Paulsen's Perspective
When Disagreement Is GOOD!
The stock market and bond market usually get along, but sometimes they simply see things differently. Although disagreements can be difficult, their currently divergent views may prove profitable for equity investors.
Fed Fears?
Investors lose a lot of sleep worrying about the Federal Reserve. Should they?
“Fed Legends” are plentiful and as heeded as ever. Several popular adages highlighting their importance have survived the test of time, including: “Don’t fight the Fed,” “Three steps and stumble,” and “The stock market is just one big sugar high.”
Best Investment? The ECONOMY!
Yields are climbing, and who knows how high they will go? Will Inflation eventually get out of control? The Federal Reserve says they won’t tighten for a long time, but is that believable? Are Tech stocks headed for a bigger correction? As always, there is so much that’s “unknowable?”
TECH CHECK?
After prolonged and noteworthy outperformance, Technology stocks lagged the market last summer and have again underperformed over the past month. Because this sector comprises the largest share of market capitalization, portfolio managers are forced to decide “What to do with Tech?”
Is New-Era “Peaking Out” Or “Breaking Out?”
It might seem like a silly question. After all, recently, New-Era stocks have clearly rolled over and fallen out of favor. Stronger economic growth (fueled by policy stimulus and reopenings) certainly benefits investments that are more sensitive to improved economic-recovery speed. This includes small caps, cyclical sectors, value stocks, and international equities.
Yield PRESSURE
The financial markets have become obsessed with “Yield PRESSURE!” The 10-year Treasury yield has tripled from its low a year ago and has surged from below 1.0% to 1.6% since year-end. This pressure has killed bonds and is increasingly causing turbulence in the high-flying stock market.
Main Street Caution
Considering how well the stock market has done this past year, it is not surprising that most indicators show optimism reigns on Wall Street. Individual and institutional investors, Wall Street strategists, and newsletter writers all currently have rosy outlooks.
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!
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