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Is All The Good News Already Priced In?

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Daniel Laboe
·7 min read
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Last week was the worst 5-days for the markets since Halloween as investors & traders pause to digest the impending blue wave that was solidified in the Georgia senate election last week and an additional $1.9 trillion in stimulus that appears to be already priced in.

The tech-driven Nasdaq 100 lead the charge down last week, shedding 2.3% of its value, followed by the S&P 500, which was down 1.9%. The value-buoyed Dow Jones Industrial Average fell only 0.9%. S&P 500 futures rose over the last two days of slow trading back towards where we opened on Friday morning.

The broader equity markets appear to be reaching a plateau, despite pockets of euphoria (i.e. WallStreetBets driven stocks like GameStop (GME), BlackBerry (BB), and Virgin Galactic (SPCE)).

We traded mostly sideways in the first 3 days of last week into Fed Chairman Jerome Powell's Q&A session on Thursday afternoon, which began the end of week sell-off. Powell discussed how there is no formula to how far/long the Fed will allow inflation to run but said that they would be utilizing the necessary tools (interest rates/balance sheet flexibility) to control inflation if and when they deem necessary.

It seems that no matter what Powell says, short of adding more monetary stimulus (despite every dovish lever being pulled), the market pulls back. In my judgment, Jerome sobers the market up with rational discussions about interest rates moving forward, and this leads to profit-pulling.

Is all the good news priced in? Probably, but that doesn't mean that this momentous rally is going to end. Like the famous Maynard Keynes said, "the markets can remain irrational longer than you can remain solvent." So, remain flexible with market sentiment, and stay cautiously optimistic until the tides turn.

This commencing Q4 earnings season will be telling. Focus on corporate sentiment about the next 12-months and how investors respond. This will help us gauge how much is optimism is actually baked in.

Big Bank Earnings

The big bank earnings from JP Morgan (JPM), Wells Fargo (WFC), and Citi Group (C) summed up last week on what you would have expected to be a positive note. JPM posted its highest profitability in history, with its bottom-line surging by 47% from the same quarter last year and beating Zacks Consensus EPS estimates by 40%.  

Prior to Friday morning's earnings, JPM had driven up over 40% in just 3 months, but the big run this past quarter catalyzed investors to look for any reason to pull profits. JPM CEO Jamie Dimon said that significant economic uncertainty in the short-term could affect the business, which was enough to push the stock down 1.8%.

Citi Group and Wells Fargo both had similar share price rallies in the past quarter, and despite each of them beating Zacks Consensus EPS estimates, they saw declines of roughly 6.9% & 7.8% on Friday, respectively.

This morning Bank of America (BAC) reported its Q4 earnings, narrowly beating Zacks Consensus EPS estimates and missing on revenue. The pre-market action is adverse, with its share price illustrating a 1.7% decline, which was on top of its 2.9% slide on Friday.

Goldman Sachs (GS) is the banking sector's knight in shining armor. The firm illustrated unbelievable results in the wake of economic uncertainty as the enterprise takes advantage of the opportunities in the market. GS reported recorded breaking earnings of $12.08 per share, which demonstrated 158% year-over-year growth, and blew Zacks Consensus estimates out of the water by over 72%. Its sales were quite strong as well, showing $11.74 billion, up 18% from the same quarter last year, and beat estimates by 22%.

Equity trading and its deal-making investment banking were the two largest growth drivers for this best-in-class investment bank. David Solomon is proving himself at the helm of this remarkable firm. Investors & traders are happy with what they see and have pushed this stock up 2.5% in pre-market trading, back towards its all-time highs, which it hit on Thursday of last week. I remain a GS buyer despite the run it has already had. This company is adaptable and resourceful, and no matter what the economy throws at it, GS comes out on top.  

Semiconductor News

Demand for chips has surged. Best-in-class and largest chip contractor, TSMC (TSM), has illustrated this significant uptick in semiconductor demand with an exciting earnings report that revealed the sector's bright future. The company is working on an atomic scale that no other manufacturer can match, with 20% of its Q4 revenue being driven by 5nm chips. Intel is falling behind the innovative curve that TSMC is setting. Intel is currently working on manufacturing 7nm transistors, putting them at least 3 years behind TSMC's capability.

TSMC announced in its earnings yesterday that it would be spending $25 to $28 billion to further develop its advanced chip manufacturing to keep up with swelling demand. The company released record quarterly results on Thursday with 22% YoY sales growth and 33% YoY EPS appreciation illustrating substantial margin expansion. Its biggest topline drivers of 2020 were smartphones, high-powered computing, and IoT devices. The biggest and baddest chip innovators like Nvidia (NVDA), Broadcom (AVGO), Qualcomm (QCOM), Intel (INTC), and even Apple (AAPL) all utilize TSMC's cutting-edge manufacturing.

2020 has digitalized the world by years in a matter of months with the need for mobile devices proliferating and the 4th Industrial Revolution taking off. Consumers and businesses are leveraging more digital technology than ever before, which means they need for chips has never been greater. I expect that 2021 will be a strong year of growth for the semiconductor space.

What Next?

As I said, I remain cautiously optimistic. There is still a lot of FOMO investing and trading occurring in the market for those that missed out on the most miraculous & rapid market recovery in Wall Street history. The thirst for risk seems to be at a peak, as investors pour a seemingly unending amount of money into red-inked (unprofitable) stocks with seemingly no regard for valuation.

This stock buying frenzy is reminiscent of the dot-com bubble, where greed and FOMO trading seemed to be the market's primary drivers. Tech giants like Intel (INTC) and Cisco (CSCO) hit their all-time highs and are yet to return after over 2 decades.

The ultra-low interest rate environment that we find ourselves today makes some of the valuation pushes justified as the financial models' denominator shrinks substantially. However, I feel that most of the good news has already been priced in. An inflation spike might be right around the corner.

Jerome and his board of dovish governors have vowed to let inflation run above the target 2% for some time. Still, with all this stimulus and an economy that's expected to explode in 2021, we will see inflation surge much more quickly than the Fed is anticipating. Once any hint of the Fed raising rates or rolling off assets on its balance sheet, the rich market valuations will deflate quickly.

I am looking to protect myself with puts on Invesco's Nasdaq 100 tracking ETF (QQQ) and SPDR S&P 500 tracking ETF (SPY). March expiring puts and beyond are how I will be hedging my portfolio in the coming months of uncertainty.

5 Stocks Set to Double

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Today, See These 5 Potential Home Runs >>


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Wells Fargo & Company (WFC) : Free Stock Analysis Report
 
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QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
 
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
 
JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report
 
Intel Corporation (INTC) : Free Stock Analysis Report
 
The Goldman Sachs Group, Inc. (GS) : Free Stock Analysis Report
 
GameStop Corp. (GME) : Free Stock Analysis Report
 
Cisco Systems, Inc. (CSCO) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
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