Neil Azous at Rareview is one of the most engaging brains in fixed income today. He recently laid out his argument for why the Nasdaq has become a drag (below) and will provide more detail on Rareview's advisor-centered solutions in Thursday's webinar. For today, though, I want to focus on his thoughts about tech stocks. It isn't just Big Tech getting too far ahead of the rest of the market. But I'll let him explain:
The world’s first and second most liquid and important stock indices are the S&P 500 (SPX) and the NASDAQ-100 (NDX).
Structurally, we believe a reversal in the ratio of long NDX versus short SPX (i.e., NDX/SPX) poses the most impending danger to an equity portfolio. The ratio is in the process of confirming an intermediate-term trend change.
Based on the sensitivity of high-multiple stocks in the NDX to longer-dated U.S. Treasuries, the catalyst for the NDX/SPX ratio to fall further is higher 30-year interest rates over the next 6-9 months.
Concurrently, capturing this rotation at the sector and security level may provide a significant opportunity to generate alpha.
The Starting Point
Below is the “weekly” ratio chart of long NDX versus short SPX (NDX/SPX) since 1999.
On March 19, 2000, the NDX/SPX ratio peaked at 3.2881, the highest weekly close ever at the time.
This level of NDX relative outperformance was not reached again until July 2020. Since July 2020, the ratio has settled above 3.2881 on 36 of 38 “weekly” closes. The only exceptions are the July 24, 2020 close at 3.2600 and the March 12, 2021 close at 3.2808.
[We've cut the supporting argument but you can see it on Rareview's site. And remember, Neil will lay out his methodology on Thursday for all who attend our next webinar, "Cracking The Yield Code."]
Investment Implications
We believe the NASDAQ-100 Index will continue to underperform the S&P 500 Index if interest rates rise further. (Note: This is a relative value view, not a call that both indices will fall on an absolute basis.)
While the NDX/SPX ratio could fall materially, capturing the rotation at the sector and single security level may generate the most alpha. We have identified the potential winners and losers.
If you are interested in how we plan to adjust the allocations in our GROW strategies, please contact us. As a boutique firm, we can help you navigate these potential critical changes in the market by providing direct access to our investment professionals and library of tools. At Rareview Capital, our goal is to become a trusted resource and the first call for your questions.
