First off, Happy New Year! I think we can all safely say good riddance to 2020. Let’s start fresh, right? Well, it seems as though the news doesn’t like that idea. If you read any headline these days, you are sure to feel some sort of anxiety, no matter what side of the aisle you sit on. Impeachment, voter fraud accusations, unrest, fiscal stimulus, tax changes, more COVID cases, new COVID strains, and on and on and on…. a never-ending loop of negative/click bait news.
As Bill Murray says in the movie Groundhog Day, “Well, what if there is no tomorrow? There wasn’t one today!” Wow. Doesn’t that line summarize 2020 well? It seems as though we have been stuck on this same news cycle for ages now. If you’re at all like me, I’m sure you are very over “it”! So, with this classic line running through your mind, let me entertain you with some thoughts on the market that run through my mind on a daily basis as I manage portfolios.
How will the market fare under President Biden? Market history seems to favor Democratic Presidents (article here). So, are we going to see a continued rally on the hopes of more stimulus? If you’re listening to new Treasury Secretary Janet Yellen, then yes. In her recent senate confirmation hearing, she shared her desire for “big” action in terms of stimulus. Combine that with the fact that the Fed promised low rates until 2022, then all signs point toward a continued market climb. Maybe something to celebrate? But, with the past stimulus and more seemingly coming, are we creating a “bubble”? Investor euphoria seems high–penny stocks trading up, IPO mania, SPAC explosion, and more. In the following two charts, we look at the historical values of the S&P 500 and the Buffet Indicator (Table 1 and Chart 1). (I think we all know and love Buffet for buying when things are “fairly valued.”) The S&P 500 valuation chart illustrates 15 common valuation models, 11 of the factors are at all-time highs, pointing toward overvaluation (or high cost in purchasing stocks at today’s values).
Table 1: S&P 500 Valuation Metrics
Chart 1: Buffett Indicator
Is this “bubble” going to burst? Can we just continue to print money with no consequences (Chart 1)? Has the Federal Reserve found a way to prop up the economy whenever it so feels by printing money?
Chart 2: Record money supply growth is at unprecedented levels.
Are we going to continue seeing lots of volatility for the unforeseen future? All of the posed questions are very valid and, depending on who you ask, you might get a different answer for each question! In my view, it is OK to be invested. I would add that being invested with caution and keeping a close eye on your portfolio is definitely warranted. The market is at historic levels and, in the past, it has never left these levels without a significant decline.
It is my HOPE that the Fed has found a way to “prop” up the markets, and that with continued cooperation on economic recovery, stimulus, and low rates, we will see continued market growth. As we travel along this new Fed-charted path, we should all proceed with appropriate caution. But, with a solid investing plan, a tested quantitative model, and an advocate by your side, it is my hope that we’ll be able to weather a long, hard winter or enjoy the warm sun of an early spring – no matter what the groundhog says.
This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Trademark Capital’s investment strategies are built using quantitative, proprietary algorithms that are designed to identify and react to changing market conditions. However, investors should be aware that no investment strategy or risk management technique can guarantee returns or eliminate risk in any given market environment. As with all investments, Trademark Capital Management’s investment strategies are subject to risk and may lose money. The investment strategies presented are not appropriate for every investor and individual clients should review with their financial advisors the terms and conditions and risk involved with specific products or services. Due to our active risk management, our managed portfolios may underperform during bull markets. Past performance is no guarantee of future results.