Hello all – we hope your new year got off to a good start.
Stocks ended January slightly lower than where they started, but were higher for much of the month. For January, the Dow was off 1.0%, the S&P lost 2.0%, and the Nasdaq was up 1.4%.
Stocks ended January slightly lower than where they started, but were higher for much of the month. For January, the Dow was off 1.0%, the S&P lost 2.0%, and the Nasdaq was up 1.4%.
The markets started out the year moving higher. It wasn’t until strong selling in the last week of the month that turned the markets negative. Here we can see the volatility pick up:
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As for the events driving the markets this month, most of the gains we can attribute to just a generally optimistic mood as Covid vaccines increase and life slowly returns to normal. This has provided a tailwind for stocks.
Also - and it seems like this was so long ago - but the results of the Georgia elections at the beginning of the month helped markets, too.
The positive reaction in the markets to the Democrat sweep is exactly the opposite of what we expected. We figured an outcome that virtually guaranteed higher taxes, more regulations, business un-friendly policies, and an antagonistic relationship with the private sector, would be a negative for the markets.
However, we underestimated how important government spending and Fed stimulus is for stocks.
Investors realized that a Democrat majority means the government will keep the ‘pedal to the metal’ when it comes to spending, printing massive amounts of money as stimulus and the Fed there to make sure borrowing rates stay low. We think this will end extremely badly, but the markets don’t mind it in the meantime.
Also - and it seems like this was so long ago - but the results of the Georgia elections at the beginning of the month helped markets, too.
The positive reaction in the markets to the Democrat sweep is exactly the opposite of what we expected. We figured an outcome that virtually guaranteed higher taxes, more regulations, business un-friendly policies, and an antagonistic relationship with the private sector, would be a negative for the markets.
However, we underestimated how important government spending and Fed stimulus is for stocks.
Investors realized that a Democrat majority means the government will keep the ‘pedal to the metal’ when it comes to spending, printing massive amounts of money as stimulus and the Fed there to make sure borrowing rates stay low. We think this will end extremely badly, but the markets don’t mind it in the meantime.
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All this spending and stimulus has caused bubbles - or at least unusual trends - to appear in the markets. Smaller, unprofitable companies have been surging in value as new investors pour money into them. Case-in-point is the financial news story that made front page news everywhere: Gamestop. The stock rose over 400% in just the last week of January.
Here’s a quick review of the Gamestop saga: The company has seen its business decline over the years and some big investors positioned themselves to profit when the share price moves lower. However, day-traders communicating in online message boards have piled in to the stock, sending the share price higher. The big investors positioned for it to fall are facing massive losses and must reverse their position to prevent more losses. This drives the share price higher still, to unprecedented levels. The story grabs headlines and even more investors pile in, making for an incredible tale.
This graphic may make more sense:
This graphic may make more sense:
This activity can be connected to a drop in the broader markets. The quick losses of the big investors meant they needed to raise money by selling their other investments, which helped send the overall market lower.
The activity in Gamestop is part of a bigger trend we’ve seen recently. Speculative investing has taken off, with smaller and/or unprofitable companies have surging in value.
Stocks that investors are betting will go down have actually surged the highest:
The activity in Gamestop is part of a bigger trend we’ve seen recently. Speculative investing has taken off, with smaller and/or unprofitable companies have surging in value.
Stocks that investors are betting will go down have actually surged the highest:
Likewise, companies that are unprofitable have also soared:
We’re also seeing a massive interest in the smallest, cheapest stocks, which are often referred to as ‘penny stocks.’ It may be difficult to see in the chart below, but a record amount of penny stocks were traded last month.
This is a sign that markets are getting ‘frothy,’ where investors are taking on more risk than usual. It usually signals a market top.
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Switching gears to corporate earnings, which haven’t gotten a lot of attention. We’re right in the thick of earnings reports for the fourth quarter, with about 1/3rd of companies in the S&P 500 reporting results. Earnings have been decent, coming in well above expectations.
The reaction in share prices has been a little different than usual, though. A company’s stock price rose if it beat estimates by a wide margin, which is to be expected. However, anything worse than a big beat likely saw the share price move lower. Usually even modest beats saw their share prices rise, but that hasn’t been the case so far.
The reaction in share prices has been a little different than usual, though. A company’s stock price rose if it beat estimates by a wide margin, which is to be expected. However, anything worse than a big beat likely saw the share price move lower. Usually even modest beats saw their share prices rise, but that hasn’t been the case so far.
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Getting into economic data released this month, the strength of the economy as measured by the GDP was lower for the past year. This is the first time that happened since the financial crisis.
Of course, we can’t forget the 30% drop in GDP this year due to the Coronavirus. The rebound from a total economic shutdown has been swift, but as we can see from this monthly perspective, the end of the year saw us starting to lose ground again.
Employment remains a concern as we’re still seeing high weekly unemployment filings.
The service and manufacturing sectors are both expanding (a number over 50 means expansion):
This is an interesting look at how home prices may be in bubble territory as they are becoming increasingly unaffordable:
People still aren’t feeling good about the economy. Consumer sentiment rose only modestly 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 continued to move lower last month.
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The late-month selloff in the markets put them at a more attractive level for a short-term investment (looking out a few weeks). We’d be more enthusiastic if they were a little bit lower from this level.
A lot of this commentary was spent talking about how markets are looking ‘frothy.’ We think from a longer-term perspective this is true. However, its tough to tell when that sell-off occurs since a government printing unlimited amounts of many may keep the markets high for a long time. We won’t venture a guess, but we remain cautious on the longer term.
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.
