“In like a lion, out like a lamb … ”
This old saying generally refers to the weather in March. It infers that February often ends with rain, snow, and cold temperatures that tend to ameliorate as Spring arrives. The adage also could have applied to stock market performance in February. Last month began in a rather benign manner with modest positive performance for equities. As the month wore on, volatility increased dramatically and the price action became mixed. The last trading week of February was marked by violent swings and significant angst. Why the change in sentiment?
I believe that there were two factors at work. The first was the renewal of activity in equity names that were the subject of a massive short squeeze in January. Game stop, AMC Theaters, Koss, Blackberry, and several other listings belied their weak balance sheets and income statements with outsized gains due to short sellers having to cover their positions. Websites like Robin hood and Reddit appeared to be part of the cause, as they trumpeted news of these securities to their largely young, inexperienced followers.
The end of January saw a reversal of this trade, and many latecomers to the party got badly hurt. By the third week of February, we began to experience a Yogi Berra “deja vu all over again” moment. The same names repeated the January cycle and nervousness re-entered the fray. The overall atmosphere isn’t helped by Bitcoin rising or falling by 5% or more on an almost daily basis. The Dow lost over 1000 points, or 3%, in the last two days of the month. Other indices were quite weak as well. The lion’s roar was certainly audible.
The second reason for anxiety on Wall Street was the incredibly rapid rise of bond yields. The benchmark 10-yearTreasury moved from roughly 1% at the end of January to almost 1.5% in less than thirty days. Many market observers feel that as this yield heads toward 2%, pressure is brought to bear on stocks. The logic is that since the dividend yield on the S & P 500 is roughly 2%, why risk owning stocks in a strange environment when you can hold guaranteed safe Treasuries? The bottom line here is that even though there was a huge percentage rise in yield last month, the rate is still below where it was before the pandemic arrived.
Many pundits are saying that the market feels toppy right now, and I get it. We’ve had a nice run and might be due for a garden variety correction. If a downturn occurs, I’d like to think that it would present a counter-intuitive buying opportunity. Let’s not forget that Wall Street is a forward-looking mechanism. Vaccinations are finally beginning to become prevalent after an admittedly slow initial rollout. I honestly believe that Wall Street is more worried about the economy over heating than it should be. It’s exciting to muse about what the “new normal” is going to look like. That being said, I feel that America will be cautious about returning to the habits of a year ago. It’s all not going to happen at once.
Both Federal Reserve Chairman Jay Powell and new Treasury Secretary Janet Yellen are committed on the record to keep monetary policy dovish and stable. This should help smooth out the trajectory of the bond market overtime. As long as rates stay underthe 2% threshold, a reasonable case can be made for owning securities. What happened at the end of last month is the realization that the TINOA(There Is No Other Alternative -to stocks) mantra might be showing a few cracks in the armor.
The economy should continue to improve. The added stimulus package that passed the House would put more personal spending on the horizon if the Senate can place it into law. The lamb just might make an appearance if volatility can ease.
We are assiduously monitoring your portfolios to see if any trend is developing that warrants adjustment. As we hopefully head toward herd immunity in the US, it’s important that we remain vigilant aboutCOVID-19. lt’s critical that we follow protocol and stay safe until some semblance of normalcy returns. Please stay safe and make sure that your loved ones do as well. I for one can’t wait to hug someone (other than my wife) again.
Thanks as always for your trust and support.
Please feel free to send us your comments and thoughts. I look forward to hearing from you soon … take care …
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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