Paulsen's Perspective
What Matters Is The “Mix”
Inflation fears have justifiably ratcheted higher in recent weeks. The expected inflation rate embedded in the bond market (i.e., the 10-year breakeven rate) surged off a low last March to more than 1% above the 10-year Treasury yield. Industrial commodity prices have reached their highest levels since 2011, and the price of crude oil—tripling from year-ago levels—is now higher than before the pandemic.
A Few Quick Incidentals!
Just a few quick thoughts on the pending minimum-wage hike, surging bond yields, and fund flows.
Stock Market Secular Sentiment
Investors have developed many short-term sentiment gauges; for example, the various surveys of individual (AAII) and professional investors (Investor Intelligence), along with newsletter writers’ recommendations. There are also measures for bullishness/bearishness based on media stories, recent market performance (e.g., Advance/Decline, New Highs/New Lows, Up/Down Volume, the total return of different stock subsets), and assorted behavioral indicators—including margin buying, short-interest, put/call ratio, CFTC futures-position changes, MF/ETF fund flows, and future stock market volatility.
DEMAND In Waiting!
Policy officials and the private sector devoted 2020 to bolstering future demand. Some of the fiscal stimulus was spent, but much of it was saved. Chart 1 illustrates that personal savings as a percent of GDP surged to a post-war high of 14%—more than 7.5% higher than average and 4% above its previous record high in the mid-1970s! That is a lot of future buying power!
In A Market With So Many PUTS… Why Not Buy A CALL?
Greenspan initiated the “Fed Put” as an aggressive monetary action. It was stepped-up under Bernanke to direct quantitative easing and became perpetual monetary looseness with Yellen. Under Powell, it is now a “Let’s run it hot, rates will be low for a long time, Everything Bubble!”
A “Shot In The Arm” Should BROADEN The Stock Market!
As the stock-market rally continues, there is growing concern that investor sentiment is becoming too buoyant. Several indicators suggest investors may be feeling a bit too comfortable and a bit too confident. A correction (perhaps a nasty one?) sometime this year that checks optimism and complacency is probably inevitable, but healthy for the ongoing bull market.
Not Enough SPEED And Too Much VOL!
Despite the amazingly quick, and surprisingly strong recovery from its COVID-19 crisis low last March, worries have escalated about the stock market. Roaring to new record highs while the pandemic continues to ravage Main Street has popularized a narrative that suggests the stock market has entered a “Manic Bubble.”
Earnings Emphasis!
Crises are dominated by macro events. When the world is collapsing and policy officials are flooding the system with juice, earnings and company specifics get lost in the shuffle! Instead, investors tend to focus more on broad asset classes. Too much in the stock market? More bonds? Cash? Gold? When markets are surging higher or free-falling, who really cares if ABC Corporation beats estimates by a penny?
Bear Claws Or Bull Poop?
Last week was a good reminder that unexpected things could happen in the stock market at any moment. Here we were watching the daily COVID-19 news, stimulus drama, earnings reports, and wham, the “Reddit Revolution” whacks stocks and totally wipes-out a mostly accommodating January stock market. Stocks have risen so much that a correction this year seems almost assured. Maybe one is unfolding now? Even though they are emotionally challenging, investors can survive corrections with a little fortitude, an eye to the future, and diversification. The real concern is whether the stock market is vulnerable to a “cycle-ender?”
Some Smart “Shorts” … Well, perhaps not so “smart,” but they are brief!
Just purging some random thoughts that have been cluttering up the place!
“Bubble Worry” May Be The Bigger Bubble!
There are certainly many signs the stock market could be getting out over its skis and a correction may be looming. A Russell 2000 small cap index that has more than doubled from its lows last year, extremely high valuations compared to historic norms, an explosion in SPACs, IPOs, and M&A activity, several scary investment sentiment indicators, outsized and over-the-top economic policy accommodation, ridiculous recent price surges in heavily shorted stocks, and the price of Crypto going Crazy!
Keeping It SIMPLE
Sometimes the simplest explanation is best. Most believe global economic growth will be strong this year. As vaccines work to dampen (if not end) COVID-19, massive policy accommodation, the restart of social industries, and the revival of private-player confidence and glee should boost economic growth across the globe. Added to that are strong pent-up demand and record-high savings.
Job Market Doesn’t Need More Stimulus...It Needs A “Shot In The Arm”
Economic programs traditionally take time to improve unemployment after a recession. However, the COVID-19 crisis created a unique divergence within the job market that will not be solved by customary economic policies, but rather, by vaccinations!
Correlations Still Comforting
There are always conflicting signals surrounding the stock market. Today is no exception. Valuations are extremely high, but yields are near record lows. Recent economic reports have weakened due to the winter’s COVID-19 surge, but current vaccinations (although slow) highlight how close the U.S. is to a more extensive economic reopening.
Stimulus? Suitable Or Silly?
Like the Saturday Night Live “Cowbell” skit, among policy officials and politicians, the solution to “everything Pandemic” has been, We Need “MORE Stimulus!”
Undoubtedly, the COVID-19 crisis has been a rare if not unique situation, incredibly serious, and has caused widespread and immense hardship. Due to that, we received a $2 trillion fiscal CARES package last spring, a massive increase in quantitative easing resulting in an 80% increase in the Federal Reserve’s balance sheet since last February, and a surge to an all-time-high 26% annual growth in the U.S. M2-money supply.
Traditional, Yield-Adjusted, Or A “Combo” P/E?
As the stock market continues to surge higher in the New Year, investor anxieties surrounding excessive valuation risk are also rising. Many increasingly worry that the bull market has entered a manic bubble reminiscent of the late 1990s.
What You “Don’t Own” In 2021 May Be More Important
Every year, there is plenty of investment advice on the best “buys” for the New Year! However, in 2021, it may prove just as important to avoid certain areas of the financial markets.
The current consensus forecast for U.S. real GDP growth is 3.9% in 2021, representing the fastest rate since 2000. Our prediction is for 6% growth—the fastest since 1984! Either way, due to massive policy stimulus and the expectation that vaccinations will finally bring COVID-19 under control, U.S. economic growth should be strong this year. Whether currently a bull or a bear, the fact that real U.S. economic growth is poised for a healthy advance should make everyone leery of traditional “defensive investments.”
Some Guesses For 2021?
Bring on the New Year! Bring on Vaccinations! Bring on Re-openings! Bring on Mobility! Bring on Socializing! Bring on Freedom (from my basement)! Bye Masks, Purell, 6-feet of distancing, Quarantine, Zoom, Curbside Pickups, and Sickness! And “Farewell” to far too many Loved Ones! Good Riddance COVID-19!
Here are a few guesses, conjectures, and maybe even some stupid thoughts for the New Year.
Another Stimulus Package for Stocks is Arriving in 2021 – Higher Yields!
The stock market has received plenty of support during this pandemic. Massive bond-buying has ballooned the Federal Reserve’s balance sheet from about $4 trillion to $7.5 trillion. The annual M2 money supply has surged from 6% to 26%, and federal-deficit spending as a percent of nominal GDP has exploded from less than 5% to more than 15%. What’s more, policy officials around the globe have replicated this unprecedented support!
A Dollar Bust Is An EM Boom!
The trade-weighted U.S. Dollar Index (DXY) has been weak since mid-May. This week’s downside pressure has pushed it below 90—within an eyelash of its early-2018 bottom. If it breaches the 2018 low, there is very little technical resistance until it moves down to near 80. This year, the dollar peaked above 100, so a drop to 80 would represent a significant 20% cheapening in just a few months.
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