During the course of only five trading sessions in early July, investors flipped from worrying about the economy, trade and regulation … to optimism. Stocks that looked like short-sale candidates are making new highs.
This is a lesson for traders. Extreme pessimism is normally a buying opportunity.
This does not mean the bad news disappeared. The economy is still slowing fast …
- The May jobs report, revealed Friday, showed the economy added only 75,000 new jobs — far below expectations. And news outlets reported that the Labor Department revised the count for March and February lower, too.
- This follows a Commerce Department report last month showing gross domestic product limped to a 2.2% increase in the fourth quarter of 2018. Corporate profits failed to rise for the first time in two years.
- Meanwhile, the trade war with China persists, and politicians are stepping up their calls for new regulations and fines for big technology.
President Trump, fresh from a victory lap following the resolution of his immigration dispute with Mexico, told reporters Monday that China will soon be forced into submission by tariffs. As a throwaway thought, the president said he favored new fines for big technology firms because they were colluding with the Democrats.
All these things should be headwinds. Yet they have been negated by the Federal Reserve.
Despite record low unemployment, the central bank seems committed to reducing short-term interest rates to keep the economy humming. Which, on its face, seems crazy. However, there is a legitimate argument to be made.
Writing in the Financial Times June 10, Gavyn Davies makes the case that the Fed believes the ongoing trade war is an existential shock to global economic growth. Cutting rates sooner than later, despite continued expansion, will help avoid a future recession.
It means cheap and plentiful capital. It’s a recipe for multiple expansion.
That idea got a shot in the arm when Salesforce.com paid $15.7 billion for Tableau Software, 42% above the previous closing price. This deal values the big data firm at 73.6x forward earnings and 11.3x sales.
The deal follows Google’s acquisition of Looker earlier for $2.6 billion. The data analytics firm fetched 9x the $280.5 million raised from private investors. It was also 26x the current $100 million sales run rate.
The bottom line is some of the smartest investors anywhere are still willing to spend big bucks to buy advanced technologies.
It means that tech stocks are not overpriced. They may even be cheap.