“Say, here I am… On the road again… There I am… Up on the stage… here I go… Playin’ the star again… There I go… Turn the page.”
Classic 1973 lyrics from Bob Seger that are definitely appropriate almost five decades later. America, albeit painfully, did indeed turn the page on 20 January. Irrespective of your political views, the baton of leadership has shifted from four years of the Trump administration and a Republican-controlled Senate to President Joe Biden with Mitch McConnell as Minority leader. What the next chapter brings will be an unfolding saga. How America got here is another matter entirely.
To say that January 2021 was tumultuous is a gross understatement. The storming of the Capitol Building on the 6th sent an appalling message around the world. The concept of America as a shining light of democracy was shattered in a few short hours. The aftermath has yet to play out. Former President Trump is soon to be impeached for a second time for his role in inciting the insurrection. It is unlikely that he will be convicted of this charge or anything else having to do with attempting to overturn the results of the election since the vast majority of Republicans remain staunchly loyal to him. President Biden has preached unity as a major theme. That being said, we’re a long way from turning the page of divisiveness.
The other omnipresent story is the Coronavirus. The supply chain for vaccines has been lumpy, and folks have been unsure about access. Without a coordinated Federal rollout, state and local officials have carved their own territory. The bottom line is that folks aren’t getting vaccinated quickly enough. New virulent strains, most notably from South Africa, threaten the efficacy of existing solutions. We’re looking at a race between vaccines in folks’ arms and continued mutations. I’m still betting on science to eventually win, but the timeline is being extended at a huge cost to human lives, not to mention the worldwide economy.
The first three weeks of January were relatively calm on Wall Street. Traders seemed happy with the stability of the incoming administration. They also appeared pleased to note that centrists made up the majority of Biden’s Cabinet selections. Even in a divided Senate, there have been few confirmation challenges. Corporate quarterly earnings exceeded analyst predictions for the most part, and that lent a strong foundation for equity performance. January looked to be a positive month until..
Who would have thought that heavily shorted companies like Gamestop, AMC Theaters, Koss, Blackberry, and Bed Bath and Beyond would dominate the headlines and impact overall sentiment? In a remarkable turn of events, a David vs. Goliath battle between retail investors and institutional hedge funds ensued. Largely unsophisticated amateurs, egged on by social media sites like Reddit and Wallstreetbets, actually forced hedge funds to cover their short positions. The massive volume in share and option trading on these stocks led to crazy price swings. The upside was exponential in nature. Gamestop shares gained hundreds of dollars in a couple days alone this week. We of course realize that basic fundamentals are not exactly at work here. The upshot is that while many small traders have made money here, the scenario will probably end badly. Folks are using margin to purchase their positions, and when price action goes south like it did on Thursday, more capital is immediately needed.
The result of this feeding frenzy is that volatility has quickly returned to the market. The VIX, or Volatility Index, went from the low 20’s to over 37 on Wednesday. When emotions are elevated like this, it becomes more difficult to make good investment decisions. My feeling is that the tenseness will dissipate at some point so that we can return to basics. In the meantime, it’s a free market lesson to many. Where do we go from here?
If we separate the current noise surrounding small, largely dubious companies, we can be cautiously optimistic that the economy will rebound as people feel more safe to participate in life as we formerly knew it. This furor doesn’t impact the way that traders feel about turning the page. The Federal Reserve monetary policy is still dovish, and a new round of stimulus seems to be on the horizon. Since the new President has COVID and the economy as his primary focus, it seems unlikely that any feared tax changes will occur anytime soon.
That being said, the short-term is murky. According to Birinyi Associates, February is the worst stock performance month for the first year of a new Presidential term. Equities may have already “paid forward” some 2021 expectations. Valuations, notwithstanding the ridiculousness of the short squeeze names, are at historically high levels. Again, it must be remembered that markets efficiently look forward 6-12 months to arrive at today’s pricing metrics. Wall Street is counting on late 2021 and 2022 to show marked economic improvement, and I believe that thesis. We might be in for a garden variety correction as long as volatility remains high, but I would look at pullbacks as a counter-intuitive sign to perhaps put some cash to work.
As always, we are watching things very closely. We’re trying our best to cut through the proverbial clutter to get an accurate assessment of market conditions. We’re sure that there will be some interesting chapters as America continues to turn the page. Thanks as always for your trust and support. We look forward to hearing from you soon.
|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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