Hello all – we hope you had a great December and holiday season.
The markets continued their rise this month, closing the year at or near record highs. For December, the Dow rose 3.3%, the S&P gained 3.7%, and the Nasdaq was higher by 5.7%.
It was a banner year for the markets, too, with the Dow up 7.2%, the S&P rose a solid 16.3%, and the Nasdaq had its best year since 2009 with a gain of 44%.
The markets continued their rise this month, closing the year at or near record highs. For December, the Dow rose 3.3%, the S&P gained 3.7%, and the Nasdaq was higher by 5.7%.
It was a banner year for the markets, too, with the Dow up 7.2%, the S&P rose a solid 16.3%, and the Nasdaq had its best year since 2009 with a gain of 44%.
The market has gone through a lot this year and its rebound has been remarkable. We worry now, though, that the market has gone too far.
We’re nearing a ‘euphoric’ stage that usually occurs at market tops, where investors get overly complacent and believe the market can’t go down. We’re seeing record amounts of money coming into the market and investors are taking riskier bets. Margin levels, which is where investors borrow money to place market bets, just reached an all-time high.
We’re nearing a ‘euphoric’ stage that usually occurs at market tops, where investors get overly complacent and believe the market can’t go down. We’re seeing record amounts of money coming into the market and investors are taking riskier bets. Margin levels, which is where investors borrow money to place market bets, just reached an all-time high.
What’s behind the euphoria?
A couple things, like complacency as the market seems to only go higher, virtually unlimited amounts of money being printed by the government, and improving corporate earnings. These all provide a nice tailwind, but that doesn’t mean the market can’t get ahead of itself and eventually reverse course. We’re not forecasting that scenario in the near-term, but it is something we’re becoming more concerned with.
A couple things, like complacency as the market seems to only go higher, virtually unlimited amounts of money being printed by the government, and improving corporate earnings. These all provide a nice tailwind, but that doesn’t mean the market can’t get ahead of itself and eventually reverse course. We’re not forecasting that scenario in the near-term, but it is something we’re becoming more concerned with.
______
As for the events driving the markets this month, one of the big stories came out of Washington. Lawmakers spent much of the month wrangling over a stimulus deal and the market would move lower on setbacks and higher on positive news. The bill’s eventual passage was greeted warmly by the market.
______
A critical element behind this stimulus bill is the Fed. These stimulus programs have rung up massive deficits and the money for these programs must come from somewhere.
The Fed helps finance this spending by printing money. In fact, this year alone they have printed more than $3 trillion to finance this spending. We use terms like ‘billion’ and ‘trillion’ like they are nothing, but these are truly astronomical amounts of money.
The Fed has printed so much money over the years and their balance sheet currently stands at $7.4 trillion - again, a mind-blowing amount of money (if we were to count to 7.4 trillion by seconds, it would take about 235,000 years). Further, in a Fed meeting this month, they indicated they would continue printing money to the tune of at least $120 billion a month, or another $1.44 trillion a year.
The amount of money being printed is a cause for concern and is causing the dollar to weaken, as you can see in the chart below.
It’s interesting to think about the theory of what money actually represents. We won’t go too deep here, but basically our thoughts are this: if you can print unlimited amounts of money, does it really have a value?
Many different things have been used as ‘money’ throughout history, from gold to sea shells to animal hides. Shoot, even cigarettes and Tide pods are currency in prison (so we’ve been told). The point is, a currency has value because people believe it has value. If people lose faith in paper money, it becomes worthless.
This idea has caused things like Bitcoin, which is like a ‘digital’ version of gold, to see its price skyrocket.
Many different things have been used as ‘money’ throughout history, from gold to sea shells to animal hides. Shoot, even cigarettes and Tide pods are currency in prison (so we’ve been told). The point is, a currency has value because people believe it has value. If people lose faith in paper money, it becomes worthless.
This idea has caused things like Bitcoin, which is like a ‘digital’ version of gold, to see its price skyrocket.
We’re not forecasting a collapse in the U.S. dollar any time soon, but you cannot argue that we are moving in the right direction.
Switching gears, the Coronavirus was also a major topic this month. Many cities and states have issued new lockdowns to one degree or another, with each announcement weighing on the markets.
Conversely, new vaccines continue to roll out and these announcements have helped the markets.
Additionally, it looks like we may be turning the tide as the data is showing an improvement in cases.
______
Conversely, new vaccines continue to roll out and these announcements have helped the markets.
Additionally, it looks like we may be turning the tide as the data is showing an improvement in cases.
______
Economic data this month was again mixed. As we mentioned above, the shutdowns are causing businesses to close and people to lose their jobs. Weekly unemployment figures remain high and are a concern.
Other economic data shows the economy is still strong and growing.
The service and manufacturing sectors are both expanding (a number over 50 means expansion):
The service and manufacturing sectors are both expanding (a number over 50 means expansion):
However, retail sales showed a decline:
People aren’t feeling as good about the economy. Consumer sentiment ticked lower last month and remains a long way from where it was before the virus.
Sentiment at small businesses has rocketed back from the virus lows, but also moved lower last month.
______
Stocks are on the expensive side in the short term, based on the indicators we follow. However, we aren’t seeing signs of a significant pullback in the near-term, either. We do have concerns over the euphoria we mentioned at the beginning of the commentary, but think that’s a longer-term play. Still, we aren’t excited about putting new money into the broader indexes at this level - we are neither buying nor selling here.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
