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.

Commentary for December 2020

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 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.  

 

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. 

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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. 

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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. 

 

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.  

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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. 

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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):

 

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.

 

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 Where does the market go from here?  

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.

Commentary for November, 2020

Hello all – we hope you had a great November.  

Stocks had a great month, too.  The Dow saw its biggest monthly gain since 1987 with a rise of 12%.  The S&P 500 and Nasdaq did well, too, but only had their best month since April.  The S&P rose 11% while the Nasdaq was up 12%. 

Here’s a look at the monthly performance of the Dow since 1987:

 

We can’t forget the smaller stocks.  The Russell 2000 index is made up of small stocks and it had its best month ever with an 18% gain. 

 

The gains in the markets look very healthy, too.  Sometimes an index might be up because a few names had a very strong month and the rest of the index was mediocre.  

However, of the 500 stocks in the S&P 500, 464 are up this month.  That’s pretty rare and signals a healthy, broad-based rally.

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Two main topics were responsible for much of the gains this month: The Presidential election and Coronavirus.  

First, the election.  It’s hard to believe the election was only a few weeks ago as it seems like an eternity.  

The markets have been pleased with the result, which as it stands now, shows a Democrat in the White House and Republicans holding the Senate.  This creates gridlock and prevents more radical elements of the Biden agenda from being implemented, particularly when it comes to business issues like taxes.

The market was also reassured by the personnel choices Biden has made to fill positions in the administration.  For example, Janet Yellen as Treasury Secretary is someone we’re all familiar with and not controversial, like an Elizabeth Warren or Bernie Sanders would be in that position.  

While the market is happy that these nominees are not from the extreme left, they are all solidly left.  There’s also a lack of private experience in this group.  Virtually every nominee comes from Washington or academia.  A lack of understanding of business - or even outright hostility of it - could lead us back to the regulatory overreach we saw under the Obama administration.  

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As for the Coronavirus, this month was very bipolar for virus news.  

On one hand, the amount of new cases has risen sharply, although doubling the amount of testing in just the last two months may have something to do with this.

New lockdowns were issued in many states and cities and we’re seeing this have a negative impact on the economy.  Unemployment is rising and many businesses are closing their doors for good.  

On the other hand, several new vaccines were announced this month.  Every announcement saw stocks soar on the news.

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As for other news this month, nearly all the companies in the S&P 500 have reported their earnings for the third quarter and the results were far better than expected.

Analysts were originally expecting profits to fall over 20%, but the results stand at just a 6% loss.  While a loss is not something to celebrate, it shows that the conditions out there are not nearly as bad as believed.  

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Economic data this month was mixed.  As we mentioned earlier, shutdowns are causing businesses to close and people to lose their jobs.  More people are now filing for unemployment.

 

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):

 

Retail sales are growing - though at a very low rate:

 

Durable goods, which are items with a longer life, look a little more promising:

 

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 stayed flat over the past month.

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 Where does the market go from here?  

Stocks appear to be on the high side in the short term, based on the indicators we follow.  That said, we aren’t too concerned with a large pullback here.  While we think the odds of a rise are too low to put a large amount of new money in at this point, the market gains have been healthy and we wouldn’t be surprised to see markets grind higher.  After all, December has historically been one of the best months for the indexes.  



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 October 2020

Hello all – we hope you had a nice October.

It was a tough month for the markets as they posted their worst returns since March when the Coronavirus began.  The Dow lost 4.6%, the S&P fell 2.7%, and the Nasdaq, which has a higher concentration of tech companies, was off 2.3%. 

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 The main focus this month was the election.  

Some commentators attributed the movement of the markets this month to investors preparing for the various political outcomes.  There may, in fact, have been some money taken off the table to avoid volatility around the election, but positioning portfolios at this time is foolish since it’s just too close to call.  

A couple months ago we mentioned how the stock market was a great indicator of who would win the Presidency.  With a 90% accuracy, if the market is up in the three months before an election, the incumbent wins.  If it is lower, the incumbent loses.

As you can see in the chart below, there’s still a couple days left but it is a very close call.

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The rising level of Coronavirus cases also had an impact on the market.  Cases turned sharply higher and reached record daily levels.

 

 

However, its not as serious as it appears.  The level of deaths remains very low despite the higher level of cases.

 

 

The concern for investors, however, is new shutdowns.  

Many European countries announced new - and somewhat severe - lockdowns.  This will have a significant impact on the economy.  Headlines like the one below cause stocks to fall.

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Another reason for the fall in stocks was the lack of a stimulus deal.  

For months there was a back-and-forth between the two political parties, where positive news about stimulus sent stocks higher and negative news sent them lower.  Stocks kept going lower when it became clear that no stimulus is coming any time soon.
 

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Corporate earnings for the third quarter were another big story this month and the results have been pretty decent.  The stock market hasn’t been impressed, though.  Companies reporting good earnings haven’t seen their stock prices rise.  

As you can make out from the chart below, an earnings beat results in only a slight rise in the stock price. 

 

On the other hand, companies that missed their estimates were sold off sharply.

 

The main takeaway is that companies have done pretty well, but their stock price hasn’t reflected it.  

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Getting into economic data released this month, the results have been mostly positive as we continue to recover from the virus’ impact.  

Economic growth, as measured by GDP, had its biggest expansion in history.  Of course, it came after the biggest decline in history, but it shows how quickly we are bouncing back.

 

Employment appears to be improving, too.  The amount of people filing for unemployment continues to trend lower, although it still remains at a very high level.

 

The manufacturing and service sectors continue to do well.

 

Retail sales continue to grow…

 

…and durable goods, which are items with a longer life, are also slightly higher.

 

It’s not all good news, however, as the industrial side looks to be weakening. 

 

As for sentiment, small businesses are seeing a surge in optimism…

 

…but the consumer side isn’t as bright.

 

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 Where does the market go from here?  

Many indicators we follow are on the oversold (or cheap) side in the short term.  We think the odds of a rise are greater than a decline at this point.

However, the election is a big uncertainty and no one can be sure how the market will react.  A Trump victory is likely to see stocks rise based on pro-growth policies, and a Biden win may also see stocks rise in anticipation of more stimulus.  It may be a good time to buy.



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.