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In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses whether investors have become complacent given the challenges facing the economy, factors supporting a possible “Santa Claus” rally in December, the exuberance of the IPO market, the attractiveness of China for U.S. investor diversification, and the outlook for the upcoming FOMC meeting.
The topics discussed in this episode are: Have investors become complacent and is it warranted?, In 2020, what can say as to the possibility of a “Santa Claus” rally?, Does the exuberance of the IPO market bode well for the broader market?, With a move towards non-U.S. markets for diversification, should investors consider China?, and What developments are likely to come from this week’s FOMC meeting?
Please tune in for more timely insights.
Hello and welcome to another episode of “A Brighter Future,” Laidlaw & Co’s Podcast Series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined again today by David Garrity, Chief Market Strategist for Laidlaw & Co.
David, we had a “touch of spring” this weekend with temperatures warming up in many parts of the Northeast, just as the FedEx & UPS trucks were warming up to deliver the first doses of Pfizer’s vaccine. In the markets, we saw stocks close the week lower, led by the real estate and financial sectors, as the jobs recovery appears to be stalling while talks between Republicans and Democrats over another round of fiscal stimulus continue to drag on. And that is where I want to start our discussion today…
David, does a postponed stimulus package, while U.S. workers are claiming unemployment insurance at unprecedented levels and as further economic restrictions from rising cases constrict growth, pose the biggest headwind for the markets?
Rick, while we did enjoy the brief respite of warmer weather this weekend, we decided to go for a hike over some rough terrain in The Blue Hills Reservation nearby where after clambering over slippery rocks and muddy inclines to get to the summit to enjoy the lovely vista of Boston and its environs we had to break our own path to get down again as my headstrong 14-year-old son was determined he knew the best way through the forest thick with undergrowth. In a way, the weekend experience captured well the character of the current market as being one criss-crossed by many possible paths, but with no clear way forward and the distinct risk of a nasty fall down steep rocky slopes. A good reminder, if any, to go slow and only with sure footing.
That said, Rick, I would rather consider risks to the market as being more pitfalls than headwinds of which the economy decelerating in the face of COVID’s resurgence is only one.
David, as follow-on question, it appears the market and investors are largely focused on the prospects of a brighter outlook driven by vaccine rollouts. To this point, the S&P 500 has hit 30 new all-times highs in 2020, 17 of them recorded after the late-February pandemic-induced bear market, and four of them recorded in the last two weeks. Is this remarkable strength justified considering the recent loss of momentum in economic data, or has complacency settled in?
Rick, while we previously discussed a COVID vaccine’s role as the leading horseman of the recovery, we view the market’s strength since the November election as a sign of investor confidence that the incoming administration will provide a measure of competence and order that will accelerate the containment of COVID, something that the current administration’s indifference and chaos allowed to flourish to the attendant suffering and loss of many. Apart from the positive sentiment following the election, note that the corporate earnings recovery is unfolding well and should serve to increase Wall Street estimates as we move into 2021.
If investors are thought to become complacent, it can be shown there are multiple factors supporting their apparent confidence in a brighter future. Still, as we will touch on later, there are also a number of signs that rational confidence may be boiling over into unbridled exuberance, something to be warned against.
David, for the past week or so, I have started to hear a topic discussed every year about this time, no matter what stock market performance has been over the prior 11 months. Whether the market has been naughty or nice really, every year stock investors ponder the question of whether there will be a “Santa Claus rally” to finish out the year.
Technically, the “official” time frame for a Santa Claus rally is the week of trading between Christmas and New Year’s Day. But why not throw a “Market Party” for the entire month of December, if possible. In fact, historically December is one of the strongest months for stock market performance, looking back over the past 65 years.
However, given that the S&P 500 just posted its best November performance since 1928, up +10.8% and is up just over +14% on a year-to-date basis, is it possible Santa came a little early this year?
Rick, you were kind recently to share the SNL take on the “December To Remember” car commercial in which parody an unemployed, cash-strapped father purchased a Lexus much to the chagrin of his wife, the recipient of the gift. While it may not have been as touching as O. Henry’s “The Gift Of The Magi” published 115 years ago, it did serve to capture the insight that perhaps the current stock market is reaching beyond its means.
In this we might say that Federal Reserve Chairman Jerome Powell has been playing well the role of Santa Claus since March 2020 and with the recent nomination of Janet Yellen as Treasury Secretary we now have Mrs. Claus. If Senate Majority Leader McConnell does not reprise the role of The Grinch, we can still stand a decent chance of a “Santa Claus” rally, especially as this Wednesday’s FOMC meeting may bring tidings of monetary policy comfort and joy.
I want to shift gears and talk about another big topic from the past week – the hot IPO market.
As we touched on last week, the pendulum of investor sentiment has clearly swung from fear of losses, to fear of missing out. In addition, the phrase “this time is different” supposedly one of the most dangerous to utter in the investing realm, came to mind as we watched AirB&B explode to the upside one day after DoorDash did the same thing.
With the past as our guide, is there anything that our listener’s can learn from the IPO market? Also, could this time really be different as at least these companies are more mature than the infamous Pets.com and their Sock Puppet 😊
Rick, the parabolic moves seen in an increasing range of speculative risk assets such as IPOs, SPACs and cryptocurrencies brings to mind what economist John Kenneth Galbraith in discussing the Crash of 1929 described as “the bezzle.”
In The Great Crash of 1929, John Kenneth Galbraith describes the bezzle as the “inventory of undiscovered embezzlements,” that grows in times of rising markets. When the markets collapse, these schemes are exposed and lead to large losses for investors.
Galbraith identified a sweet spot after the embezzlements have been committed and before they are found out, “Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the embezzlee, oddly enough, feels no loss. There is a net increase in psychic wealth.)”
To me, the bezzle of the current bull market isn’t stocked with Ponzi schemes and outright frauds, but rather it is built on the notion that risky assets have become practically risk-free thanks to central bank and government fiscal policies. Like Icarus, the market will eventually drop from its heights and the current bumper crop of bezzle will be exposed.
David, the pandemic has accelerated geopolitical transformations such as a bipolar U.S.- China world order, and a rewiring of global supply chains for greater resilience – with less emphasis on efficiency. As a result, it appears a strategic U.S.-China rivalry looks here to stay, with competition and bifurcation in the tech sector at its core.
I know as recently as last week in our Investment Committee Meeting we discussed the need for investors to have exposure to both poles of global growth. Knowing as much about China as you do, do see assets exposed to Chinese growth now becoming a core strategic holding?
Rick, the recent moves by the PRC government to impose restrictions on the Chinese technology sector should give investors pause as to the risks associated with the market which can be at times quite opaque as the government pursues its own policies that may be at cross purposes with investors. Meanwhile, note that last week, Chinese stocks suffered their worst weekly decline since September, as concern over high valuations and the tightening supply of cash weighed on the market.
The Chinese stock market has done well this year based on the faster recovery from COVID, but it is likely that as other regions recover with the distribution of COVID vaccines in 2021 that the Chinese stock market will lag the global averages. While the depreciating U.S. Dollar has us looking to international markets, our suggestion for investors looking for exposure into China is to do so by investing in the ETFs for Singapore, South Korea and Taiwan as they contain companies that are exposed to the China market, but not directly subject to the whims of the PRC government.
David, as we bring another episode of “A Brighter Future to a close, we are heading into a big week with a Fed Meeting.
Some Fed watchers think the central bank could begin to move their $80 billion monthly Treasury purchases toward the longer end of the curve to put an artificial ceiling on longer-term interest rates. But the overall size of the purchases probably won’t be increased.
They also could provide guidance about how long they will continue the current pace of securities buying but can we assume they wouldn’t want to do anything to disturb things while Congress continues to fail to agree on a much-needed new fiscal relief bill?
Rick, the Fed has been unfailingly accommodative throughout the COVID crisis and we expect this week’s meeting to offer reassurance that this support remains constant. Yes, it is understood by the Fed that Congress has been delayed in providing further fiscal relief, the need for which has been underscored by Fed Chair Powell in his recent testimony before Congress.
To that end, we expect the Fed to provide strong indications that it will engage in quantitative easing with the aim of capping yields at the long end of the Treasury curve and it is not out of the question for the Fed to increase its monthly purchases from the $80bn level. Liquidity continues to be on offer from the Fed as we move towards the inauguration of the new administration in January 2021.