Markets seemed to calm this week as economic reports came in a little weaker than expected, increasing the probabilities of a September rate cut by the Fed (at least, in the minds of investors). However, certain events have harkened us back to the days of 2010 and even the Dot.com crash.
Similar to last week's musings, we found inspiration in the warm vacation months of Summer. The 1985 film, "Back To The Future" was released in the Summer of that year and was a massive success, along with its successive sequels. Here's some trivia about the movie:
This film had a pretty meager budget of $19 million and made more than 20x that at the box office. In fact, all 3 movies were gold mines for Universal Pictures:
Back To The Future (1985): $384.5 million worldwide
Back To The Future II (1989): $332.5 million worldwide
Back To The Future III (1990): $245.1 million worldwide.
Bob Gale and Robert Zemeckis own the rights to the film and it sequels. After the first movie became a hit, they received a hand-written letter from John DeLorean thanking them for immortalizing his car.
Michael J. Fox admitted in an interview that strangers who meet him will still call him "McFly." He stated that when he was in a remote South Asian jungle on vacation he ran into a group of Buddhist monks and one them looked at Fox and said, "Marty McFly!"
One of the executives of Universal Pictures at the time, Sid Sheinberg, insisted that the movie have a different title. He wrote a letter to Zemeckis and Steven Speilberg demanding that the title be changed to "Space Man From Pluto" and that the line where Marty pretends to be a alien and says, "I'm Darth Vader from the planet Vulcan" be changed to "I am a spaceman from Pluto." Spielberg responded to the letter thanking Sheinberg for the "wonderful joke memo" and that everyone got a kick out out of the memo. Sheinberg was too proud to admit that he was serious, so he let it go.
Here's what we've seen so far this week...
Back To 2010? While economic data has some investors concerned this week, trading didn't exactly start off on a good note. On Monday, investors experienced a partial market "flash crash" that wiped out the entire market cap of Berkshire Hathaway and halted trading in about 40 other stocks.
Those stocks recovered quickly after a "glitch" was found in a software update that seems to have caused the trading issue. It was reminiscent of the Flash Crashes of 2010 and 2013 (see more info on those here). Regardless, volatility is still muted in relation to previous bull markets. If we look at the Nasdaq, which is laden with AI-related stocks, Realized Volatility this year is only half of what it was in 1999.
If we look at the VIX Index, which is related more to the S&P 500, we also see a stark contrast in volatility today versus previous bull markets. For example, in the periods 1999, 2007, and 2019, the VIX spiked approximately 2-7 months before the S&P 500 Index peaked. Currently, the level of the VIX is roughly half the level it was prior to previous bull market peaks. Can that change? Absolutely, in a hurry. However, the average level of the VIX since 1990 is 19.5 and the index is comfortably lower than that now. The level of the VIX alone is not enough to determine when the next bear market might be around the corner, but it's a good indicator of a pick up in volatility.
Related specifically to the tech bubble in 2000, we are not currently seeing the same type of spread between fundamentals and price action. For example, in 1999 and 2000, earnings of Nasdaq companies as a percentage of S&P 500 companies was fairly normal, while the price action of Nasdaq stocks was significantly higher than the price action of S&P stocks. Today, we are seeing more of a balance between the price action of the two indices and their fundamentals. This would indicate that we are not in exactly the same type of market environment as existed at the height of the tech bubble. Many market pundits are akin to the weather man. They aren't very good at predicting. In "Back To The Future," Doc Brown asks Mary, "Are you sure about this storm?" To which Marty replies, "Since when can weathermen predict the weather, let alone the future?" It's best to just follow the data and let the so-called "prognosticators" fumble about with guessing where we'll be 12 months from now.
I'm Afraid You're Just Too Darn Loud. The permabears are out in full force this week as some of the economic data has disappointed. And though, some of the data is concerning, I'm afraid they are just too darn loud.
The labor market is definitely normalizing from pandemic irregularities. The JOLTs Job Openings declined for the fourth consecutive month. Now, job openings per unemployed worker is back to pre-COVID levels as employers have found the right balance for their needs, all with very little job destruction. So this is good news and bad news. While the labor market is normalizing, it also means we're likely to see employers be more selective and current workers may not find it so easy to find a replacement job in the event they are laid off.
On the flip side, though Initial Jobless Claims and Continuing Claims inched slightly higher for the week, Challenger Job Cuts for May, on a year-over-year basis, had the largest drop in almost a year. So, while the labor market is normalizing, we're not seeing mass layoffs yet.
This morning, the Jobs Report showed that 272,000 jobs were added in May, which was more than the market expected. Fed Futures had moved higher to almost a 56% probability of one rate cut in September, but inched lower this morning after the strong labor market report. So, all things considered, perhaps we should listen to Mr. Lewis when the permabears start making wild predictions. In "Back To The Future," Marty's band is trying to get a gig at the high school dance. While his band is performing a few riffs from the one of the movie's theme songs, "The Power of Love," the actual performer of the song Huey Lewis stands up to chide the band, "Hold it, Hold it, fellas. I'm afraid you're just too darn loud."
Huey Lewis in the house, folks...
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