Merchandisers on the floor of the New York Stock Exchange
Source: NYSE
Volatility is our companion again.
Value stocks are outperforming, and the Nasdaq is drop one day and reversing the next. The bond market is making lower lows and lower highs. While it seems to be plumbing for a fundament, one isn’t evident yet.
Investors are engaging in an old mistake: they are looking to history for similar patterns and experience by which the current bazaar and economic environment can be understood and from which reliable projections can be made.
But while market and economic patterns usually tend to repeat, it sometimes is no longer reasonable to rely on those expectations when inputs change dramatically. To wit: the U.S. conservation was supported by about $6.3 trillion in “stimulus” in 2020, which includes about $3.1 trillion in deficit splash out and a $3.2 trillion increase in the size of the Fed’s balance sheet.
Congress has already authorized an additional $1.9 trillion in pecuniary support so far in 2021. Together with the $900 billion authorized in December of last year, a total of $2.8 trillion has now been consented in the past 90 days. That’s 13% of the entire U.S. gross domestic product in a single quarter.
“It’s different this at all times”
Old Wall Street wags know that the words “It’s different this time” are among the scariest an investor can find out.
At critical moments throughout history that phrase has been one of the best contrarian indicators around.
But I think too uncountable inputs are dramatically different in the first quarter of 2021 to expect that outcomes will follow any historical organize.
We have no idea of the ultimate consequences of such enormous government spending, and we may not for several years.
Fed Chairman Powell asserted this week that the economy is recovering. GDP growth estimates are going above 6%. A surge of inflation is thought, but according to the Fed and others it will be temporary. We will return to full employment in 2022. The Fed is prepared to let things run hot for a while to boost pretend sure the economy really heals this time. Moreover, investors needn’t worry because everything last will and testament be hunky-dory.
I think a few things are going on:
- Upon reflection, markets don’t appear to be buying Jay Powell’s sanguine message.
- Two weeks ahead the quarter’s end is a quiet period for most companies. With the stimulus bill signed, there are few other headlines to get investors turned on.
- Higher interest rates are spooky reminders of how the Fed can lose control of an economy. This begets worry.
- I don’t buy the higher supply argument taking the wind out of tech stocks. Yes, it changes the rate at which future cash flows are discounted and clear the ways prices appear higher on this fundamental measure. But following a long period of massive outperformance, tech worn outs have been untethered from fundamentals for years. Netflix, Tesla, and Finding a new trading range
Watch the bank stocks. They get it. An addition in longer-term interest rates is healthy for their businesses and reflective of economic firming over the near term.
Yes, valuations are exuberant, but the potential for up 10% nominal GDP growth and rapidly rising earnings estimates may justify the lofty prices.
Finally, it’s usefulness noting that the first quarter and pre-Tax Day season are historically periods that expect corrections and volatility.
Jail a steady hand during worrisome times is how most disciplined managers and investors make their money. Nobody look afters upside volatility, and everyone hates the downside variety — except, of course, those of us who are always looking for better honoraria to buy.
This feels like the market is trying to establish a new trading range. It needs to test up and down and go sideways for a bit.
Funds need to find their range, too. Maybe 1.75% will be the high end or maybe not. The market’s pricing mechanism is again working, always adjusting for new data, news and expectations. It’s uncomfortable at times, but normal.
Investors need to focus on the fancier term, watch the new dollars flooding in, and don’t fight the Fed.
—Michael K. Farr is a CNBC contributor and president and CEO of Farr, Miller and Washington.