Every stock-market rally is top heavy. In other words, every stock-market rally is led upwards by the very few. The 80/20 Pareto Principle that defines so much of life is 95/5 when it comes to equities, and realistically 98/2.
Looking back to the rally of the late 1990s/early 2000s, companies like Cisco, Intel
Consider the companies mentioned. Most, but not all, were and are technology-focused. This is important simply because as their high-flying stories indicate rather loudly, they succeeded against all odds. If readers doubt this, they need only pick up Sebastian Mallaby’s essential new book, The Power Law. The funding story about more than a few of these companies is within Mallaby’s book, and they all resemble one another: initial and subsequent investment rounds defined by enormously expensive capital; capital so expensive that debt financing was out of the question. Think about it.
In thinking about it, consider why so many of the companies mentioned enjoyed historic rallies of the kind that so thoroughly enriched the lucky-few early shareholders. The stock surges proved enriching precisely because so few saw their immense potential from the beginning. All of which explains why the funding was of the equity variety, instead of debt. These companies weren’t expected to make it.
This is a long or short way of saying that the Federal Reserve and its vain attempts to set the cost of short-term borrowing had nothing to do with the early, pre-public funding of the companies that drove the last two stock-market rallies. How could it have? In just about every instance these businesses didn’t come anywhere close to rating anything resembling bank finance. Figure that bank loans must perform, which explains why banks pay so little interest on deposits now, and why they paid so little in 1999. They weren’t taking big risks then, nor are they now.
All of this is requires mention given stock-market commentary that never changes. A Federal Reserve that projects its well-overstated influence through the most risk-averse financial institutions on earth is the all-weather explanation for everything stock-market related. Never explained is how. The stock market is risky, banks studiously avoid risk, but minor Fed fiddling with the short rate for credit supposedly tells the market story. What’s sad is the narrative rarely even rates the most basic of interrogation.
Among other things, if market rallies are as simple as an “easy” central bank, why is Japan’s Nikkei 225 still well below highs last reached in 1989? Why are European indices so far behind U.S. indices despite the ECB’s allegedly “easy money” policies that have so often mirrored those of the Fed? These questions are never answered. Similarly not answered is why U.S. companies that risk-averse U.S. banks wouldn’t have paid a second of attention to during their much more than uncertain ascendance have their fates so explicitly tied to the alleged stinginess of banks now.
More important, ‘the Fed’ as far as the eye can see view is all over the place. Supposedly stocks rallied on Wednesday based on “relief” that the Fed only hiked 50 basis points. Investors apparently feared 75. Ok, but the following day stocks cratered. And they declined even more on Friday. Did Chairman Powell backtrack? Readers know the answer, or they should. The rate hikes announced this week had been priced weeks ago, yet we’re supposed to believe the big equity declines of the last few days were Fed related? That’s what the pundits want us to believe. They embarrass themselves. They don’t even try to be serious anymore, or investigatory. Their routine answer whether markets go up or down is that “the Fed did it.”
Sorry, but markets don’t work that way. They’re always a look into the future, and the future as far as the Fed fiddling with rates was priced long ago.
That it was raises obvious questions about the real drivers of stock-market uncertainty last week. And while equity markets are way too complicated to be simplified in the way that Fed simpletons do week after week and year after year, it’s worth pointing out a few possible instigators of the decline. For one, it’s apparent that the Biden administration thinks it can “win” its proxy war with Russia over Ukraine. Whether true or not, what we don’t know is how Vladimir Putin might ultimately respond if the U.S. “wins.” Russia has nukes…Hopefully it’s all nothing, but as equities are a look into the future, wouldn’t something that’s potentially something have to be priced?
China is in most instances the biggest non-U.S. market for U.S. production, and its most prosperous city (Shanghai) unexpectedly remains locked down. Another surprise for investors to digest perhaps?
There was also a leak of an upcoming Supreme Court opinion this past week; an opinion that just might energize a Democratic voting base that was expected to be relatively blasé about the upcoming mid-terms. Particularly as an expected Republican rout had been informing equity prices for some time, is it not unreasonable to speculate that the overturn of Roe v. Wade just might change the November equation?
These are things to consider as pundits retreat to a central-bank narrative that they always retreat to. It’s so trite, it’s so five minutes ago, and it’s so rooted in a form of financing that maybe mattered hundreds of years ago. Wise minds will look beyond a Fed that’s logically not the story right now, and that realistically never was.