I sat watching the madness in Washington, D.C, on Wednesday and was somewhat surprised we did not see a pullback in stocks.
The narrative among investors and traders was that the Blue Wave meant more stimulus checks and support for the economy. The shared view was that this was bullish for stocks… especially bank stocks.
The 50-50 split among Senate seats means that tiebreakers will go to incoming Vice-President Kamala Harris.
The theory is that the majority is big enough to pass bills the market will like, including stimulus packages and infrastructure bills.
According to the narrative, it is not big enough to pass tax hikes, regulatory increases, or confirm liberal judges.
It’s a cool story, but I don’t think it’s going to age well.
First, if you thought Mitch McConnel snapped the whip to keep votes in line, you ain’t seen nothing yet.
The combination of Chuck Schumer and Kamala Harris isn’t going to take ‘no’ for an answer. Most votes will go the way they want them to go. Unless you enjoy your time in the Senate spent on a subcommittee studying the flow of sewage in urban areas of Latin America, you are going to vote in line.
Second, Republicans from the states that Biden flipped will become a lot more interested in climate change and engaging in some judicious redistribution over the next two years.
All of this led to a ferocious rally in banks on Wednesday.
The story is that stimulus will support economic growth and cause rates to rise, thereby increasing net interest margins is another cool story.
I do not think it happens that way.
The stimulus packages that have and are being passed are merely a bridge to get us to the point where vaccinations can bring us back to normal. Then we can talk about economic growth.
Right now, the stimulus money is Horatius at the bridge for the U.S. Economy.
I am in the school of thought that we should not have locked down. We should have been aggressive about mask-wearing, sanitizing, and distance. We should have protected the elderly and those at risk.
We didn’t, so the politicians locked it down.
It was not a great decision, in my opinion. However, once our political leaders decided, continued stimulus packages were going to be necessary.
19 million people are collecting some form of unemployment benefit…
35% of small businesses could not pay their rent in December…
Hundreds of thousands of small businesses are gone taking millions of jobs with them…
And the economy is not growing.
It is just less ugly than it was before Congress and the Fed stepped up.
I am not a perma-bear or anything close to that. I simply think the market is ahead of itself.
The blue wave threatens the entire scenario that the market has embraced for the last four years (Don’t take that as a political statement. I loathe all politicians of all stripes and think political parties are evil).
Stocks have embraced looser regulations, lower taxes, and low-interest rates. Rates will still be here, but the other two are toast.
Then there’s the virus. It is still running amuck, and cases, hospitalizations, and deaths continue to rise. That’s not good for the economy.
The market is not pricing in the next six months, and I think it needs to pull back to reflect reality.
I am not the only one that thinks so, by the way. In the Fed minutes released this week, the Open Market Committee said pretty much the same thing.
Of course, I could be talking my book because I want to see lower prices to be an aggressive buyer.
The reality is that we have been in Fed driven market rally for over a decade now. Historically it has been very hard to earn high returns from the current levels of interest rates and equity valuations. We could have some more upside from here based on momentum, but eventually, we run out of steam.
The reality is, long term returns over the next ten years will most likely be lower than long term returns over the last ten years.
Jeremy Grantham, the Co-Founder of GMO, agrees and suggests in his recent letter that we should focus on emerging markets and value writing:
“Value stocks have had their worst-ever relative decade ending December 2019, followed by the worst-ever year in 2020… similarly, Emerging Market equities are at relative lows against the U.S. of the last 50 years. Not surprisingly, we believe it is in the overlap of these two ideas, Value and Emerging, that your relative bets should go, along with the greatest avoidance of U.S. Growth stocks that your career and business risk will allow.”
Insider and institutional money flows are starting to tell the same story. We see more buys in stocks with value traits as well as emerging markets, while the big tech names are beginning to see waves of selling.
It has been a much busier- and weirder-than the usual first week of the New Year, but the core opinion of where we are has not changed.
I love the companies we own and expect solid performance in 2021. I want to buy more but am too disciplined to chase stocks higher. That ends most of the time painfully.
The widespread distribution of the COVID vaccine will lead to a stronger second half of 2021, but it could be a very bumpy journey along the way.
When those bumps occur – and trust me they will – we will be ready to put our cash to work.