THE WEEK ON WALL STREET
Stocks notched strong gains last week, paced by a string of solid economic reports and consensus-beating corporate earnings.
BULL STORY REMAINS INTACT… FOR NOW
As the social media trading frenzy fizzled, investors were able to focus on more fundamental issues, like economic data and a fresh batch of corporate earnings. Pleased by an economy that appeared to be growing stronger, coronavirus cases in decline, and an improving vaccine rollout, investors bought stocks with enthusiasm.
The rally last week was broadly based, with the Energy, Financial, Communication Services, and Technology sectors posting gains. The stock market’s optimism on an improving economy was seconded by the bond market as the 30-year Treasury rate rose to nearly 2.0% by Friday. When yields rise, bond prices fall. Falling bond prices may indicate that investors are less interested in Treasuries and more interested in other investments that benefit from a stronger economy. Rising yields may also reflect worries that a growing economy may spark inflation that may lead the Fed to rethink its zero-rate policy.
THE INEVITABLE DENOUEMENT
It was just two weeks ago that a social media chat forum appeared to contribute to a buying frenzy in a handful of struggling companies, unsettling Wall Street and capturing the nation’s attention. These stocks staged a broad retreat last week as more was learned about the trading activity. A similar social media-inspired buying effort was also initiated on silver. But silver prices experienced a modest gain before quickly reversing direction just days later.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: JOLTS (Job Openings and Labor Turnover Survey) report.
Wednesday: Consumer Price Index (CPI).
Thursday: Jobless Claims.
Friday: Consumer Sentiment
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Monday: Simon Property Group (SPG).
Tuesday: Twitter (TWTR), Welltower, Inc. (WELL), KKR & Co. (KKR), Martin Marietta (MLM), Fiserv (FISV).
Wednesday: Cisco Systems, Inc. (CSCO), General Motors (GM), Coca Cola (KO).
Thursday: Walt Disney (DIS), AstraZeneca (AZN).
Friday: Dominion Energy (D)
FINAL THOUGHTS
The larger challenge of this market is its ability to gaslight analysts. In many ways, this is reminiscent of 1999. For those without the gray hair earned riding through said era, this was the period of the ‘new economy,’ where dot-com’s no longer needed to make money; they just needed to attract customers.
During the dot-com era, traditional analysis sort of flew out the window. Stocks went up regardless of the financial health of companies. New investors were jumping in with E-trade and other online brokerages. Everyone was going to become a stock millionaire.
Today, there are new app-based online brokerages, free trading, and everyone is going to become a stock millionaire. Companies may make money, but the multiples are so stratospheric it would take eons to get paid back.
What’s different? This time the government is printing money. Lot’s of it.
In fact, a quick google search revealed US GDP at $9.6 trillion in 1999 (2020 numbers aren’t official yet, but it’s over $21 trillion). If we look at the amount of stimulus being conjured up, we’re looking to print more than half of 1999’s total economy.
Let that sink in.
The kind of money being created is so mind-boggling it doesn’t compute for regular people. It may as well be a zillion-kerbillion. Because we don’t have any sense of how much money it is.
Therein lies the problem. When money can go to a zillion-kerbillion, you see assets like Bitcoin become actual conversation pieces. And you see assets become mega-inflated. The question is when?
Inflation is sneaking in. We see it in housing, where people can access the capital. If the next stimulus package includes a minimum wage increase, we will see it start to spread to more areas of the economy. Stocks, historically, have been a leading indicator of economic health. However, in a world with near-zero savings rates, stocks become one of the only alternatives to store value. So, demand is sort of conjured up by circumstances.
When one gets too far out over their skis, at some point, they tumble. If we see inflation pick up, and rates start to rise, demand for stocks could fall. Then those stratospheric multiples could start to look pretty unnatural. Judging from the pace of movement in certain assets – the sort-of frenzied FOMO (fear of missing out) attitude of many new stock buyers – and the actions of both DC and the Fed, the idea that markets could pull-back later this year is still very much on the table.
But for now, looking week-to-week, it looks like the party is still going on. John Maynard Keynes said “the market can remain irrational longer than you can remain solvent.” He is right. Making a big bet the market will go down at this stage is a fool’s errand. The “tested in the trenches” way of being diversified and staying invested is still undefeated. While many have called near-term tops in the market over time and occasionally been correct, they have all been surpassed by higher highs at some point down the road. Yes, the market is expensive right now, but it is possible it just gets more expensive. Stay tuned…
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February 08, 2021
