Outlook 2021: Post-Pandemic Blues?
On to my Outlook 2021. This year I'm bringing back Mr. X to discuss markets with me. Mr. X is a very wise, shrewd, experienced and skeptical investor, and he's a total figment of my imagination, basically my alter ego which keeps asking questions on everything I'm observing.
First, Michael Santoli of CNBC reports investors are handicapping the new market year see similarities to 2010′s recovery and 1999′s risk binge:
So many questions swirl as the calendar turns — including what year has just started.
What year or years from the past, that is, have the most relevance for the current market and economy. Before the objections are uncorked: Of course, there are no exact replays of history, and the key to tomorrow is not lying in a musty archive.
Yet each year contains its own distinct blend of prior patterns which we interpret as cycles and convert into probabilities for future outcomes. There are always rough precedents even for periods that feel wholly unprecedented.
With that in mind, the year 2021 begins as an apparent hybrid of 2010 (early-cycle recovery), 1999 (late-cycle risk binge) and – a far lesser-discussed antecedent – the early-1940s. (There’s another narrative in the air of a Roaring Twenties repeat. That’s a subject for another time but seems as much a wishful hot take as a considered analogy.)
A War Story
Before getting to the more recent historical touchpoints, a word on the World War II market and policy backdrop to illuminate the market’s powerful run amid the awful global experience under the coronavirus.
During the war, as the government ran record deficits to finance the military effort, the Fed and the Treasury set government-bond yields from short- to long-term maturities at low levels, to promote demand for record amounts of debt and keep the yield curve positively sloped. Today’s is not quite doing the same, but its promise to keep short rates at zero and buy bonds unless and until full employment and higher inflation are achieved is serving a similar purpose.
And then there’s the market’s behavior. The U.S. had little military success in the first months after entering the war. All knew it was going to be a dauntingly long, uncertain and painful ordeal. Yet as soon as the U.S. had its first military success in the Pacific in 1942, the market bottomed decisively and ran almost straight up – even as the bulk of the war and casualties and expense lay ahead.
One can imagine the equivalent of bloggers and tweeters at the time noting with alarm that Wall Street appeared alarmingly out of touch with the realities on the ground, as we’ve heard since March 2020.
Echoes of 2010
The main resemblance to 2010 comes in the market action itself. A powerful upside reversal from a panicked sell-off in March followed by an uncommonly broad and persistent rally that for months investors treated as fragile, premature or misguided.
Nicholas Colas, co-founder of DataTrek Research, notes: “Like the March 9, 2009, lows for US stocks, the March 23 lows [in 2020] marked ‘peak unreliability’ in terms of investors’ judgements about their environment. In both cases, fiscal and monetary policy went to work to reestablish market confidence.”
Plenty of Wall Street handicappers have been noting the synchronicity between the 2020 equity advance and those of 2009 – and, for good measure – the decisive rally in 1982 that launched the greatest-ever bull market.
There are also macroeconomic echoes. The typical early-cycle swing higher from deeply negative manufacturing indexes, corporate earnings and consumer confidence, for example.
The overwhelming central-bank and fiscal responses are similar in effect. In each case, the Federal Reserve’s actions (quantitative easing then, a promise of heavy accommodation until explicit inflation targets are reached now) were novel and generated awe.
Arguably the Fed’s stance and message now is more supportive for asset markets than in 2010. Early in 2010, the Fed ended QE1 and at the time investors assumed rates would “normalize” fairly soon. As the above chart shows, the market turned choppy and corrected early in 2010 as it digested the massive ramp off the lows.
Is the Fed’s current “zero rates for years” position more believable and durable?
Liquidity, after all, is not a quantity of a substance called money, not the nominal size of the Fed’s balance sheet or bank reserves; liquidity is a promise believed. In this case the promise of easy conditions until unemployment falls a lot and inflation surpasses 2% for a while. Perhaps investors’ belief in this promise will be tested, if the economy and markets start to run a good deal hotter?
Other ways that today differs from 2010 argue against assuming a clean replay. The 2020 downturn, unlike 2007-2009, was not a grinding 18-month reckoning that cost the stock market half its value, threatened the financial system itself and wrung out years of dangerous imbalances in the credit markets and household finances.
It was a mandated shutdown, a flash recession, with a quick fear-driven market collapse halted by enormous, proactive policy measures and left the aggregate consumer balance sheet in good shape, with spending holding up and more than $1 trillion in additional savings.
The 2009 rally took the S&P 500 back up to levels first reached almost 12 years earlier, while the 2020 rebound led to new record highs within a few months. Credit spreads improved tremendously by the end of 2009, but were still far above peak pre-crisis levels. Today credit conditions are even stronger than before the Covid shock, leaving less room for more improvement there to bolster equity valuations further.
And as for valuations…
’99 on the mind
In recent months investment pros have not been able to resist comparisons with the fevered market run-up of the late-’90s, which culminated in a vertical melt-up in tech stocks that capped the indexes for more than a dozen years. Understandably.
Today’s price/earnings ratio on the S&P 500 of more than 22 is the highest since 2000, though a bit below the peak P/E of nearly 26 then. Yes, bond yields are far lower today, and Fed Chair Jerome Powell cited this fact to say equities were not worrisomely overvalued now.
But while lower yields explain higher valuations they don’t boost forward asset returns, and 22-times earnings is likely not a great starting point for delectable long-term gains from here, such as the 18-percent total return the S&P has delivered since March 9, 2009. Unless – and this is not impossible – the old investment math is under revision.
The atmospherics are what have the bubble-callers exercised about 1999 similarities. The rush of IPOs that surge in price, the stampede of newer smartphone investors who chase price and ignore traditional valuation, the entry of Tesla into the S&P 500 in a way that evokes Yahoo’s inclusion in late-1999.
Ark Innovation ETF can stand in for the Janus 20 fund in the late-’90s – a concentrated portfolio perfectly tuned to the technology advances and market themes of the time, spinning great performance to massive inflows which drive its stocks up even more, for as long as it lasts.
Most of the action is rhyming with the 1999 tune but has not run for as long, grown quite as extreme or become quite as pervasive. Non-tech growth stocks now are not as expensive as then. And this market has shown a knack for deflating some of the wilder sub-sectors while the broader market stays supported.
The late ’90s also were discounting the genuinely massive promise of new technologies and turned tech from a sector that always traded at a discount (due to cyclicality) to one valued at a persistent premium. In other words, much of the excitement was well-grounded but was carried to indiscriminate extremes. And even then the fun didn’t end until the Fed began tightening aggressively in 2000.
The upshot: 2021 is serving investors a cocktail of early-cycle recovery forces and policy inputs, with late-cycle valuation and risk appetites. It could well provide a kick.
Alright, Mike Santoli's piece sets the background for my discussion with Mr. X on markets and more, so here we go.
Mr. X: Before discussing the outlook for this year, a quick recap of what you saw last year. What were the key things that explained markets?
LK: I think there are a few things that stand out in my mind. 2020 was a terrible year but from a purely markets perspective it was a year like no other, with huge extremes between winners and losers.
First, the thing that struck me late January of last year was how complacent the market was about the "Wuhan virus". It was around this time on my blog that I noted how asymptomatic transmission was a game changer, but the market kept grinding higher.
Importantly, investors were treating this new virus as just another SARS episode, not like a global pandemic, but that changed very quickly and abruptly and markets reacted violently, plunging by 30% or more depending on which index you're looking at from mid February to mid March, and volatility spiked to unprecedented levels with the VIX going from below 15 to over 80 during that short time.
It was crazy, fear reigned as we were experiencing the first global pandemic since the 1918 influenza pandemic. Luckily, this pandemic isn't as bad as that one but it's still terrible, affecting close to 90 million worldwide and causing close to 2 million deaths, and it's still going on.
The second thing that struck me last year was the policy response, both monetary and fiscal. Global central banks led by the Federal Reserve pumped trillions into the system and governments around the world ratcheted up fiscal stimulus very quickly to deal with an unprecedented situation as large parts of the economy had to shut down.
Dale MacMaster, AIMCo's CIO, told me back then that policymakers "took the 2008 playbook and put it on steroids". He was right but it didn't prevent AIMCo from losing over $2 billion in its VOLTS strategy and the fallout from that has impacted the organization at the highest level.
The third thing that struck me last year was the V-shaped recovery in the stock market, there was no retest of March lows, it was an unrelenting snapback in the markets led by technology shares that caught many, including me, by surprise. That shows you how effective policy responses were in shoring up markets.
But while the policy responses were necessary, they also led to major consequences which we will be dealing with for quite some time.
Mr. X: How so? What are the long-term effects of the policy responses?
LK: Well, the massive liquidity central banks pumped into the system coupled with stimulus checks unleashed a speculative mania in parts of the market and to be honest, brought forward ten years worth of returns into one year, especially in some sectors of the market.
In many ways, the market acted very textbook last year and let me explain.
The first thing investors did in late March when the Fed increased its balance sheet by $3 trillion is use all the liquidity to chase mega cap tech giants. When in doubt, invest in large cap tech stocks, that's the first place of refuge. They're highly liquid and "pandemic proof" and they were benefiting the most from the forced lockdowns.
I think I read that over 50% of the S&P 500's return last year came from five large mega cap tech stocks and I believe it as there was a tremendous amount of herding going on initially and that lasted throughout the year.
But apart from the well known tech giants, hedge funds and retail traders were placing their bets on winners and losers.
The pandemic winners early on were stocks like Zoom (ZM), Teledoc (TDOC), Docusign (DOCU) and retailers like Zillow (Z) which had a strong online presence, and the initial losers were airlines (JETS), cruise lines (CCL, RCL, NCLH), casinos (WYN, MGM, LVS, CZR, PENN), hotels (H, HLT, MAR) and retailers which didn't have a strong online presence (M, KSS, etc).
But the biggest trade last year was on the short side. Everyone is talking about how Bill Ackman crushed the market again in 2020, but the reason isn't because he's a great stock picker. His stocks did fine but the real big gains in Ackman's fund last year came from his big bet against the market in January which netted him $2.6 billion, in what is largely considered the single best trade of all time.
The other big hedge fund trade early on was going long Nasdaq (QQQ) and short small cap stocks (IWM) which were more sensitive to the shutdowns.
Mr. X: You're still not explaining the long-term consequences of the policy responses...
LK: Hold your horses, I'm getting to all this.
For me, the biggest consequence to the 2020 policy responses -- both monetary and fiscal -- is how they exacerbated rising inequality.
The real winners in 2020 were Wall Street speculators (elite hedge funds and private equity funds, large trading outfits including capital market operations at big banks), tech moguls (Jeff Bezos, Bill Gates, etc), Elon Musk (the ongoing ESG bubble has catapulted him to the world's richest man), ultra high net worth families (Walton family but plenty of others), and yes, some Robinhoodies neophyte traders who hit grand slams investing in Tesla, Nio, and a bunch of other EV stocks most people never heard of.
The real losers last year were small businesses forced to shudder down because of the pandemic and forced shutdowns, pensioners looking for stable and high yields in safe government bonds, and most ominously, millions of unemployed still reeling from the pandemic and its after-effects.
It's this divide between Wall Street and Main Street that should worry us the most because it poses the biggest risk to our democracy and social fabric, and it's deflationary and very bad for public and private markets over the long run.
Mr. X: Wow, you really feel very strongly about rising inequality. Why?
LK: Because it is unrelenting and presents an existential risk to capitalism as we know it, and I'm afraid we are on the wrong path.
Mr. X: Wrong path? How so?
LK: There's a book I keep referring to, C.Wright Mills' classic, The Power Elite, it basically explains that all the important decisions in the United States (and around the world) are made by elites in the corporate, political and military world.
In many ways, I believe 2020 was a social experiment. Can we keep a wide subset of the population unemployed collecting stimulus checks, keep more people working from home to reduce congestion and greenhouse gas emissions, but the key thing is can we keep enriching the elites while quashing social unrest.
I think we are closer than ever on universal basic income for the restless many as long as the prosperous few can keep speculating on risk assets and getting richer and more powerful than ever.
Let the masses have just enough income to afford iPhones, Netflix and post silly stuff on Instagram and Facebook. Basically, cover their basic needs to quash any social unrest, as long as the elites can keep making off like bandits speculating in public and private markets.
Mr. X: That's a very cynical view of the world we are living in. How does this all end?
LK: It's actually a realistic view of the world, not cynical. I see major social changes happening over the next decade and how it all ends depends on how policymakers address these rising social tensions.
Will they implement redistributive fiscal policies and will these policies work or make things worse?
I don't know, all I know is the sharks on Wall Street don't give a damn about the restless many, all they care about is raking in windfall gains for the prosperous few and themselves.
Mr. X: Alright, I think this is a good time to stop discussing the Power Elite, rising inequality, existential threats to capitalism and get into markets and the outlook for 2021.
LK: Agreed, let's get into markets and what lies ahead even if nobody has a goddamn clue of how this year will play out.
Mr. X: What do you see in general? Some general observations on the overall market?
LK: Well, my first observation is monetary and fiscal policies remain highly accommodative and I don't see this changing anytime soon.
This is important because as long as the Fed isn't even hinting at raising rates, markets can continue climbing the wall of worry.
Also, I expect the Biden administration will introduce another major fiscal stimulus package in the first quarter of the year, and this too will help shore up confidence.
Mr. X: That sounds very optimistic, blue skies ahead?
LK: Not exactly, there are serious risks to the economy and markets.
On the US economic recovery, economist Paul Krugman is predicting a swift, sustained economic recovery once vaccines are rolled out.
Apart from the fact that he's hopelessly and openly biased, I'd say this is consensus, once vaccines are rolled out and a large portion of the population is vaccinated, all that "pent up demand" and "excess savings" are going to go right back into the economy.
And to be sure, they will but what remains to be seen is whether there are after-effects from the pandemic in credit markets and whether these reverberations will hit the economy hard.
For example, if default rates start climbing, even if the Fed is injecting billions in corporate bonds, then unemployment will remain stubbornly high, and that presents a real risk to the economy. Again, consensus doesn't see this happening right now, but this can change.
Capital markets have raced “far ahead of the economic fundamentals,” allowing companies to borrow trillions of dollars that may be difficult to pay back even after they return to profitability post-pandemic: Howard Marks https://t.co/xxPbZMr3wb— Lisa Abramowicz (@lisaabramowicz1) January 5, 2021
Some jobs will never come back, others are very fragile right now, so it remains to be seen if consumers will start spending like drunken sailors once vaccinated or remain in savings mode worried about what lies ahead.
There are entire industries like air travel, restaurants, tourism and hospitality, retail, which remain on edge and will remain on edge until the health crisis dissipates.
Mr. X. : And will the health crisis dissipate?
LK: Eventually, it will but in the short run, nobody really knows, including infectious disease experts. We are all praying it will go away like other pandemics but it remains to be seen what happens over the next five years.
We know the virus mutates and there are already worse strains out there but luckily, for now, the vaccines remain effective against these strains.
Then there is the question of vaccine rollout. So far, only one country, Israel, is way ahead of everyone else in terms of vaccinating a large percentage of its population. Israel was well prepared, a lot better than most other countries.
There are now questions on how the vaccine rollout should proceed. Some countries like the UK and Canada are considering administering one dose to as many people as possible, but some healthcare professionals are advising against this.
On Sunday, Operation Warp Speed chief Moncef Slaoui said on “Face the Nation” that health officials are considering giving two half doses of the Moderna vaccine to speed up immunizations in the US.
But what really worries me right now is the surge in cases all over the world and the long-term health consequences. The New York Times reports that recurring admissions don’t just involve patients who were severely ill the first time around.
“Even if they had a very mild course, at least one-third have significant symptomology two to three months out,” said Dr. Eleftherios Mylonakis, chief of infectious diseases at Brown University’s Warren Alpert Medical School and Lifespan hospitals, who co-wrote another report. “There is a wave of readmissions that is building, because at some point these people will say ‘I’m not well.’”
Many who are rehospitalized were vulnerable to serious symptoms because they were over 65 or had chronic conditions. But some younger and previously healthy people have returned to hospitals, too.
COVID-19 "long-haulers" share stories of debilitating symptoms: "I will never be the same person" https://t.co/6NzjDs9ZBr— CBS News (@CBSNews) January 5, 2021
What this tells me is vaccines are not enough, on top of vaccines, we need better treatments to treat COVD-19 and better, faster and cheaper tests to detect it to ensure people traveling and going to restaurants and malls are safe.
Mr. X.: And do you see better treatments and tests ahead?
LK: I do, some are being tested right now on critically ill COVID patients and are showing great promise in smaller trials but it remains to be seen whether they are as promising in larger, placebo controlled, double blinded studies.
I also see better testing on the horizon but that too takes time and we need to remain patient and vigilant in the meantime.
Mr. X: Do you have any health advice for your readers?
LK: Yes, we are by no means out of the woods. Respect public health guidelines, stay at home as much as humanly possible, if you go out, make it quick, always wear your mask, disinfect your hands, keep a safe distance from people and wash your hands thoroughly the minute you get back home.
But I also encourage everyone to eat properly, sleep well, exercise moderately and take at least 1,000 IUs of vitamin D a day, if not three to five times that amount in the winter. Start slowly as you may experience gastrointestinal discomfort if you go heavy from the start and take it with a meal as it's fat soluble.
Mr. X: You're a big believer in vitamin D?
LK: Huge believer, not just for COVID but the flu and other illnesses like autoimmune diseases and many other illnesses. People need to check their vitamin D levels and make sure they're sufficiently high. For most people, they aren't. Smart doctors recommend D to their patients, dumb ones don't.
Mr. X: Alright, let's get to markets now and what you think lies ahead. What are your overall thoughts?
LK: Like I said, policy remains very accommodative for the economy and markets. Global central banks and all governments around the world are in highly stimulative mode.
This is generally very good for markets but there's a hitch, a lot of unknowns remain as we enter the new year:
- Vaccine rollout, uptake and how the virus mutates and whether we will be able to respond fast enough if it does.
- A new administration is coming in the US. I don't expect a huge shift in policies but there will be a shift and it remains to be seen how markets respond.
- Will there be another credit crisis or will we avoid it via policies, private equity funds lending money to businesses?
- Will all these stimulative policies cause a surge in inflation, forcing the Fed and other central banks to raise rates much faster than anticipated?
Mr. X: Hold on, do you really see a risk of inflation?
LK: No, I don't, Gavekal and others do, but I firmly remain in the deflation camp and explained my reasoning in a recent comment on CPPIB and inflation risks here.
Investors always mix up cyclical and secular inflation and I don't see the latter. You might get some cyclical inflation in the US because the US dollar got clobbered last year, but the Fed won't respond to this by jacking up rates, first because it knows it's transient, and second and more importantly, because it is in record stating it is willing to accept much higher inflation for a time.
Mr. X.: I'm glad you brought up bonds and the greenback. You're still bullish on bonds and the US dollar, right?
LK: I wouldn't say I was super bullish on either last year but I certainly wasn't bearish and think a lot of the bearish talk on long bonds and the US dollar was way overblown.
Let's look at US long bond prices (TLT) first and it should be noted, all the charts and data I use here are as of the end of last Thursday when markets closed out their year:
As you can see, US long bond prices were marginally up last year but sold off after March (long bond yields backed up; bond prices are inversely related to bond yields), mostly owing to all that monetary and fiscal stimulus.
But to put things into perspective, the yield on the 10-year US Treasury note started at 1.9% in 2020, reached a low of 0.39% when markets got clobbered and it has been hovering near 1% lately (it's 0.9% today).
Importantly, this isn't the big, bad bond bear market bond bears have been warning of for years and if my prediction of a long bout of deflation comes true, we have yet to see the secular low on long bond yields.
Long bond prices could sell off more (long bond yields back up more) because of cyclical inflation, but I just don't see this as the start of a multi year bond bear market.
Now, as far as the US dollar, I'm a long-term bull and so are Canada's large pensions which by and large don't hedge their US dollar exposure over the long run.
Look at how the US dollar ETF (UUP) performed relative to the euro (FXE), the yen (FXY) and Canadian dollar ETF (FXC) since I'm Canadian:
What do you see? The US dollar sold off hard last year because the Fed was way more aggressive than the ECB and BoJ in raising its balance sheet, engaging in more QE.
But that's not the only reason. There was a global Risk On trade last year benefiting emerging markets stocks and bonds, and benefiting commodities and commodity currencies like the loonie.
What else? US stocks outperformed all other major stock markets and since global investors are long US stocks, they had to hedge and sell US dollars forward, exacerbating the trend.
Lastly, commodity trading advisors (CTAs) went short US dollars (not bonds), and that too exacerbated the move in the greenback.
Mr. X: Very interesting and what do you see going forward for the greenback?
LK: I'm long and remain long the USD. My best advice to Canadians and other investors is to ignore all the gloom and doom nonsense on the greenback and focus on the facts.
And the most important fact remains euro area deflation is still a huge concern, more so now that the euro rallied so sharply last year. Can it go a bit higher? Maybe but it's set to tumble hard if you ask me.
The same for the yen. There's no way the ECB or BoJ are going to absorb lower import prices indefinitely and risk stoking their deflation demons further.
Currency strategists who understand this dynamic understand why big moves in any currency can occur in any given year but they tend to revert back the following year.
The same goes for the Canadian dollar. All these commodity bulls out there claiming the US dollar lows aren't in might be right but I wouldn't risk it here, the loonie might hit 80 cents but my best advice is to short it right here, right now and stay short (lots of reasons why, our ballooning deficit is starting to worry me a lot).
Mr. X: Alright, you gave us your global macro thoughts, did you miss anything?
LK: Not really, like I said, last year, the global Risk On trade dominated and that benefited emerging markets stocks (EEM), bonds (EMB), commodities and commodity currencies.
Still, unless I see emerging markets (EEM) hit a new high, I'm not ready to proclaim a new bull market in commodities (DBC) is starting.
Mr. X: Alright, I sense you're anxious to talk about stocks and sectors specifically and start wrapping it up here.
LK: Yes, to be honest, my head is spinning, I'm a bit tired, so let's get to stock market stuff, that's what I love and why people love reading my market comments.
Mr. X: Before we go to specific sectors, can you provide your overall thoughts on the major indices?
LK: Well, after a year like 2020, things are definitely not cheap out there, it wouldn't surprise me if investors are reblancing here and locking in profits on stocks in general, especially those that ramped up a lot last year:
As shown above, the S&P 500 closed the year gaining 17% led by the tech sector (XLK) which gained 43%.
Mr. X: Can this outperformance in technology shares last? Will we see a third year of incredible gains?
LK: I wouldn't bet on it given that the Nasdaq (QQQ) has doubled over the last two years:
But you just never know. That chart above is breaking out, investors can't get enough of old tech and new technology companies, and in a world of ultra low interest rates, we might just see a third year of record gains in technology stocks.
Having said this, investors need to brace for more volatility ahead, stocks don't go up or down in a straight line and even before today's market selloff, the VIX index was set to jump higher:
Also, I expect some of 2020's high flyers, like solar stocks (TAN) and biotech stocks (XBI) will be rebalanced after a year like last year, so expect a lot more volatility here:
Don't get me wrong, I'm a secular bull on solar and biotech shares but when you see a parabolic move like the one above in solar stocks, you know rebalancing is going to occur.
The same can be said on biotech shares but here I warn investors, the index isn't where the alpha lies, there are a lot of small biotechs I'm tracking that are set to have a huge year this year (or they will crumble and flop, thus is the nature of the biotech beast!).
Mr. X: So, you're cautious on the overall markets and tech shares in particular?
LK: Yes, I think that's a fair statement, people get too wrapped up in the most recent performance but these markets with these record low rates have taught us to always be wary and prepared for anything, as things can change on a dime.
Sure, tech stocks look great, led by semiconductor (SOX), fintech (FINX), and other stocks but a lot of the good news is already priced in, especially in hyper growth stocks, so you really need to be careful.
Mr. X: What about cyclical shares? Do you see the return of value over growth this year?
LK: I'll break that down in two parts. First, let's look at Financials (XLF), Industrials (XLI), Energy (XLE) and Materials (XME), collectively known as cyclical stocks which are more sensitive to the economy, and I'll throw in small cap stocks (IWM) here as they too are very sensitive to the economy:
As you can see, Financials (XLF) have yet to make a 5-year high, only Industrials (XLI) have and Energy (XLE) remains very weak despite a strong Q4 last year. Materials (XME) rallied sharply last year mostly owing to the strong performance of gold (GDX) and copper miners (COPX) which had a fantastic year:
But small caps seem to be rolling over here after breaking out to a new record 5-year high and that tells me the economy can't sustain these moves.
It's a bit confusing because a lot of small cap biotech shares are now part of the Russell 2000 index and that is fudging the relationship between small caps and the overall economy.
Mr. X: And what about the whole value vs growth debate?
LK: What about it? 2020 was the worst year ever for contrarian investing and the battle between value (IWV) vs growth (IWF) rages on, and you can read about it here.
The only thing I can say is in a market dominated by mini manias on some tech shares and where rates remain at ultra record-low levels, you shouldn't be surprised that momentum factors have propelled some ETFs much higher:
Again solar, fintech, cloud computing, clean energy, ESG, Ark ETFs, IPOs, all did really well last year and it shouldn't surprise you given the Fed printed $3 trillion and Wall Street took that money and speculated (retail investors went along for the ride!).
Mr. X: So you think momentum will still carry the day this year?
LK: Honestly, I haven't a clue but I'm sure of one thing, momentum stocks that make parabolic moves will get clobbered at one point this year.
Mr. X: Like which ones specifically?
LK: Like Tesla (TSLA) and Nio (NIO) which were both up again today after posting stellar returns last year:
These parabolic moves make me very nervous, it doesn't mean these stocks can't go higher as momentum is clearly on their side, but you really need to be careful trading or investing in some of these bubble stocks.
Momentum is fun on the way up but it stings like hell on the way down, just look at what happened to QuantunScape (QS) today and fubo TV Inc. (FUBO) recently:
You can buy the dips, just make sure you sell the rips or else your portfolio will go from FUBO to FUBAR at a moment's notice!
Mr. X: Wow, that's insane, is there anything safe to buy in these markets?
LK: Unfortunately, there isn’t, you need to pick your spots carefully and manage your risk tightly.
I look at hundreds of stocks every day (small cap, large cap, all cap!), know what dips to buy, which ones to avoid and I can honestly tell you these are very dangerous markets which is why I'm all cash again this year after posting solid trading returns from mid November to end of the year (was all cash before that too).
Mr. X: So you're bearish? Right?
LK: No, I'm not, I'm very cautious and will weigh every trade on its risk reward merits. For example, I was looking to buy the dip on Moderna (MRNA) shares recently but I didn't pull the trigger as I'm not so convinced it's the time and while I liked today's price action, I'll wait for a better buying opportunity here or elsewhere:
There are tons of opportunities in markets, you don't need to rush to do anything stupid, especially not after a monster year like 2020. Pick your spots carefully, manage your risk appropriately!
Mr. X: Does this include safe sectors like Staples (XLP), Healthcare (XLV), Real Estate (XLRE) and Utilities (XLU)?
LK: Yes, it does, there's nothing really safe out there except for US long bonds and they're not returning a lot here, except if you believe negative rates are coming and then you're playing the capital appreciation game (wouldn't surprise me).
Mr. X: Thank you for your time, you covered a lot here. Any parting words on markets and risks?
LK: You're very welcome, hope my readers enjoyed reading this comment.
My only parting words are stay humble, stay disciplined, these markets will test your resolve. Don't rush into making foolish decisions, you will read all sorts of opinions on where these markets are heading and what to buy, and all of them will be wrong.
My advice is to be patient, pick your spots carefully and manage your risk very tightly. Don't be afraid to sweep the table and take profits and cut your losses early. Wait for the right setup, if it's not there, be patient, don't force it.
This is especially true in these markets where central banks are backstopping madness and bubbles are popping up everywhere.
When will it end? Nobody knows but it will end in tears. That's not my opinion, Charlie Munger has said so and more recently, Jeremy Grantham is warning the stock market is in a 'fully-fledged epic bubble'. Read his thoughts here.
Still, even though we don't know exactly when the madness will end, keep an eye on corporate bond spreads and corporate bond prices, this is where the first signs of stress and trouble will appear:
Lastly, follow me on StockTwits, I'll try post stuff more regularly but no promises as I'm more focused on writing this blog and less on trading these days. I'll keep writing my market comments every Friday so there will be plenty of market coverage for all you markets people.
I also want to thank all of you who take the time to subscribe and donate to this blog via PayPal options at the top left-hand side under my picture, it's greatly appreciated.
Below, David Rosenberg, chief economist at Rosenberg Research, speaks with Financial Post’s Larysa Harapyn about lessons learned from 2020, and what to look out for in the year ahead.
No surprise, Rosie doesn't think 2021 will bring as much relief as markets appear to be telling us.
Also, CNBC's "Halftime Report" team discusses Carl Icahn's investing advice for 2021 and what the team is watching in the markets.
Third, allied with landlords and monopolists, the finance sector is extracting economic rents from the economy that's impoverishing US government, industry and labor says economist Michael Hudson discussing the chokehold of pro-finance, pro-rentier capitalism reaching into the present COVID-19 crisis. Great food for thought here, take the time to listen to this interview.
Lastly, my idea on how the markets will feel like this year, like going into the ring with the Russian Bear, praying you will come out alive. Be careful out there, we're not out of the woods on the health front and markets are vulnerable to a serious correction. Stay healthy above all else, let's all have a great year!
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