February 2021 Market Outlook

Hello friends, welcome to our February Market Outlook. We’re only one month in, but it already feels like a lot has occurred in 2021. We had the contested election results, the disaster at the Capitol building, Tesla, Bitcoin, Ark Funds, GameStop and Silver run ups to name a few. I’m not going to spend any time discussing these events as they’ve been discussed thoroughly in the mainstream media, social media and financial news outlets. Instead, I want to highlight some comparisons to history. Here’s a quote from Jeremy Grantham regarding allocations and speculation: “Using the latest Flow of Funds for Q3 2020 and extrapolating with recent market moves, we find that US households’ equity allocation has risen to record highs, surpassing its previous high seen at the beginning of 2000, the peak of the dot-com bubble.” So investors and markets are over their skis. You can also draw this conclusion from sentiment, which has been at extreme greed levels since March.

One of the oldest adages on Wall Street is that those who don’t study history are doomed to repeat it. History teaches us that speculative manias and bubbles have always existed. And almost always, they get bigger than the previous, before they ultimately pop. In 1978, Charles Kindleberger wrote “Manias, Panics and Crashes” describing these past events. In one of his chapters, he said “The word mania in the chapter title connotes a loss of touch with reality or rationality, even something close to mass hysteria or insanity. It is used continuously in economic history, which is replete with canal manias, railroad manias, joint stock company manias, land manias, and a host of others.” Sound familiar? Just replace his manias with IPOs, SPACs, Bitcoin, Tesla and GME. Then question investors need to be asking themselves, are we in a similar environment? It’s our belief that we are. But as we’ve stated in the past, no one knows when the music will stop, so might as well get up and dance, right? Not necessarily. Just one week ago the Market had turned negative for the year. Now, we bounced back significantly last week, but most of it was due to first-of-the-month rebalancing and the next stimulus package promised from the Biden administration. I don’t know how many more times we will price in stimulus. At some point the realization needs to be made that stimulus is not a sign of a healthy market. In fact, what we’re witnessing is deteriorating market breath (more stocks declining compared to advancing), a sign of a weakening market. There’s also very little value left. Many stocks have moved up, such that almost 90% of all stocks are trading above their 50 day average price, which is near yet another record. Where does this leave us? It’s our belief that investors with a short term time horizon, 1-2 years, should begin trimming stock exposure and reducing risk. We also believe the market is missing a few major headwinds: Small businesses being gutted and potentially never opening again, unemployment pressures, the exploding deficits and an increase in the corporate tax rate.

Now, we don’t see a bear market unfolding yet, but we want to point to the risks that we believe most investors are missing. There are plenty of places to hide where can you pick up a yield and wait this out. It’s our belief that we’ve entered a period that the return of your money might eclipse the idea of return on your money.

Last but not least, let’s end this on a good note. The science and medical field have really knocked the Covid vaccine out of the park. In the U.S. alone, we have distributed 32.8m vaccines. We’re now vaccinating more people daily than the infection rate. Hopefully we’ve turned the page and we can begin reverting back to normal in the not too distant future. After all, it very well may be the vaccine that helps avoid a double dip recession.

As always, please reach out to us with any questions.

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