U.S. Markets Sink as Stimulus Talks Stall

With stimulus talks at another standstill and vaccine momentum in the rearview mirror, U.S. equity markets fell today, bringing the S&P 500 and the Nasdaq off their record highs. The losses were mild with technology and stay-at-home stocks leading the declines. 

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The IPO market was red-hot as DoorDash shares slammed home an 85% gain on their first day of trading (more below). Airbnb may be coming next and investors are into new things. 

We are at the time of the year when investment banks and money managers start making their 2021 market predictions. It’s an annual ritual like decorating the tree or making things with ginger bread. Here is a sample:

• UBS: 2021 target for the S&P 500: 4,100. “We see gains front-loaded driven by vaccinations, with the prospect of 4,000 by Q2. We see the upside case (4,400) on even higher valuations as more likely than the downside (3,300).”
• JPMorgan: 2021 target for the S&P 500: 4,400. “We expect a ‘market nirvana’ scenario for equities with the melt-up continuing into 1H21, driven by earnings recovery and multiple expansion. We expect next year to be front-loaded.”

Take those with the appropriate grains of salt, but know that big money is bullish. It wasn’t today, and we haven’t seen a market like this in a minute. There will be days like this…

CFOs Feeling the Froth

It’s easy to find people who thing the stock market is overvalued. It’s all relative, of course, but by most traditional measures it is. Chief financial officers — some of the most conservative people you will find — also share that sentiment. 

According to Deloitte’s recent CFO survey, 80% of CFOs now say equity markets are overvalued (the fifth-highest level in survey history) and just 5% say they are undervalued. The survey also showed that given low interest rates now and out into the future, CFOs are favoring using debt to raise money, with 87% of those surveyed favoring it over equity financing. 

Why it Matters

Cautious by nature, we should not be surprised to see CFOs feeling high anxiety these days. But the fact they like debt over equity means we are going to see a lot more debt issuance coming up. Companies taking on more debt is fine as long as they can service it — but we’ve seen dozens of well known public companies fall under the weight of their borrowing.

Everyone Is in the Pool

That overvaluation we may be feeling is being compounded by the fact that so many investors are piled into the equity market right now. Regular readers know that the last month has brought record amounts of inflows into the equity market. It has been pretty much the only games in town in terms of returns, and when Treasury yields are below 1%, investors get the T.I.N.A. syndrome (There is no alternative). 

According to data from Goldman Sachs, equity allocation among households, foreign investors, mutual funds, and pension funds stands at 97%. That’s the highest level since 1990. 

DoorDash Blows the Hinges Off

DoorDash began trading on the NYSE today under the ticker DASH. The food delivery service priced its shares at $102 apiece, valuing it at $39 billion on a fully diluted basis. This is higher than the $90-$95 share price it sought last week. The IPO didn’t feature a greenshoe and is the third-largest U.S. listing of 2020. At $39 billion, DoorDash has a market value greater than YUM! Brands, Restaurant Brands International, and Dunkin’ Brands Group.

Even though DoorDash wasn’t the first on-demand delivery food upstart, the pandemic has solidified its lead in the U.S. food delivery industry, ahead of competitors Uber Eats, GrubHub, and Postmates. DoorDash’s market share is close to 50% (No. 2 Uber Eats has 28%), largely because it caters to the suburbs, which saw an influx of new residents after the pandemic pushed people out of the city. 

Monthly subscribers for DoorDash have tripled to 5 million and more than 390,000 merchants use its app. Revenue during the second quarter jumped 214% annually, granting DoorDash the first profitable quarter for a food delivery service. While it dipped back to a loss in the third quarter, DoorDash’s revenue during that time still grew 268% annually.