It Feels Like The Market Is Looking In A Mirror

It Feels Like The Market Is Looking In A Mirror

December 21, 2021
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To me, this current market is starting to feel a lot like it did when COVID first hit in 2020, yet this time we know what happened. In 2020, there were very severe cases that, to many, became lethal. There was no vaccine as of yet, and there was really no way to measure the eventual effect on the economy, so the financial markets were left in limbo. The short-term outcome was a decline, a rather severe one at that, but then a recovery when the US Government showered the market with capital, and demand at all levels in the economy was very strong. People began stockpiling and companies, after initially being afraid of a complete shut-down in demand, were faced with the need to "over order" to meet an unquenchable demand for many many products, from cars to toilet paper. Today, we are faced with a new strain. One, we are told, that is dramatically more contagious. Even the vaccinated aren't safe (in some reports the vaccinated are even less safe as there is a preponderance of infections in greater numbers in the vaccinated). I am not here to debate if this is a true statistic or not, but what I am happy about is that this strain appears to be dramatically less severe and, as of yet, there are very few deaths associated with the Omicron variant.  

So, what gives with the market? To begin with, I think we need to look at where we are in the calendar year and also some other issues that are going on:

  • Hedge fund managers locking in profits
  • Mutual Funds balancing positions by selling off over-concentrated positions of large winners
  • Tax loss "harvesting"
  • The newest one: no future dependency on the newest and biggest helicopter of money due to Manchin shutting down the Build Back Better agenda

I am sure there are many more reasons, and they will all be crystal clear when we look in the rear-view mirror afterward, but at present, the weather outside is far from delightful and the markets are becoming downright frightful! Leon Tuey said it best in his December 3rd missive, "In my last report, I noted that when Macy's has a Sale, shoppers would line up at the front door before the store opens. Yet, when the market sells off, investors panic and run for the hills. Investor behavior is perfectly predictable. As the market rises, they get excited. Conversely, when the market corrects, they become cautious and as the correction continues, caution rises."

In last week's letter, I actually showed graphs of how oversold the markets were from a psychology standpoint. This week started off extending this decline in attitude and prices. There are currently around 4,400 US stocks above $2 that trade on the NYSE and NASDAQ exchanges according to FINVIZ.com. Of those, roughly 51% are down — 20% or more from 52-week highs, and over 20% are down more than 50%! Speaking for myself, I don't need a follow-through day from Investor’s Business Daily to take advantage of some of the decliners or those that have ignored the decline entirely. Although the action after the Fed meeting last Wednesday was quite volatile, not trying to take advantage, to a small extent to the statistically consistent Santa Claus rally would seem like missing the sale at Macy's. I don’t suggest that caution be thrown to the wind, but making sure that choices are not overly speculative would be more appropriate.

The hardest thing to do is to take emotion out of one's thought processes. We are all emotional beings, and there is always a human element involved in our thought process. But I tend to look at things on a broader scale to make sure that one is invested where the greatest probability of success lies. So how do I do this and what do I see? Well, in a very broad sense, there are really only six places liquid money can be, and this is what I see at this point:

  1. US Stocks: The US economy seems to have recovered best from the COVID decline in 2020 and it continued in 2021. Earnings were good (as I had discussed in last week's letter) and the forecasts we are getting for 2022 seem to be quite a bit stronger than initially expected. 
  2. Foreign Stocks: The foreign markets still seem to be in trouble. There are many countries that still have negative interest rates and it appears that their dependence on US consumers and travel is still quite challenged. I don't see a lot of opportunities there. 
  3. Bonds: Whether one buys into the inflation as transitory or not, it is fairly clear that there is very little upside in market values of bonds and even less should interest rates increase and therefore making buying bonds at current interest rates even less attractive. 
  4. Commodities: Most commodities spiked in 2021 and are now consolidating these moves. Where demand was high, there were increased supplies coming about and therefore no reason (exclusive of much higher demand) to drive prices higher. 
  5. Currency Other than the US Dollar: Given that our economy seems more stable, and our interest rates are more attractive than many places, currency still seems to be flooding over our borders. With Powell talking about raising interest rates, the US Dollar tends to appreciate and therefore be the desired place for large asset pools still, so to invest in the Euro or some other large currency I still don't think it makes sense. 
  6. Cash: Other than a place to hang out during a storm, I really don't find short-term instruments and cash a viable "investment" as they are just that, a place to hang out. 

So, in the end, the US equity market still seems like the best place to be. Maybe not today, but heck, Rome wasn't built in a day either! So, finding where to put one's dear capital in the US equity market is really still seeming to be the best option. So, this brings me to an article that I read this week. The article is titled, "Big wealth investors are likely to put money to work in stocks after amassing record levels of cash." YOU REALLY MUST READ THIS ARTICLE!!!!

To share some startling facts from this:

  • Hundreds of billions of dollars in cash have been amassed by big investors in the last few weeks.
  • Investors added more than $43 billion into money market funds last week, bringing the total amount in the past seven weeks to $226 billion, according to Goldman Sachs.
  • The money market stockpile has not declined in 2021 despite the rally in stocks this year, with assets under management in cash equivalents standing at a near-record, $4.7 trillion. Yes, trillion. 
  • Scott Rubner, analyst of Goldman Sachs said, "My core thesis is that money will come out of negative real yielding cash out of bonds aggressively and early in 2022."
  • Rubner went on to say, "Every private wealth advisor in the world is conducting 'year-end allocation review' meetings right now. The feedback will be largely that investors hold too much cash with rising inflation."
  • Investor's cash allocation jumped 14% in the month of November to a net 36% overweight, the highest cash exposure since May 2020, according to Bank of America.
  • The move out of cash could come as early as January, which typically makes up the majority of yearly flows according to Goldman Sachs.
  • BlackRock finished with, "We see another year of positive equity returns coupled with a down year for bonds." 

The world is an unsure place, but money will always be hungry. It will need a home. It will want to be treated right. And right now, there is a record amount of cash on the sidelines. When will it run onto the field? To this, I have no answer, but as I showed in my letter last week, we are close to an extreme. These extremes tend to reverse themselves. If they do, this year-end could be a good one. We will see. 

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