Weekly Wrap

Market Update

Calendar Icon   Friday, 14th May 2021

ASX 200 Index (XJO)

Last week we mentioned that the XJO was in an uptrend and it wouldn’t surprise if the market attempted to reach the previous high from February 2020 at 7194 points. Monday’s close for the ASX was at 7172, a record. Since then the index has fallen 130 points and we can see on the chart below, the ETF equivalent for the XJO (YMAX), has registered multiple Distribution alerts.

Technical readings for the XJO have turned lower and it would not be surprising if the XJO did take a breather at least for the short term.

XJO Chart

Corporate Snapshot for US Stocks

Sometimes it is important to take a step back and look at the state of the market through an objective lens. One way to do this is to look at the price to book value ratio of the S&P 500. In standard times, shares are considered overvalued when the ratio is close to 1.5 times book value with a dividend yield around 3% to 5%.

In the 1929 and 1987 markets crashes, this ratio was below 2 times book value. Since the 1990’s the value of stocks compared to their book value has soared. Until last month, the previous high water mark was in March 2000 when stocks were trading at almost 6 times their book value on a yield of 1.5%.

In April 2021 a new record in share valuations for the S&P with stocks trading at over 6 times their book value on an average yield below 2%. Whilst this is a simplistic view of the market, the majority of views remain bullish, hence, the need to temper high expectations.

Stock Market Valuation Chart

Inflation Vs The Fed

This week the April CPI numbers for the US were released. The 4.2% increase is a figure that would cause angst within the Federal Reserve if repeated in the next few months. According to the Fed, this rise in inflation is just a temporary blip that will have no lasting effect on their interest rate policy. However, the rise in the Producer Price Index of over 7% for the month of April is not a good sign for the inflation outlook.

Rising inflation is normally accompanied by rising rates as the Central Bank uses monetary policy to try and tame the economy. If inflation is back on the agenda, then the Federal Reserve’s policy to keep rates low and continue pumping money into the bank system via Quantitative Easing will be seen as a massive failure.

For a detailed look at this issue please click here.

Crypto Wobbles

During the week, Elon Musk announced that Tesla would not accept Bitcoin as payment to purchase their vehicles. According to Musk, the amount of electricity used to produce and transact Bitcoin around the world is bigger than most countries (see chart below). Bitcoin has fallen under US$50,000 per coin and the rest of the crypto universe is suffering as well.

Another problem for the crypto crowd is that the US Justice Department and Internal Revenue Service have started to investigate the biggest Bitcoin platform in the world, Binance. The rapidly growing platform has not commented on the investigation but the use of crypto currencies is a favoured method for illegal activities. Just this week, a cyber raid on a US oil pipeline company resulted in a US$5m payment to a ransomware company reportedly operating out of Russia.

The blockchain technology is a very useful tool. The rise of unregulated crypto currencies surrounding the technology is drawing attention from enforcement agencies. We noted a few weeks ago that when Bitcoin made the cover of Time magazine, it was a sign that the euphoria surrounding the currency was at a peak. Bitcoin is down over 20% since that magazine cover first appeared.

Headline: Binance Faces Probe by U.S. Money-Laundering and Tax Sleuths
Annual electricity consumption graph