"Nothing is so permanent as a temporary government program." - Milton Friedman
It's always a little difficult to get back into the routine after a long holiday weekend. Coming out of the Thanksgiving holiday and into December has historically been a good time of year for the bulls. However, as we have already witnessed with COVID, there is always something lurking in the background. Fear is an extremely powerful emotion, and it can force investors and traders to do some illogical things at times that defy the rational decisions made back when that fear wasn't present. Mr. Market doesn't make it easy on us, and since nothing goes straight up, every pullback will look like a top is in place and create a wall of worry that will need to be climbed. Now we face another obstacle (or is it?) in the form of yet another COVID variant.
While we have seen these knee-jerk responses before when saner heads prevail the markets tend to look at the facts and tosses emotion aside. After all, there should be no surprise that a new variant has emerged. We've been told this is NORMAL activity and it is how these viruses usually proceed.
What occurred the day after Thanksgiving is typical. Far too many investors conjure up, then RUN with the worst possible scenario. It should have occurred to the average market participant that this entire global economic rebound has occurred with the COVID situation in the background. For months we have seen the global data continue at or near PRE-pandemic levels. The world is simply doing what I believed it would have to do back in the middle of 2020. It will learn to live with the virus. It was one of the reasons I never left the market last year.
Change Is In The Air
One thing we know about rules in investing. There aren't many, and those that are around don't work all the time. It is because the investment landscape is constantly changing. Within that landscape, there are so many variables an investor can hardly keep pace with. Those that have been around a while will ultimately go back and call on their experience. Once again the market has an answer for that; it surely can help to have experience but one better enter the scene with an open mind. Therein lies the answer to guide us, find a balance between our accumulated knowledge and being open-minded.
For those that may be just starting on their investment journey, and have limited experience to draw from, turn yourself into a sponge. Absorb as much as you can. Take it slow, after all, you have years to invest and build wealth. There is always opportunity in the equity markets. I will share this. There is no book, no set of rules that will guide you through a nasty downturn in the market if you haven't experienced it before. Simply because none of us know for sure how we'll react while under the extreme stress of losing money.
The common road that most investors travel is incorrect. They learn about fundamentals, then add some technical expertise and formulate their plan learning by trial and error. However, the most important piece of the puzzle is left for last or never learned at all, because it is dismissed. It is an issue that always needs to be reinforced. Make sure you know yourself and understand the role emotion and human nature play while managing money. This needs to be addressed as soon as one opens up their brokerage account, and of course, we all know that doesn't happen.
After many years of investing, trying many different methods and approaches to managing money, I have come to this simple conclusion. Grasp the human nature aspect when it comes to investing early, and the doors to success open, dismiss it and spend years trying to figure out what is going wrong. I did my time, I spent years trying to figure it out.
November is in the books and it was an interesting month. The S&P 500 made 7 new highs in November bringing the total for the year to 66. That makes 2021 the second-best ever for setting records behind the 77 posted in 1995. The Dow kept pace adding 6 new highs bringing its yearly total to 47. That is well off the record of 71 set in the prior secular BULL market in 1991. However, the NASDAQ Composite outpaced both of them with 9 new records, bringing its yearly total to 47, which is well above the historical average of 19 per year.
It's been a rangebound year for the Russell, but the index did break to new highs in November adding 4 to its total which stands at 17. That's four more than last year and just below the average of 20 per year historically.
When the new high parade ended, ALL except the NASDAQ Composite posted losses for the month. The Russell 2000 gave up 4.3%, followed by the DJIA losing 3.7%. The S&P 500 and the Dow transports were flat losing 0.80% and 0.40% respectively. The NASDAQ posted a minuscule gain of 0.26%.
As we enter into the final month of the year, it still has been a very profitable one. All of the major indices have posted double-digit gains this year.
- S&P 500 + 21.5%
- DJIA +12.6%
- NASGAQ + 20.5%
- Russell 2000 +12.6%
- Dow Transports +26.6%
So it is on to December. In the back of my head, I keep thinking about the time of year and how this is a seasonally strong period. However, after seeing emotion rule the trading, I'm not going to hang my hat on that alone. In addition, the Fed announcement this past week regarding inflation and interest rates is a potential game-changer.
The Week On Wall Street
The S&P 500 was up 22% on the year heading into Monday morning. There is plenty of room to give some of those gains back if that's what is necessary for the new COVID and Fed uncertainty to ripple through the markets and for risk to be repriced. We have been through this process many times. It used to take months, now it takes days or hours. That is how the investment scene works today.
Monday was the scene of a tepid rebound from the 107 point drop in the S&P in the abbreviated post-Thanksgiving session. Sentiment has turned and every headline brought the "'worst case" scenario to the forefront. All of the major indices collapsed on Tuesday and Wednesday. Support levels were quickly dispatched as the selling intensified. It could only be described as dismal price action as the emotional shakeout took the DJIA on a 950 point ride. Unfortunately for the BULLS, a 500 point gain was turned into a 450 point loss in one session.
The roller coaster price action is a sign of the markets trying to find an intermediate bottom. Sellers come in to kill the rallies and buyers swoop in to go bargain hunting and set support. On Thursday the buyers won the battle. The S&P rallied and recouped 1.45% of the 4% loss it suffered in the prior four trading days. The S&P closed the week adding its sixth straight day of moves greater than 1% and closed lower for the second straight week. That made it three out of the last four weeks the index closed in the red, after a 5-week winning streak. The NASDAQ has followed that same path, 5 weeks of gains followed by 3 of the last 4 weeks with losses.
The DJIA, Dow Transports, and the Russell 2000 made it four successive weeks of lower prices.
Another payroll report missing expectations by a wide margin. Payrolls rose by 210,000 (lowest in 11 months) about half of the expected 550,000. Non-farm payrolls remained ~4 million jobs below their pre-pandemic high, as employers continue to report difficulties in hiring and retaining workers. The vaccine mandates (announced in November) remain an anchor on the job's picture. This report might as well be called "policy uncertainty" as people watch the entire mandate issue now being settled in the courts.
One bright spot, there were minor upward revisions made to the September and October totals. One bright spot, there were minor upward revisions made to the September and October totals. The unemployment rate fell to 4.2%.
November PMI data from IHS Markit signaled the second-weakest rise in production recorded over the past 14 months as producers reported further near-record supply delays and a slowing of new order inflows to the softest so far this year. Jobs growth also waned amid difficulties filling vacancies. The seasonally adjusted IHS Markit US Manufacturing Purchasing Managers' Index posted 58.3 in November, down fractionally from 58.4 in October and lower than the earlier release 'flash' estimate of 59.1. The latest reading was the lowest since December 2020. Although remaining well above the 50.0 neutral level.
Source: IHS Markit
While the index has come off the recent highs and many want to fun with a headline take a look at where the index stands today. It is still ABOVE pre-pandemic levels.
Dallas Fed manufacturing fell 2.8 ticks to 11.8 in November, weaker than expected, after jumping 10 points to 14.6 in October. The index was at 12.9 a year ago and was at a cycle high of 37.3 in April. However, most of the components improved. Prices paid for raw materials surged to 82.1 from 76.3, while prices received slipped to 42.2 from 49.8. The 6-month outlook index jumped to 28.6 from 15.
Construction spending headline number posted a smaller than expected 0.2% October gain. Yet, the level of activity was sharply higher than expected due to big upward revisions. Analysts have seen hikes for construction in ten of the last twelve reports. Analysts saw big hikes in nonresidential construction and smaller hikes for residential and public construction. Construction spending looks poised for a 5% pace in Q4.
The U.S. ISM Manufacturing Index matched estimates with a rise to 61.1 from 60.8 in October, versus the same 61.1 in September, a 6-month low of 59.5 in July, and a 37-year high of 64.7 in March that was last seen in 1983. The November reading marks an 18th consecutive month in expansion territory since May of 2020, and the index has had a 60-handle in eight of the last ten months.
ISM Services index rose 2.4 points to 69.1 in November a new all-time high (the report goes back to 1997). This easily beats the prior high of 66.7 set in October, having jumped 4.8 points from 61.9 in September. Components were more mixed, but the employment index surged to 56.5 from 51.6 previously. New orders were unchanged at 69.7. Supplier deliveries were also steady at 75.7, while the inventory change gauge rose to 48.2 from 42.2. Imports declined to 50.5 from 53.3, and new export orders dropped to 57.9 from 62.3. Prices paid slipped to 82.3 versus the record peak of 82.9 in October.
Pending home sales index rebounded 7.5% to 125.2 in October, much stronger than projected, following the 2.4% drop to 116.5. It is the best since December's 126.4. The record high of 130.3 was set in August 2020, with the all-time low hit in April 2020 at 70.0. The index was at 127.0 last October. Sales increased in all four regions, recovering from September's declines. Sales have been on a choppy month-to-month course, impacted by low inventories, rising rents, record-high prices, and weather. The NAR also suggested there has been a rush to get in before prices and mortgage rates go higher.
Consumer confidence reported by the Conference Board this week missed estimates and fell more than expected. The Index now stands at 109.5, down from 111.6 in October. The Present Situation Index-based on consumers' assessment of current business and labor market conditions-fell to 142.5 from 145.5 last month. The Expectations Index-based on consumers' short-term outlook for income, business, and labor market conditions-fell to 87.6 from 89.0.
As you review the Global PMI data keep in mind these results have come while COVID (Delta variant) has remained on the scene. While there have been speedbumps COVID has NOT halted the recovery and it's doubtful the Omicron threat will have a major impact.
The J.P.Morgan Global Manufacturing PMI edged down to 54.2 in November, little changed from readings achieved in the prior three months. The headline PMI has now signaled improvements in business conditions for 17 consecutive months.
Source: IHS Markit
All five of the PMI components were at levels normally associated with positive trends in operating performance.
The rate of global economic expansion edged higher in November, as output rose at the quickest pace for four months. The J.P.Morgan Global Composite Output Index posted a four-month high of 54.8 in November, up from 54.5 in October. The headline index has signaled expansion throughout the past 17 months. Growth of service sector business activity held steady at October's three-month high and has now outpaced that of manufacturing production for eight successive months.
Source: IHS Markit
Eurozone manufacturing sector growth stabilized in November, latest PMI® data showed, following a four-month slowdown from June's record expansion. However, factory operations across the euro area continued to be hindered by severe supply-related constraints.
The IHS Markit Eurozone Manufacturing PMI increased from 58.3 in October to 58.4 in November, marking the first rise in the headline index since June. However, aside from the positive direction change, the latest data marked the second-slowest expansion since February.
The IHS Markit Eurozone PMI Composite Output Index rose to 55.4 in November, from 54.2 in October, indicating a solid and accelerated rate of economic expansion across the euro area. On a positive note, the faster increase ended a three-month sequence of slowing growth in which the headline index shed six points.
UK manufacturers continued to face a challenging operating environment in November, as severely stretched supply chains disrupted production schedules and drove up input prices to the greatest extent in the 30-year survey history.
The seasonally adjusted IHS Markit/CIPS Manufacturing Purchasing Managers' Index rose to a three-month high of 58.1 in November, up from 57.8 in October. All five of the PMI components had a positive influence, as production, new orders, employment, and stocks of purchases rose and supplier lead times lengthened.
A strong recovery in UK service sector activity continued during November, helped by the fastest rise in new business intakes for five months. Export sales were a key factor supporting growth across the service economy in November, with looser travel restrictions contributing to the steepest upturn in new business from abroad since March 2017.
The headline seasonally adjusted IHS Markit/CIPS UK Services PMI Business Activity Index registered 58.5 in November, down only slightly from October's three-month high of 59.1. As a result, output growth in the final quarter of 2021 remains well on track to exceed that seen in Q3.
The Latest PMI data indicated that overall business conditions faced by Chinese manufacturers were broadly unchanged in November. Output rose for the first time in four months as disruption to production schedules from power supply issues eased, but total new business fell slightly. As a result, capacity pressures subsided, with backlogs rising only slightly, while softer demand conditions also contributed to a further drop in staff numbers. Prices data meanwhile showed notable slowdowns in the rates of both input cost and output charge inflation.
The headline seasonally adjusted Caixin China Manufacturing Purchasing Managers' Index dipped from 50.6 in October to just below the neutral 50.0 mark at 49.9 in November. This indicated that operating conditions were broadly unchanged on the month after a slight improvement in October.
The headline seasonally adjusted Caixin China Services Business Activity Index fell from 53.8 in October to 52.1 in November, to signal a third successive monthly increase in Chinese services activity. That said, the rate of expansion was the slowest seen over this period and only modest. Panel members often mentioned that the recent increase in virus cases had weighed on performance and impacted sales.
Japanese manufacturers signaled a quicker improvement in operating conditions in November, as respondents registered the fastest expansions in production and new order volumes for seven months. At the same time, however, firms continued to report significant supply chain disruption had intensified price pressures midway through the fourth quarter, with manufacturers commenting that material shortages and delivery delays in receiving inputs had contributed to the sharpest rise in cost burdens in over 13 years. That said, Japanese manufacturers remained strongly optimistic regarding the year-ahead outlook for output.
The headline au Jibun Bank Japan Manufacturing Purchasing Managers' Index rose from 53.2 in October to 54.5 in November. This signaled the strongest improvement in the health of the sector since January 2018 and the tenth consecutive month of overall growth.
At 53.0 in November, the seasonally adjusted Japan Services Business Activity Index rose sharply from 50.7 in October, signaling a second consecutive expansion in the activity that was the quickest for 27 months. The increase was moderate overall as companies saw activity lift following the lifting of the state of emergency measures.
The Indian manufacturing sector continued to expand strongly in November, as an accelerated rise in sales supported the fastest upturn in production for nine months. Companies scaled up input buying, which in turn led to the second-quickest accumulation in stocks of purchases since data collection started nearly 17 years ago. Also, there were tentative signs of an improvement in hiring activity, following three successive months of job shedding.
Increasing from 55.9 in October to 57.6 in November, the seasonally adjusted IHS Markit India Manufacturing Purchasing Managers' Index signaled the strongest improvement in the health of the sector for ten months. Moreover, the headline figure was well above its long-run average of 53.6.
Posting 58.1 in November, down only fractionally from 58.4 in October, the seasonally adjusted India Services Business Activity Index pointed to the second-fastest rise in output since July 2011. According to monitored companies, the upturn reflected sustained increases in new work and ongoing improvements in market conditions.
Supply issues continued to impact the South Korean manufacturing sector midway through the fourth quarter of the year. Output volumes fell for the second successive month, while new order growth broadly stagnated as manufacturers continued to report that sustained supply chain disruption had hindered demand in the sector and placed additional strain on business costs and capacity.
At 50.9 in November, the seasonally adjusted South Korea Manufacturing Purchasing Managers' Index rose from 50.2 in October, indicative of a quicker, yet still marginal improvement in the health of the sector. The latest increase extended the current sequence of improving operating conditions to 14 months.
Following a return to growth in October, the ASEAN manufacturing sector remained in expansion territory during November, according to the latest IHS Markit Purchasing Managers' Index data. Both output and new orders rose further, with the rates of growth remaining close to recent peaks despite easing slightly, while firms cut jobs at the weakest rate for five months.
The headline PMI posted above the 50.0 mark for the second month running in November. The latest reading was down from October's survey high of 53.6, to 52.3 in November, but was nonetheless indicative of one of the quickest improvements in ASEAN manufacturing conditions on record.
The latest PMI data continued to reveal a robust expansion in Canada's manufacturing sector. Output growth accelerated while new orders rose at a solid pace. Firms continued to engage in advance ordering to protect against shortages, but transportation bottlenecks led to another marked lengthening in lead times. Consequently, backlogs of work rose at a survey record pace.
The headline seasonally adjusted IHS Markit Canada Manufacturing Purchasing Managers' Index registered at 57.2 in November, down slightly from 57.7 in October. Growth has been seen in each month since July 2020, with the latest expansion among the strongest in over 11 years of data collection.
In the past three weeks, sentiment has taken a big hit with the percentage of respondents to the AAII survey reporting as bullish falling 21.3 %. That is the biggest three-week decline since March 2018 when bullish sentiment fell a slightly larger 22.1%. With 26.7% of respondents bullish, market optimism is at the lowest level since the first week of October when 25.5% of respondents reported as bullish. That was about the time the market took off to the 4700 level.
Food For Thought
The Price of Oil
I'm not alone in my ramblings about policy errors when it comes to the Energy situation here in the U.S. They have zero to do with making a political statement.
A well-respected analyst, Philip Orlando from Federated Hermes recently penned his thoughts on the topic.
We've shot ourselves in the foot with a series of questionable policy decisions over the past 12 months. When President Biden took office in January, he shut the Keystone XL pipeline and banned fracking on federal land and oil drilling in Alaska. Biden then accelerated our transition to electric vehicles (EVs) for environmental reasons, prompting GM and Ford to announce that half their auto production will be EV's by the end of this decade. With production for combustion-engine vehicles declining, major oil companies such as Exxon-Mobil and Chevron announced reductions in their exploration and production activities, diverting 15% or so from this year's drilling budget to accelerate their development of sustainable energy (such as solar, wind, hydro and geothermal).
Consequently, the U.S. reduced its overall energy production from 13 million barrels per day in 2020 (when we were the world's largest energy producer) by 15% to 11 million, ceding our market share to OPEC+ monoliths Saudi Arabia and Russia. When the global re-opening from the pandemic caused energy demand to soar, market prices went vertical because the world's largest marginal energy producer voluntarily reduced production by 15%.
Mike Rothman, an energy expert from Cornerstone Analytics, believes Biden's decision fails to address our structural oil imbalance, and that oil and gas prices ultimately will rise as a result.
It appears the mixed messages and the war on energy will continue as the administration calls for higher fees for oil, gas leasing on federal land. The report recommends hiking federal royalty rates for oil and gas drilling, which have not been raised for 100 years. While it now allows companies to drill on federal land there may be little incentive to do so given the new pricing structure, and of course, additional costs will be passed on to the consumer.
This move may also be in response to what some have cited as a ban that was never legally feasible, to begin with. If oil companies take up the administration on this offer despite the higher rates it won't impact oil production here in the U.S. Drilling on federal land amounts to 10% of production. It is the uncertainty that surrounds what has become a war on fossil fuels that has taken the U.S from being energy independent to asking OPEC for more oil.
The facts are there, they are indisputable, and this problem has and will continue to have implications for the economy and the markets.
The Omicron variant sparked a travel ban imposed by the administration that began last Monday. The push for having everyone that enters the country vaccinated continues unless you enter the southern border of the U.S. The mass migrations continue unchecked. This policy error will have longer-lasting economic effects than the virus.
It took Germany over 5 years to eventually begin to cope with its open-door policy in 2015. It's been one of the big drags on the Eurozone economic recovery while other parts of the world were rebounding smartly.
Angela Merkel has always stood by her decision of 2015, but told a conference of her Christian Democratic Union (CDU) in December 2016 that a situation like the one in late summer 2015, "should and must not be repeated." The German government then introduced a more restrictive asylum policy and immigration slowed.
We are on the same path that Europe took. The ramifications of what is occurring today will be felt for years. In essence, this ball and chain will guarantee slower growth in the future.
The Daily chart of the S&P 500 (SPY)
A very volatile week is in the books. Multiple support levels were taken out, and more importantly, the S&P 500 closed the week below another support level. The bottoming process is usually frustrating and disappointing. In this case, what we see occurring under the surface has also been very damaging to investors' portfolios. The S&P 500 closed the week with its 6th straight day of moves greater than 1%, and the second straight week of losses. At 4538 the index is 3.4% off the highs.
So investors are witnessing another "dip" and it remains to be seen if this drawdown has more room to run. None of the intermediate or longer-term trends have been disturbed.
My Playbook Is Full Of Opportunities For 2021.
Coming into this latest shakeout, we knew the market was overbought, and last week I introduced the fact that market BREADTH was starting to diverge. On the surface that is not unusual after a big rally. Yet many seem "shocked" by this 45 dip in the S&P. When an overbought market with weakening breadth meets a negative headline, emotion takes over. I cannot predict how emotion will affect the equity market in the short term, BUT I doubt this Covid variant by itself kills the recovery. Investors see markets at or near highs and many will look at this as an opportunity to lock in gains. While others may decide to go bargain hunting. The back and forth price action is to be expected with or without a virus headline.
Worrying about another variant when it has already been shown that the economy and market have already dealt with these variant issues belies common sense. Look at the global data - it's at or above pre-pandemic levels and the virus has been here the entire time.
The Fed Is Back In The Picture
In addition, it's no coincidence that the high-flying speculative growth areas of the market are being hit the hardest in this pullback. It's simple, that area is extremely sensitive to rising rates. Why is the stock market all of a sudden concerned about interest rates?
It's what I have talked about for months and was chastised for being too "political". Too Political? It is called citing the data. This week confirmed my initial concerns about the Spending /Inflation issue. A problem created by "policy error". Only the folks in D.C. deny that spending adds to the inflation problem. The data doesn't lie and neither did Fed Chair Powell this week.
In his testimony before Congress this week:
Right now the economy is strong and the risk of higher inflation has increased. That would justify "wrapping up the taper, perhaps a few months sooner.
Mr. Powell also said:
It's "time to retire the word transitory regarding inflation".
That is a clear CHANGE of the Fed's stance regarding the inflation risk, which eventually impacts the interest rate scene.
The stock market hears that and also watches congress in the midst of adding another $4-$5 trillion in spending to this inflationary environment. Investors also see the U.S. and other global economic data at or above pre-pandemic highs and realize there is a big disconnect. I've stated it for months, there isn't an economic data point that suggests 1 dollar of stimulus is needed today. More spending in a good economic backdrop won't alleviate the inflation issue.
Let's also stop this ridiculous bickering over whether it's 2 trillion or 5 trillion, It's Trillions, and that matters. According to Penn's Wharton School of Business Budget Model, the House bill would increase spending by $2.1 trillion over the 10-year budget window, but that includes early sunsets on several entitlements. If the provisions are made permanent, it estimates the spending at $4.6 trillion over 10 years.
I've talked about interest rates rising for the RIGHT reason, a strong economy. Right now any rate increase would seem to be warranted by inflation. To put it in plain English: the Federal Reserve is preparing to reduce growth to combat inflation, and that will have a ripple effect in the economy including increasing unemployment.
The Fed is going to slow growth, slow inflation, and flatten the curve further, and while that won't necessarily induce a recession, it certainly raises the risk of a downturn brought about by inflation. It's not hard to imagine, then, an equity market that suffers more than it did during the last tightening cycle. Remember the last "tightening" was due to concerns over a fast-improving economy, NOT INFLATION. The stock market was at highs then and it sold off to the tune of 15%. Back then I argued vehemently that rising rates in an improving economy were not to be feared. This situation is different.
No one is saying this happens tomorrow or next week, but the stock market always looks ahead. I also realize there are so many things that can come along and "change" the present situation before it gets out of hand.
- If the supply chain issues are resolved will that help the inflation problem?
- Does the Fed taper slow inflation down?
- Will the spending bill be killed?
- If more spending is approved might the stream of money flowing to the economy be at a "slow" pace?
Those questions and any number of other unknowns can "change" the scene.
It's why I don't "prepare" today for tomorrow's "possibility". How often have we heard that hope is not an investment strategy? So I wouldn't advise hoping inflation goes away. There are much better ways to look at this situation and navigate it successfully. If I am forced to reevaluate, I will do so, but that will be because of the market action, not because of the headlines or a "feeling".
Fear And Greed Are In Control
When I look around at the roller coaster ride the markets have been on this week, I come away with two distinct groups of investors. Those that are responding to FEAR and deciding it's been a good year and it's time to lock in profits while they are there. The second group is the folks that have followed the script, bought every dip, and are driven by GREED to continue that strategy.
While there has not been any irreversible damage done to the long-term trends in my view, I decided to play the "middle". This dip did negate the immediate bullish trading setups that I noted to clients and members of my service.
Add in the Fed's pivot and it's time to start reassessing.
The violence of the decline during the selling event has taken the Russell 2000 from more than three standard deviations above its 50-day moving average on November 8 (overbought) to now more than two standard deviations below the 50-day moving average (oversold). I don't know if I have ever seen such a quick reversal from being so extended on the upside to being so extended on the downside. If that isn't enough to warrant a reassessment of a situation I don't know what is.
This group (XLY) has taken a needed pause. After a 14% rally from early October, shares have followed the general market and given back about 5%. FEAR says it's time to lock in gains. GREED says it's time to buy this dip.
An area of the market that had all of the bullish setups negated with a 9% peak to trough decline in the Energy ETF (XLE). However, that fared much better than the 23% peak to trough correction in WTI.
The 10-year drops from 1.63% to 1.42% in six trading days and the banks follow. The Financial Sector ETF (XLF) is sitting at support.
The rebound off of support levels was stopped in its tracks, and only select names continued to hold support or rally. The Healthcare ETF (XLV) sits in no man's (woman's) land between the old highs forged in August and support levels established in October. Pfizer (PFE) continues to outperform.
If the Fed is on track to move up its tightening schedule to fight inflation, then speculative growth is going to be re-evaluated and re-priced. We may have seen the first step in that re-pricing this past week as highly speculative stocks were indiscriminately sold.
The ARK Innovation ETF (ARKK), which is the poster child for everything speculative has broken down and gives the appearance of being in free fall.
This sub-sector of technology remains in a "stretched" position after its 25% rally since early October. I noted last week that it was hard to recommend the group until the sector experienced a reversion to the mean. The Semiconductor ETF (SOXX) did remain resilient with a flat performance for the week.
There is a bubble in the stock market and it's in the Electric vehicle sector. Tesla (TSLA) has often been criticized by skeptics as being a perfect example of excess optimism in parts of the market, but the action in the EV space lately makes those prior Tesla complaints look laughable.
The rise of the EV is an overarching trend that consistently finds its way into the headlines. As shown below, Google Trends scores for terms like "Electric Car" and "EV" are approaching record highs and have more generally been grinding higher over the past few years with particular acceleration in 2020 and beyond.
That interest in EVs is also reflected in the surging value of publicly traded EV companies. Of the 118 global auto stocks with market caps of at least $100 million, 40% of the combined market cap is made up of primarily EV names, the largest of which are Tesla, Lucid (LCID), Rivian (RIVN), and NIO (NIO). Tesla alone possesses the largest market cap of any single auto manufacturer on that list making up roughly one-third of that aggregate market cap.
And those valuations are pretty extreme compared to sales. Of those same 118 stocks, the only EV name that is even a blip on the radar in terms of sales is TSLA accounting for 1.9% of those global automakers aggregate TTM (trailing twelve months) revenues.
There is a major disconnect between these stocks' sales figures over the past year and their market caps. Traditional automakers are bringing in far higher revenues than EVs, which for whatever reasons (rational or not) are not being reflected in market caps.
Bitcoin and other cryptocurrencies along with the Grayscale Bitcoin Trust (OTC:GBTC) are offering little in the way of a hedge against inflation or a stock market pullback. Last week I noted:
"The pullback brought bitcoin back below its 50-day moving average, and a pullback to its uptrend line from the summer lows could bring prices back down towards 50K. Anyone interested in getting involved or adding to the sector may have an opportunity to do so in the near term."
Bitcoin traded down to the 53k level on Friday and GBTC traded right down to what appears to be a decent support level. With the volatility in this asset, there is no guarantee that any support level holds, but for those that are interested, here is your opportunity to scale into a position for the long haul.
You play the hand you're dealt. I have been around the investment scene for a long time, and I've learned that you have to take advantage of what the market is telling you. When this Bull Market is over, it will turn ugly and stay ugly for a while. There will most likely be a fairly long period where it will be very difficult to make money and many people will give back a lot of their gains depending on how they navigate the downtrend.
The problem is I don't know if this current BULL will last for another three weeks, three months, three years, or longer. No one else does either. There is a change in the air and it is all intertwined between Inflation, Spending, and Interest rates. Whether it takes three weeks, three months, or longer to affect the economy is debatable.
I simply look at the probabilities of each of those scenarios and proceed from there. Anyone that possesses a closed mind when it comes to THIS current investment backdrop is going to pay the price.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client's situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
THANKS to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
When we watch the DJIA give up a 500 point gain and close 450 points lower in a single day, it is a sure sign emotion is ruling the price action. The roller coaster continues as FEAR and GREED are pulling equities in opposite directions. The Fed further complicates the scene.
During this volatility, you NEED to be apprised of the situation in a timely manner. Our chat room and MY DAILY updates provide that service. The Savvy Investor Marketplace service is here to help.
A one-time year-end offer is here; Join my marketplace service today at NEW introductory pricing.
Come climb Mt.Success with us.