Wednesday's Market Minute: The Harvey Dent Market

With U.S. vs. China and U.K. vs. E.U. looming over financial markets, I've often referred to this year as the Howie Mandel market, as in “Deal or No Deal?” But that only goes halfway in describing the bifurcated nature of what's happening right now.

When hopes are dim for geopolitical resolution, low interest rates are the underpinning force. Bonds and gold rally, investors clamor for central bank cuts, and increasingly expensive rate-sensitive stocks keep the equity market chugging along. When there are signs of progress on these deals, the reversal is powerful. Treasuries sink, gold drops, bond proxy stocks underperform, and – this part is crucial – evidence is building that high-flying momentum tech and growth names undergo sharp valuation corrections when the reversal in bonds is fast enough.

There is a real danger in this two-faced nature of leadership and we need a darker description of a market exposed to such sharp reversals of fortune: the Harvey Dent market, after Batman’s nemesis Two-Face. What many assume is good, like progress in geopolitics, may prove to have a dark side if the reversal in rates accelerates.

The two corners of the stock market most exposed to higher rates, bond proxies and high-valuation growth names, have important implications. According to Bank of America Corp’s BAC fund manager survey, investors are positioned in utilities, staples and low-volatility factor funds to an extreme degree. On the other end, expensive growth names – Alteryx Inc AYX, Roku Inc ROKU, Shopify Inc SHOP, etc. – which have yet to recover after September’s yield spike, are the names most popular among retail traders and average Americans, who are currently viewed as the pillar for the global economy. A sustained drop in those names will be damaging to sentiment.

What makes Harvey Dent/Two-Face so dangerous is that he’s in some form a result of Batman’s negligence. Let’s hope investors are more careful.

Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.

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