Commentary for February, 2021

Hello all – hard to believe the month is already over, we hope it was a good one for you.

Stocks saw gains this month, but there was a lot going on under the surface.  For February, the Dow was up 3.2%, the S&P gained 2.6%, and the Nasdaq was the laggard with a 0.% return. 

 

The major markets took different paths this month.  Usually they tend to move in the same direction, though at different speeds.  A look at the chart below and you can see the tech-heavy Nasdaq falling off sharply in the latter part of the month.

 

Like we mentioned in the intro, there was a lot going on this month.  Investors appear to be rotating out of previous high flyers like tech stocks and into investments that had been underperforming, thinking they have more room to rise.  

Sectors that will do well as the economy continues to reopen, like airlines and cruise ships, saw a lot of interest.  Money is also flowing into smaller stocks, too.   

In the investing world, there are basically two investment categories: value and growth.  Growth stocks are the high flyers that are expected to keep growing fast – like the tech stocks.  Value stocks trade at prices lower than their fundamentals might suggest.  

Anyway, growth stocks have been outperforming value stocks for years.  However, value stocks saw a lot of interest in the latter part of this month.  As you can see in the chart below, growth stocks fell sharply while value stocks held up.

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Bonds were also a big story this month - actually, they were probably the biggest story this month.  Bonds are pretty boring, though, so they don’t get a lot of headlines.  

Bond prices fell very sharply this month, which means their yields rose sharply.  In your investment account, you’ll see your bond holdings lost value, but their interest payout will be higher.

 

In fact, the average dividend payout for stocks and the interest payout for bonds is now about the same.  This means investors who bought stocks for their yields can get the same payout in a safer bond. 

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 So what’s going on here?  Why the rotation out of bonds and out of high-flying stocks?

One reason is the strength of the economy.  Economic data looks fairly solid and the pace of Covid vaccines is accelerating.  That means economic data will keep getting better as the country continues to reopen.  That’s good for stocks, particularly the beaten-down ones.  

The other reason is an expected rise in inflation.

Fed chairman Jay Powell made comments in front of Congress this month that they would continue the record pace of money-printing stimulus, even long after their economic objectives have been met and even if inflation runs hot.   

In addition to the current stimulus from the government, a $1.9 trillion stimulus bill is expected to be passed shortly, and there are rumors of a $3-4 trillion infrastructure bill coming within months, if not weeks.  These are absolutely massive amounts of money being printed and it’s not inconceivable that it will stir up inflation.

Below is a look at the amount of money that has already been printed.  Throughout the course of our history, the money supply has gradually risen.  In the last year it has skyrocketed.

 

This amount of money printing begets the question, why isn’t there more inflation already?  Well, there is some inflation out there - which we’ll get to shortly - but it’s a decline in the velocity of the money that has kept a lid on inflation.  The “velocity” means that means it’s not cycling through the economy quickly.  Take a look:

 

While the “velocity” of this money has fallen sharply during the shutdown, there is the perception that it will pick back up as the economy reopens.  That increase in velocity, combined with the trillions more from new stimulus, is bound to stir up inflation.

We’re already seeing signs of inflation.  The inflation metrics like PPI and CPI are showing increases.  Plus, commodity indexes are rising quickly.  The Bloomberg Commodity Index, which tracks 23 raw materials like oil and gas and copper and wheat and sugar, etc., rose at one of its strongest paces in a decade.  

Here's a look at copper prices:

 

As the economy reopens and inflation rises, stocks will tend to do better than bonds.  In particular, the reopening stocks will outperform the tech stocks.  Commodities will be an important part of the portfolio, too.

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Switching gears to the economy, which has shown a lot of strength.

The Federal Reserve Bank of Atlanta has raised its estimates for the GDP.

 

The employment picture looks to be improving as fewer people are filing for unemployment.

 

The service and manufacturing sectors are both expanding (a number over 50 means expansion):

 

Retail sales are picking up:

 

 

Durable goods, which are items with a longer life like a phone or refrigerator, are also looking solid:

 

People still aren’t feeling good about the economy, though.  Consumer sentiment rose only modestly last month and remains a long way from where it was before the virus.

 

Sentiment at small businesses rocketed back from the virus lows, but continued to move lower last month.

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 Where does the market go from here?  

Similar to January, the late-month selloff this month put the indexes at a more attractive level for a short-term investment (looking out a few weeks).  We’d like to see them a little lower from this level before we’d get too excited, though.  

We’re a little more cautious for the longer term.  We think the economy will continue to improve, but the froth in the markets, along with a steady increase in inflation, could be a drag on stocks.  


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.

Commentary for January, 2021

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%. 

 

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.  

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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 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:

 

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.  

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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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 Where does the market go from here?  

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.