The stock market continues on its rocky 2021 path. With prices yesterday gyrating in a wide range, giving hope for short term bull and bear alike. When the dust settles on this most recent 'correction'.. will we be seeing the recent record highs as a long term top? Or are we in the early innings of a multi-year bull market?
Even after this most recent pull back, the stock market still remains close to record highs. Actually yesterday the Dow Jones Industrials hit another new all time record high. Go figure.. even with the Nasdaq dropping some 3%.. the DJIA hit a new record high. As a widely followed market pundit likes to say there's always a bull market somewhere... right?
Buying stocks in this market is akin to looking at the price of something that is more 'expensive' than its ever been, and buying it with the expectation that down the road its going to become even more expensive.
You don't walk into a store and say... I'd like to buy all of your most expensive items. Walk back in that store with prices even higher than they were the prior year and buy more at even more expensive prices... And yet, buying stocks in the market for some 10+ years has been just that. And guess what? It's worked. Why?
A widely followed blog states on a long enough timeline the survival rate for everyone is zero... which is true. We all die at some point. Sadly. yes. I wrote about that a few years ago.
Along those same lines... many wake up each morning expecting asset prices to plunge. Everyday. And yet here we are... a once in a 100 year pandemic ravaged the global economy. And in the face of it... markets rallied to unbelievable new heights.
While everyone dies at somepoint.. sadly....
at the same time....
On a long enough timeline.. the stock market heads higher.
That is a fact as well. Since the dawn of man.. the stock market has moved higher. We've had market crashes... lost decades... 40% declines.. depressions, recessions... and when the dust settles.. down the road the stock market is trading higher.
In the thick of the pandemic last Spring with prices hovering around the lows.. widely followed market pundits were calling for the end of the bull market. Stocks were done going up. They weren't just happy selling/shorting the pandemic move.. they were "selling more!"
And when stocks continued to rally.. they were certain stocks were going back to re-test the lows. Why? because thats what they do? Stocks retest the lows... right?
And when the markets rallied to fresh record highs, with the Pandemic still growing in scale and size... it was all the Central banks fault.... the same people who said the FED was out of ammo, was blaming the FED when they showed they clearly were not out of ammo.
Why has the market continued to rally?
Low interest rates.
Why has the marker pulled back recently?
the 10 year has been selling off sharply for the first time since 2016.
Why? Inflation.
And to me.. that no doubt a concern.
Two things have helped this market move higher and they work hand in hand. Low inflation and low interest rates. A long term move higher in either will likely be bearish for the stock market? Right?
I do think inflation is a concern down the road. I wrote about it last summer.
Inflation is good too though. However just like anything in life... there is always too much of something. Whixh is why I cant have Oreos in the house. Too much inflation will surely force the FED to act quickly.
Listening to Powell the last two FED meetings... he seems completely unconcerned about inflation. Even talking about a quick uptick as nothing more than a possibly one time event. Noting that price pressures remain muted. With a goal to see higher prices for a long time before even thinking about moving the FED funds rate higher.
The recent 10 year sell off, amid an economy set to catch fire this spring in summer, has the FEDs attention perhaps? We will find out at after the FED meeting last this month (8 days from today).
My thoughts? The recent correction/pull back, and 10 year sell off will prove to be short lived. Its not yet a long term concern. However it clearly is something to keep an eye on.
While there have been countless excuses to sell stocks, I think sharply higher and sustained prices will be something we haven't seen in a long time.
Will the FED be able to keep borrowing costs lows amid an uptick in prices? Will they announce some yield curve control in a few weeks?
Low borrowing costs and low interest rates amid higher inflation will be terribly bullish for stocks.
Higher borrowing costs amid record corporate debt? That's not good for most stocks.
Especially those with high debt and negative cash flow. You are looking at a recipe for disaster for many of these high growth names.
My thoughts? The FED will be able to walk this tight rope. The most recent correction is a way of forcing the FEDs hand.
Market at record highs with covid cases/deaths at record highs... what does that tell you besides the fact the market has a cold heart? it sees a boom the likes we've never seen before as we come out of the other side in the spring and summer with huge pent up demand
— UPBOptionMil (@UPBOptionMil) December 30, 2020
Clearly we are going to see a massive spring and summer.
Anyone do a wellness check on the consumer?
The consumer is heading into this spring and summer in better share than they've ever been. Savings has never been higher.
Those out of work, many are making more staying home than going to work through the expansion of benefits. More stimulus checks coming.. this round bigger than ever.
The backdrop over the next 6-8 months is about as bullish as it gets for the economy.
One thing we know.. the stock market is not the economy. If the massive boom we see on the othe side of this pandemic forces the FED to act in a way that tightens the purse strings... that will certainly weigh on risk assets.
I don't think that will be the case. Actually I think the FED will help to keep rates low, despite a white hot economy.
I don't think we are at the end. It's been easy calling for record highs. I was even calling for new record highs last March,, in the face of the fastest drop in market history from 52 week highs to 52 week lows.
However one thing is certain. The FED will have a delicate balancing act going forward. The Nirvana of a low inflation world is ending.. And with it the FED will need to keep rates low while making sure inflation remains contained.
If they can... we remain in the beginning stages of a bull market that started less than a year ago.