Authored by Bill Blain via MorningPorridge.com,

"In order to save the village we had to destroy it..."

As Apple passes through the $2 trillion market cap, I'm hi-fiving myself or correctly understanding how it would successfully weather the Pandemic storm – and I can't help but wonder when to sell. The speed at which the market wobbled after the Fed failed to make loud enough promises about even more bailout and support ahead, says it all about what's driving the current market. 

Sure, there are lots of analysts and investment banks saying the outlook for stocks is for further upside, and raising their targets for the year. If it happens, I hope they remember to thank the Fed.

The reality is markets are on a spectrum between uber-bears (who always believe everything is going to end badly) and the pixie-dust-upside-prophets who think current market strength is properly discounting an even stronger post-Covid rally and vaccine driven recovery. The truth, as always, is not only out there, but probably lies in-between these extreme views. 

On one hand you've got the market's natural exuberance which has been massively encouraged and inflated by QE Infinity. If you are wondering how the Fed buying bonds causes stocks to rise, then its dead simple: the more expensive bonds get because of the QE distortion, it makes higher returns in stocks look relatively more attractive. Stocks might be trading at record P/E ratios and look massively overpriced, but relative to other financial assets (bonds), they still look cheap. 

The mistake is to look at bonds and stocks as a closed bubble. For most institutional investors they are – they can't invest in anything else due to regulations demanding they ensure certain liquidity standards. These regulations assume that in a crisis funds will be able to meet drawdowns by selling financial assets. (Pray to whatever gods you follow we never have to test that particular flat-earth theory – in times of crisis, no matter how much liquidity you think is there, there will never be enough.) Daily liquidity is a recipe for disaster – but any serious fund hoping to raise investment money has to offer it. 

Tech stocks have soared because, frankly, they've had a good crisis. 

Others… not so much. Airline stocks – for instance Qantas dropping a $1.4 bln loss this morning but looking forward to resuming flights to the US sometime in the next 3 years (!!!) – are good examples of firms having a not-so-good-crisis.  

The market is not stupid. Data compiled by Deutsche bank shows new money and flows into the equity markets is almost all going into Tech or healthcare – the rest of global commerce is essentially flatlining or negative. If your cash is invested in index-followers on the basis the rising Tech tide will lift all boats – then beware, it's a false connection. These stocks could be dragging for years. (And explains why a V-Shaped recovery was never realistic.)