Markets have been on a wild ride for the past two weeks. The S&P 500 fell from its all-time highs down to its 50-day moving average, only to rally back to all-time highs again to close out last week.
At this point, the momentum is still intact. So the trend continues: higher.
As with all things in the market, every up-trend ends in a downturn (duh). The question is when?
The longer-term idea that price multiples are unsustainable at these levels still seems to make sense. Recall the 2021 projections called for markets to go higher – for the SPX to rally towards the 4000 level – then for a potentially more significant pull-back from these levels.
Judging from the way markets have been moving, this may be a less organized trend that would make the pull-back harder to spot. If stocks do not uniformly correct across the board, it may not even be recognizable.
Instead, what we could see is a type of sector rotation where money moves out of some stocks, prices correct, and then begin to recover – all on a stock-by-stock basis rather than happening across the entire market simultaneously.
Some are suggesting this may have already happened in the last two weeks, as many stocks have pulled back at least 10% from their all-time highs in the past few weeks.
Of course, it’s possible we could still see a more orchestrated correction. Stimulus out of DC is still largely assumed to be on the table. But the form of stimulus is still up for debate. Whatever the case, it seems the plan is to monetize debt. At some point, one would expect consequences to come with this plan (if Bitcoin is any indicator at all… which it may or may not be).
The larger challenge of this market is its ability to gaslight analysts. In many ways, this is reminiscent of 1999. For those without the gray hair earned riding through said era, this was the period of the ‘new economy,’ where dot-com’s no longer needed to make money; they just needed to attract customers.
During the dot-com era, traditional analysis sort of flew out the window. Stocks went up regardless of the financial health of companies. New investors were jumping in with etrade and other online brokerages. Everyone was going to become a stock millionaire.
Today, there are new app-based online brokerages, free trading, and everyone is going to become a stock millionaire. Companies may make money, but the multiples are so stratospheric it would take eons to get paid back.
What’s different? This time the government is printing money. Lot’s of it.
In fact, a quick google search revealed US GDP at $9.6 trillion in 1999 (2020 numbers aren’t official yet, but it’s over $21 trillion). If we look at the amount of stimulus being conjured up, we’re looking to print more than half of 1999’s total economy.
Let that sink in.
The kind of money being created is so mind-boggling it doesn’t compute for regular people. It may as well be a zillion-kerbillion. Because we don’t have any sense of how much money it is.
Therein lies the problem. When money can go to a zillion-kerbillion, you see assets like Bitcoin become actual conversation pieces. And you see assets become mega-inflated. The question is when?
Inflation is sneaking in. We see it in housing, where people can access the capital. If the next stimulus package includes a minimum wage increase, we will see it start to spread to more areas of the economy.
Stocks, historically, have been a leading indicator of economic health. However, in a world with near-zero savings rates, stocks become one of the only alternatives to store value. So demand is sort of conjured up by circumstances.
However, this market may be out pretty for over those skis. At some point, you tumble.
If we see inflation pick up, and rates start to rise, demand for stocks could fall. And those stratospheric multiples could start to look pretty unnatural.
Judging from the pace of movement in certain assets – the sort-of frenzied FOMO attitude of many new stock buyers – and the actions of both DC and the Fed, the idea that markets could pull-back later this year is still very much on the table.
But for now, looking week-to-week, the looks like the party is still raging.
The trend for the S&P 500 suggests the last two weeks were a mini-correction, and new highs are on the way. This week looks like a test of the 3950 levels. We’ll see…
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