we see crypto after crypto-currency being made it is obviously not a finite thing.  Shit one day there may be more crypto than fiat.Just sayin'....

In reply to by FreeShitter

Peak Finance Sat, 06/10/2017 - 12:43 Permalink

There is no market, there is only the Fed.THAT BEING SAIDSo,After last weeks total embarasment and complete ownage of the entire Washington Liberal and Media complex, do they crash the market to "teach Trump a lesson" are try to cost him his support? Honestly I expected them to "pull-it" the moment he got elected to get us serfs in line and teach "us" a lesson for having the nerve to vote against THEIR interests. I don't know what the fuck is going on anymore. I am firmly in the hyperinflatiopn camp and am a BTFD'er now, so watch me get raped after my final capitulation lol  

Hongcha Peak Finance Sat, 06/10/2017 - 12:59 Permalink

Peak, I have pondered the same scenario.  I narrowed it to one of two scenarios:1.  Trump's enemies, of which he has many, simply don't have the power to 'Pull it';2.  They do have the muscle but they are biding their time.I am inclined towards #1. They couldn't prop it up in 1929.  They sent the president of the NYSE on the floor to bid up US Steel and it didn't work.  Sometimes landslides happen.We may be setting up for a rotation, not a broad correction.  Either one works for me. 

In reply to by Peak Finance

Soul Glow Hongcha Sat, 06/10/2017 - 13:06 Permalink

The "people" running finance could pull it whenever they want.  Just raise rates more than expected.  The crash may not happen the next day but sooner than later the debt mountain would become unfundable and would crash on everyone's head.  You've seen the movie "Margin Call" right?

In reply to by Hongcha

Peak Finance Hongcha Sat, 06/10/2017 - 13:20 Permalink

About this:1.  Trump's enemies, of which he has many, simply don't have the power to 'Pull it';Well, who is supporting the market with all of those block trades? If you understand technicals, the trades are made at "the worst possible moment" (if you were actually rying to make money) or conversly at "the best possible moment" if you goal was to halt downward momentium. We are talking HUGE TRADES in like /ES and QQQ SPY and such. I saw an /ES trade cler 5 ticks!! Who can do tht other than a central bank? So I do believe based on this, "they" (The Fed) are in complete control and can guide it up and down at their will.  

In reply to by Hongcha

Heterodox economics Hongcha Sat, 06/10/2017 - 20:23 Permalink

I am inclined to choice #1.  One of the main enemies of Trump are the intelligence agencies (CIA, NSA, etc).  However, it seems that the miilitary supports Trump.  Also, it looks like that Wall Street now supports Trump.  On the campaign, Trump seemed more critical of Wall Street and the financial system than Hillary Clinton.  (As to whether this current Trump-Wall Street alliance is a good thing, is a separate, though interesting, issue.)  Trump is aiming for lower regulations and lower taxes, which is fine with Wall Street.  So my take is that Wall Street won't pull a crash  because they have no problem with Trump's policies.  Corrections and  periods of sliding stock prices will happen though.   

In reply to by Hongcha

Overleveraged_… Sat, 06/10/2017 - 12:45 Permalink

Last time the Market Acted like What? Like "this"??? This is new Territory my friends. You see, for the first time in history the markets are COMPLETELY fabricated. They are at the full control of the world Central Banks in Coordination with the President's Working Group on Financial markets. They are creating $300+ Billion of new money every single MONTH and pumping all markets full of it!If you paid attention to yesterday's price action, it's not hard to tell at all. If things start to get overly pessimistic, they are standing by with finger on the buy trigger, waiting to prop the markets back to WHATEVER LEVEL THEY WANT. This is why I have been stressing that Stock Market Crashes are NO longer possible. Not even close.I used to be frustrated about this, but now I have the perfect strategy. I am 3x Long Leveraged S&P 500. The fact is that the Market Masters (Kuroda, Draghi, Gary Cohn, Janet Yellen) WANT stocks to be at ALL TIME HIGHS. Not only do they want them there, but they have the power to make it so, quite easily. Donald Trump is IN ON IT TOO. He is the King of the Stock Market and will absolutely not have a crash under his watch.There is no need to fight any longer. I am up about $48,000 on the year and will be quitting my job soon. Finally I'll be financially free once the S&P 500 hits my estimated year end price target of 3000, and Q1 2019 Price Target of 4500. This may very well be the easiest time in history to make the MOST amount of money!! For those who are worried about yesterdays 2 point dip, I am not. I bought MORE 3x Leveraged Long S&P500. I am expecting a HUGE gap up on Monday which will bring us right back to all time highs. 

Overleveraged_… Soul Glow Sat, 06/10/2017 - 14:39 Permalink

Yes, it would be "hillarious" in the sense that it's completely impossible. I am willing to hold my 3x Long Leveraged positions into any weekend or Holiday. You see, I always know that by Monday the President's Working Group on Financial Markets will have a full grip on any situation and send us on the path to new all time highs. I am so confident in this fact that I will be quitting my job soon.

In reply to by Soul Glow

GodHelpAmerica Sat, 06/10/2017 - 12:43 Permalink

Congrats central banks, you've bid these shit stocks so high that the long term risk associated with them is now greater than the sovereign debt of insolvent nations.

Endgame Napoleon GodHelpAmerica Sat, 06/10/2017 - 13:12 Permalink

Is that because when the stocks inflate too high, novice people buy the stocks at prices that are too high and then it crashes, leading them to actually lose money, whereas the ones who bought in while the stock was new and low in price occasionally make a lot? If you put in just a little, and if it goes up a lot and then crashes, you still have more than you originally put in. You really did not lose, but just did not make as much as you would have if you pulled it out at the right time. This stock betting involves a lot of risk any way you go.

In reply to by GodHelpAmerica

Manipuflation Sat, 06/10/2017 - 12:45 Permalink

Fuck off Goldmanstein.  I see some rotation in the clouds around this part the Upper Midwest.  77 F before the sun even came up this morning with 40 mph wind gusts.  Now the sun, the main cause of global warming, is well up and heating things up thus giving moar energy.  We are going to get hammered hard.  I saw the cirrus clouds yesterday and the moondog early this morning.  This is tornado weather.  I didn't need to look at the weather forecast to see this coming.  There is nothing I can do about it.  I'd rather a tornado than straightline winds and hail.  I am not sure about a hurricane but I have lived through a few of these types of storms and they are very violent and fast.  By three or four o'clock I think we will know what is going to happen.  Maybe we will get lucky here?          

Endgame Napoleon Sat, 06/10/2017 - 13:00 Permalink

At least, when you have no money, you do not have to make a choice. It must be hard to resist these fascinating tech stocks, like the ones that say they have a chip that will be used across all the major tech companies to provide visual effects in AR apps.

When AR first came out, it did not look utilitarian enough for me, and I am an art person. Most art people are not interested in pretending to be inside of a video game or some kind of sci-fi movie. They want to make things themselves.

But AR has all kinds of practical art & design applications, not to mention all kinds of social media sharing / scrapbook-like functions for all these baby show-off parents and grandparents who use it that way now. It will even radically change workplaces, hopefully making them remote.

If I had money, I would be tempted to put it there, even though the conservative people do not seem to do that. And people who are not math-oriented trader types often lose money when betting it. I have seen people get money and lose it, trying to pretend they were Wall Street traders.

Still, it seems like people often just put their money into what their instincts and interests tell them to do, like in real estate if they love architecture and styles. That sometimes pays off, not in the way you guys talk about, but on a small scale with a house that appreciates.

Or, if they grew up on a farm, they'll buy land, and sometimes, they hit the jackpot, buying a piece of land that people want to develop. These tech investors are really interested in the products. Some of them just enjoy seeing which ones pan out.

It seems like there are a ton of underlying, gritty business factors that can impact it, though, like the fact some of these innovations are not proprietary. They can get a ton of competition that drives their prices down.

Aside from whether the whole thing crashes, to put money in stocks, people have to really research it or just go with what they love and hope for the best. Most of the people with money probably just go to a broker who puts their $$$$ in a bunch of different places, getting modest returns.

montresor Sat, 06/10/2017 - 13:07 Permalink

Look this is very easy...  Nobody clicks on Google's ads, most don't even see them anymore with the ad blockers.. Nobody needs or wants that stupid pixel phone.. Sundar Pichai put his ass in the air and became a gay rent boi for the democratic party.. He altered Google's precious search algo and destroyed the company in the process..  Tim Cook was so focused on his social justice warrioring that he forgot all about how to make phones and computers.. I don't see anyone gushing over a new macbook, and we've all seen or owned an iphone by now... Facebook, like Apple, can't be bothered to do anything innovative, that's why M Zucker is running for office and trying to shake hands with people who hate him.. Like Tim Cook and Sundar Pichai, M Zucker was conscripted into service for the democratic party.. His "app" was used by the democratic party as a stasi secret police force and book burning proxy army.. The government can't stop free speech, but they can lean on M Zucker to turn off his own website, which he agreed to do while he was sucking their cocks..  Netflix, is a site literally everyone hates.. Over a million titles and not a damn thing to watch.. They rub this bullshit in people's faces.. It doesn't matter what the monthly price is.. The price could be zero, and nobody watch his stupid movies..  That leaves Amazon, the one FAANG stock that actually has a service that people like and want to pay for..  The problem is that Bezos is the very worst of all democratic party operators.. He owns the Washington Compost, which is a propaganda ministry for the democratic party.. He is a disgusting traitor to his country like all the others..  Until each of us is willing to sacrifice.. Until each of us is willing to suffer..  These traitor pieces of shit and their slave masters from the democratic party will continue to wage war against us.. Do you get it? That's what the FAANG stocks are! They are arms of the democratic party! That's why all the "smart money" hedge funds are buying their stock!! Because they know for sure, that these companies exist within the protective circle of the democratic party! They will not be permitted to lose money!

U4 eee aaa Sat, 06/10/2017 - 13:16 Permalink

I guess they heard from the CBs that they are going to continue to buy the Qs so they are looking at a low price point to buy in. There is no way they make two short calls if they think the market is really going down. Their message has too much urgency to it