Investment Insights & News

“My Way”

by Ron Gambassi
January 15, 2021

Old Blue Eyes Influences the Market Once Again

If financial markets in 2020 (and continuing this month) were characterized by a song it would be the Frank Sinatra classic, “My Way”. To say all conventional investment wisdom went out the window would be an overstatement, but not by much. Markets certainly behaved in their own way, ignoring traditional factors that would have led to a second steep correction.

Unemployment sits at 6.7% with 10.7 million people out of work. The percentage is 10% if you factor the number of people who have given up the job search. The weekly unemployment filing was an eye popping 925,000. After an encouraging trend the past few months, it spiked to a high not seen since March 2020.

The S&P 500 Price/Earnings ratio now stands at 38. The historical average since 1945 is 19.6. That’s a dramatic overvaluation by any objective assessment.

The Federal Reserve is buying $140 billion of bonds every month and injecting all that money as cash into the economy. That’s great for mortgage rates but not much else. The Federal Reserve plans to keep rates at or near zero for the next few years while trying to get inflation up to 2%.

The so called Robinhood traders have contributed to a high level of volatility and irrational run-ups in certain stocks this past year. Those and other traders have driven Tesla stock up 700% last year. Speculation in crypto currency is outrageous. Bitcoin went from zero to $20,000 per coin in four years, then to $40,000 in only four weeks and lost 15% in the next two trading days. Twenty-one IPO companies doubled on their first day of trading in 2020.

The most extreme example is the U.S. Stock market hitting an all-time high on the very day of a protest turned violent siege of the U.S. Capital. That alone could easily have resulted in a 10-15% stock market correction in a single day!

What is driving this seemingly irration market momentum?

Two things...

  • The Federal Reserve will continue pumping colossal amounts of cash into the system and driving rates low. This is forcing a lot of money into the stock market that should otherwise be invested in the relative safety of bonds (fixed income). Day-trader speculation is adding a lot of fuel to this market on fire.
  • The market is looking beyond the economic catastrophe caused by the Corona virus and anticipates companies will make so much money in H2 2021 and grow into the outlandishly high price/earnings ratios of their stock.

What to do about it varies by investor and warrants further evaluation during a portfolio review.

Let's talk soon.

Best — Ron

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