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| Exuberant investors are cheering as favorable tailwinds are converging to push the stock market higher [Image ©interstid / Adobe Stock] |
January was a mixed month as far as equities were concerned. Certain names and sectors saw strong buying pressure in one part of the month balanced by weakness in another part of the month (energy is one great example here- rising sharply in the first two weeks of January but seeing strong selling pressure in the second two weeks of January). The relatively muted performance of the major indexes does miss relatively strong undercurrents in component sectors. The more-comprehensive list of smaller public companies in the Russell 2000 rose a whopping 5%, and biotechnology saw some strong buying pressure too.
What was driving these disparate moves? One big driver was investor expectations under an improving economy and aggressive vaccination goals. Another was rotation around Democratic control of Congress and the White House; companies that benefit under the Democratic agenda saw significant buying pressure, while companies that will face headwinds saw selling pressure. The reopen trade also saw new bullish moves as expectations grew for additional stimulus measures and improved vaccine rollout.
Consensus market expectations for 2021
Strong fiscal support of US economy will continue
Democratic control of Congress assured passage of the proposed $1.9 trillion coronavirus-related stimulus package (yes, that is a “T”). This in combinations with massive support of the economy by the Fed will prove to be a significant tailwind.
The dollar will continue to face weakness
All this extra money flowing into the economy (increasing supply) will reduce the real value of the dollar, which will also be helpful for US exports.
Economic data will remain relatively solid
Vaccination efforts have been mishandled around the globe, but the outlook continues to improve, and progress has been made. With multiple "good" vaccination options available, economic reopening will continue to increase as large portions of society become vaccinated against the virus.
Inflation will likely be rising, possibly significantly
All of this extra money floating around, with Treasury yields near zero, will likely accelerate price increases in the United States.
The regulatory environment will be tightening
Scrutiny of everything from financial markets to energy markets is likely to increase. Hey, Gamestop’s recent YOLO moves alone will likely also bring some unwanted attention to “stonks.”
The tax regime will likely be less favorable for the stock market
All of the discussion around wealth disparity, enhanced by 2020’s moves around economic shutdowns and reopenings, will likely result in a higher tax rate for both corporations and stock market participants. Retail investors will likely see little direct impact from this, although markets will rebalance to account for any tax adjustments.
The policy train is just pulling away
One theme? Renewables are in, fossil fuels are out. Amid a much longer list on President Biden’s agenda is an return to intense focus on environmental protections (and hence additional regulations).
Notable stories since the New Year
Staggered global recovery is causing a shortage in shipping containers
Supply chains are stable and various brands and types of food available in, say, the grocery store is very stable and incredibly diverse. Or at least this is the case in the United States. Travel across the pond to developing nations and this stability is not always guaranteed- various brands come and go, some are in plentiful supply, others less so. Behavioral change in global consumption as the United States and China reopen and economic activity in these juggernauts accelerate is beginning to strain supply chains as demand for storage containers for shipping skyrockets along some routes and remains muted in others. Strong pent-up demand in the USA for various consumer goods is leaving major US retailers struggling. Even the trade in food has not been spared- Bloomberg has a concise and excellent summary of the situation here.
The Keystone XL Pipeline has been canceled – again?
In years past, the Keystone XL Pipeline had the misfortune to become a popular political football, kicked between opposing sides of a debate over the environmental role (ie as an enabler of fossil fuel) the pipeline plays until President Trump’s administration approved a permit for the pipeline in 2017. Focus is again on the pipeline in 2021 when President Biden signed an executive order revoking that permit. While this does fulfill a campaign trail promise, the fickle (stop-go-no go) nature of US officials over the years has made Canada unhappy and the US court system may now have the final word on the pipeline. A quick summary of a US appeals court ruling against Dakota access pipeline permit can be seen at Reuters.
The time of the SPAC is upon us! But what’s a SPAC, and is the playing field fair?
SPAC stands for “Special Purpose Acquisition Vehicle” and is basically a shell company that has been created to help business go public outside of the standard IPO process. The concept has been around since at least the 1990s, popping up with some small degree of popularity from time to time until becoming all the rage in 2020. Indeed, with 2021 now upon us, investor enthusiasm for SPACs continues to show no sign of abating. With a SPAC, a group of investors come together and fund a company with the express purpose of finding and then acquiring a favorable candidate in a reverse-merger-type transaction. In purely speculative plays, The Ignorant Investor has personally seen some sizable gains in 2020 through several SPACs and watched others with passing interest from afar. Keep in mind that the initial SPAC investor will typically make decent returns regardless of whether the resulting company is any good, so retail investors still need to do their homework and be aware that even after due diligence they can still get burned (*cough* Nikola *cough*). The Wall Street Journal has a great article on how early SPAC investors get “steady returns with little risk.”
The Gamestop Saga: A Tale of David and Goliath vs another Goliath
In the one corner, we have the smug and stoic hedge funds and other institutional investors, waving their fact sheets and touting their models, convinced that Gamestop is overvalued and will over time prove to be in irreversible secular decline (okay, The Ignorant Investor is using artistic license with this prose, but you get the point). Nothing unusual here, merely standard operating procedure for retail companies eventually destined for the dustbin in a similar vein to Blockbuster or Circuit City. In the other corner, you have the upstart retail investors - mainly millennials too young for lessons learned from the dotcom boom and bust - recently liberated from high trading fees and newly enabled to execute trades in a burst of confetti by merely touching their smart phones (*cough* Robinhood *cough*). Retail investors roared; their combined power unleashed as they turned their attention from Bitcoin and began a coordinated buying spree using a subreddit of the popular WallStreetBets thread. Institutional investors were unprepared and never knew what hit them as losses snowballed (at least this remained the popular narrative for a time).
When the dust settled, it became clear that investors had managed to execute a spectacular short squeeze using a combined strategy of buying shares, options, and in some cases calling their brokers to disallow loaning out their existing Gamestop shares to short sellers. The strategy worked remarkably well, and the power of the retail investor – backed by powerful, strategic trades of Wall Street institutional investors looking to make a quick buck – suddenly became less ethereal and very real. Hey, we already knew some of that from Tesla and other names popular with millennials, but still, this latest activity in and of itself deserves at least a golf clap followed by a moment of silence for the initial shorts forced to cover their positions.
