Will the NASDAQ crash? We get that question often.
Here’s a Bloomberg discussion on that subject and a Bloomberg chart comparing the NASDAQ bubble 20 years ago with the NASDAQ spike this year: “Nasdaq-100 Stumbles Near Dot-Com Era Record Versus Dow,” https://theonedave.tumblr.com/post/634605567333236737/nasdaq-100-stumbles-near-dot-com-era-record-versus.
And here’s a Cumberland commentary we wrote at the peak of the NASDAQ bubble twenty years ago: “Will the NASDAQ selloff become a crash?” https://www.cumber.com/pdf/nasdaqpe04012000.pdf.
So was the forecast of a crash then correct? History says “yes.” Is the rationale we constructed 20 years ago still as valid today as it was then. Rationale the same? Yes! Forecast outlook? No!
So, what’s different?
Then (April 1, 2000) we demonstrated how a market multiple of 100 times earnings made no sense. Accordingly, we sold the tech sector and took it to extreme underweight at a time when it was our heaviest-weighted sector by market cap. We rolled the cash into 6% very-high-grade tax-free municipal bonds. In 2000, emotional, greed-driven investors were fleeing bonds and buying Microsoft and Cisco at huge earnings multiples. There was nothing wrong with those two companies fundamentally. What was wrong was that their stock prices were outrageously high given their earnings and given competing interest rates. Simultaneously, in 2000, municipal bonds were incredibly cheap – 6% AAA tax-free versus 100 times earnings for premier growth stocks. That’s a tax-free 6% yield versus a taxable 1% earnings yield. The complex equity risk premium models said that, in 2000, you were paying the market a premium for the privilege of owning a stock instead of a bond. Simple asset allocation wisdom said buy bonds and sell stocks. We did.
Fast-forward to today: The US struggle with COVID-19 is well underway. A failed federal COVID mitigation policy will be replaced as a new administration takes the helm. Science and medicine appear able to succeed in delivering COVID vaccines and improving treatments next year. US, European, and other developed markets anticipate economic recovery. The Asian economic and market recovery is way ahead of the US recovery and continuing.
And, most importantly, the market multiple is NOT 100 times earnings. Our S&P 500 earnings estimate for 2021 is a central data point at $162 with a $5 band. But most importantly, the bias will be toward upside surprises. Bond yields are likely to be headed higher, but the Fed and other central banks will keep short rates very low. So the steepening yield curves (US and other places) mean good news for stocks and an opportunity for total-return bond strategies.
At Cumberland, US stocks portfolios (ETFs) are nearly fully invested. At Cumberland, bonds continue to utilize a barbell strategy. At Cumberland, our quant strategy awaits another trading entry after several active trades this year. We can send details to anyone who emails me. Please try to specify which strategy so we don’t clog your inbox.
Please be safe and careful with your Thanksgiving, even if it has to be a Zoom Thanksgiving. The next few months are going to be COVID dangerous, as our pandemic-related commentaries will amply demonstrate.
Now we want to segue into an important discussion about nurses. We can be very thankful for them. And we are worried about them.
The GIC is developing a nurses session as part of its COVID series. Information will be forthcoming at www.interdependence.org.
Also, and separately, we’ve given the University of South Florida College of Nursing a grant to help launch a four-part series to aid nurses in protecting themselves during the COVID onslaught. As of early October, almost 1100 US healthcare workers, many of them nurses, had died from COVID-19 contracted while helping others who were sick (“COVID-19 death toll for US healthcare workers tops 1,000, news investigation finds,” https://www.beckershospitalreview.com/workforce/COVID-19-death-toll-for-us-healthcare-workers-tops-1-000-news-investigation-finds.html).
In Florida we have more than 300,000 nurses. They are and have been on the firing line. In fact, some of them have walked picket lines outside their hospitals to protest a lack of PPE and other unsafe conditions.
Nurses are the front-line infantry in this COVID battle. Let’s really support them with money and equipment and good, accurate information. The USF series will offer continuing-ed credit for nurses. It will be in webinar format and available worldwide. Anyone interested in helping to publicize or to contribute financially to this effort may email me, and I will forward your message to the USF folks. We have funded this with immediate philanthropy because USF Nursing School was waiting for a grant and we didn’t want them to wait anymore. Nurses need the best information available and they need it NOW!
In August, the WSJ posted a moving video about the experiences of four crisis nurses who were traveling from COVID hot spot to hot spot. If you didn’t catch it then, it’s well worth a look: https://www.wsj.com/video/COVID-chasers-the-nurses-fighting-coronavirus-from-hot-spot-to-hot-spot/E05FF3C1-0873-4AF9-ADA1-9F1CECE24065.html. Please remember on Thanksgiving: we cannot solve the COVID economic crisis until we solve the COVID public health crisis. Nurses are critical fighters in that war against COVID. Please remember them on Thanksgiving and every day.
Thank you.
David R. Kotok
Chairman of the Board & Chief Investment Officer
Email | Bio
Original commentary went out to subscribers via MailChimp: Will the NASDAQ Crash? Also: Helping Nurses!
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