The Other Risk of Exuberance
Doug Walters
The current market excesses have surfaced new risks for investors in the form of SPACs, NFT art, retail squeeze stocks, and cryptocurrencies. But there is another risk on the other end of the spectrum to which investors must not fall victim.
Contributed by Doug Walters , Max Berkovich , ,
Despite the start of the corporate earnings season, it was a fairly quiet week from a market perspective. Stocks still have a wind at their back, with most segments up on the week and major indexes hitting new highs. We have spent a lot of time recently highlighting market excesses to steer clear of, including SPACs, cryptocurrencies, NFT art, and retail squeeze stocks. But at times like this, there is another big risk lingering which we have neglected to speak to recently.
In times of market excess, it is easy to get swept up in the exuberance. Every day there is a new story about somebody striking it rich in some questionable investment. Hopefully, we have done enough to steer our readers clear. We have seen this story before, and it does not end well for those that get carried away. But equally at risk is the investor who “knows” that the market is too expensive and decides to exit “at a market peak.” This is a dangerous game of market timing and akin to gambling (as we wrote in our white paper from a few years back, “Market Timing: Investing or Gambling?“).
To be clear, there are circumstances where de-risking makes sense. If the market performance of the past decade has put an investor in a position where they no longer need to take on as much risk, they may decide with their advisor that a lower allocation to stocks makes sense. That is not what we are talking about here. Rather, we are referring to the investor that is trying to outsmart the market.
Evidence-based investors like us draw a clear delineation between what we can and cannot predict and control. Is the stock market at a peak and about to fall, or poised to rise another 50% on reopening momentum and stimulus? This is unknowable, and acknowledging this fact frees us to focus on what we can control, namely robust, diversified portfolios and a sophisticated rebalancing strategy, which will take advantage of whatever the future has in store.
Headlines This Week
Bipartisan Approach
- President Biden’s infrastructure bill is seeing little bipartisan traction. Republicans do not want to spend more than $800 billion, while Democrats keep pushing for an infrastructure bill with a price tag of around $2 trillion or above.
- According to news sources, some Democratic legislators are considering breaking up the infrastructure bill into two parts. The idea would be first to pass a bipartisan infrastructure bill of $800 billion and then separately focus on the remaining $1.2 trillion bill.
Shopping Spree
- Retail sales grew about 9.8% in March, thanks to the last round of stimulus provided to Americans.
- The industries that benefited the most were clothing retail, restaurants and bars, sporting goods, auto parts, and building materials.
Labor Problem
- The weekly jobless claims declined to the lowest level of the pandemic; About 613,000 people filed first-time claims.
- The restaurants and other service industries say that they cannot find people to work, especially in tourist destinations. This seems odd since unemployment remains elevated, yet many sources say there are plenty of jobs on the market.
- Some news sources attributed the labor market behavior to “generous unemployment benefits” or “people worried about getting sick” choosing to forgo these jobs. Whatever it may be, these industries will have to raise wages to attract labor or face losing market share.
Banking on it!
- Banks kicked off the first-quarter earnings season this week, with JP Morgan and Goldman Sachs blowing past estimates.
- The elevated trading revenues helped these banks beat estimates, with many analysts pointing to a one-off event.
- Seeing improvement in credit trends and strengthening in capital markets, banks continue to reverse loan loss reserves.
- Loan loss reserves are treated as an expense for banks that lowers profits. Reversing the reserves increases profits.
Retail Sales
Retail sales grew about 9.8% in March, thanks to the last round of stimulus provided to Americans.
The Week Ahead
Looking at Europe
The European Central Bank (ECB) will meet next Thursday for its monthly interest rate vote and subsequent press conference.
- In March, the central bank accelerated its Quantitative Easing (QE) purchases to help stabilize rising bond yields.
- Now that yields have started to move sideways instead of upwards, the question is whether the ECB will continue its pace of QE as the European economy continues to improve, albeit rather slowly.
- The real headline of the week might be the preliminary Purchasing Managers Index (PMI) numbers for April, which are set for release next Friday.
- Forecasts suggest the important economic health indicator to be flat, so any surprises there could move markets.
Looking Up North
The Bank of Canada (BoC) meets next Wednesday for its monthly interest rate decision with crucial monetary policy decisions on the table.
- The BoC might become the first major central bank to slow its emergency programs when it is expected to announce a change in the Bank’s monetary policy.
- Currently, the Bank is purchasing CAD 4 billion per week in bonds, leading the BoC to own about 40% of all Canadian Bonds.
- The Governor of the Bank has stated that he does not want to see the Bank’s holdings rise above 50% of the total market.
- This aggressive approach has left the BoC with few options but to scale back the pace of its bond purchasing programs.
Looking at Earnings
It will be another notable week in the earnings calendar as several big names will be reporting next week.
- First up on Monday will see two companies that have faced strong headwinds from the pandemic, Coca-Cola (KO) and United Airlines (UAL).
- While currently hoping to gain from the rise in travel from the reopening of the economy, United Airlines is still set to post some fairly dismal numbers for Q1 of 2021, with losses of $6.78 a share and a daily cash outflow of around $9m a day.
- Netflix’s (NFLX) report on Tuesday is expected to be the week’s highlight as it is the first of the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) to report.
- Expectations are high as the company’s growth soared last year as people were stuck inside with limited entertainment options.
- Other names to look for next week will be Johnson & Johnson (JNJ), Procter & Gamble (PG), Pfizer (PFE), AT&T (T), Verizon (VZ), Honeywell (HON), and Intel (INTC).
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