Published March 5, 2021

Readers of this column will note that sometimes I refer to the market climbing a wall of worry.

In the past week the market hit that wall head-on.

The market had been moving up nicely, so what happened that led to it hitting a solid obstacle?

It was a case of good news and bad news. As often happens, investors were lured by the market into a sense of security by benign interest rates, a supportive Federal Reserve and a likely stimulus package for the economy. However, as the economy began to improve, interest rates began to rise. The 10-year Treasury yield, a benchmark for investors, traded as high as 1.6 percent – a move that was unnerving to investors. The 10-year yield moved more than half of a percentage point in two months, which is a rapid increase for the bond market.

Never mind that the unemployment rate in the country is still high or that Fed Chairman Jerome Powell promised to be supportive with low interest rates. Rates began to rise. A rise in interest rates would not be too bad, if it signaled an improving economy, but this rise was too fast. A rise in interest rates could also signal a rise in inflation. Indeed the 5-year TIPS/Treasury Breakeven Rate, an indicator of the markets’ expectations for inflation, rose to 2.38 percent in the last week of February – its highest level since before the 2008 financial crisis. The rapid rise in interest rates was too much too soon. The market was spooked.

The interest rate on 10-year Treasurys, a popular benchmark for the bond markets, began to reach the dividend yield on S&P […]

Published February 5, 2021

A variation on the old investment strategy of short selling took on new dimensions as new traders took control. What brought about the market turmoil? Several factors were influential.

One factor was growth in the number of investors. In the past year, more new investors opened accounts – at least 10 million – faster than ever before.

Additionally, a shift to no-commission trading unlocked a wave of activity. With coronavirus-related lockdowns in place, people had little else to do. There were no major sports to bet on, so the stock market took its place. Trading activity started to surge. Recently, equity volume was triple the amount as on an average day in 2019.

Individual investors have always been small fish compared to the sharks of Wall Street: hedge funds. Before the pandemic, activity from individuals (“retail investors”) made up about 15 percent of daily trading volume. Now, it consistently makes up more than 20 percent. A single trader, from his basement office, led the change in this increase. Why?

Social media has given investors message boards and group consciousness, and that has evolved into market action. A single investor working on a social media platform called Reddit targeted a single stock with enthusiasm: GameStop. Convinced that GameStop offered opportunity and noting that some very big players had large short positions, he attacked with a relatively small commitment. One day he bought $53,000. By using options, he amplified his bet and made as much as $46,000 in a single day. Over the next year and a half, by using Reddit as his message board, “Roaring Kitty,” as he called himself, promoted the company and enthusiasm grew.

Encouraged by […]

Published January 8, 2021

Will Rogers often said, “It is hard to make predictions, especially about the future.” But that is what investors must do. Obviously the past is easier to read. For instance, we know that last year the market went from peak to trough in 33 days. This was three times faster than the 1987 bear market. In 2020, the market then recovered to break even, for a V-shaped recovery, by Aug. 18. That made it the fastest recovery on record.

We have since made 19 new highs. The S&P was up 18.4 percent for the 2020 calendar year, and up nearly 50 percent for the trailing two years. An unprecedented amount of government stimulus was the main driver. Some say 10 years of digitization of the U.S. economy squeezed into a matter of months has also been a catalyst for increasing multiples and stock prices. The market began 2021 with a bang, rising strongly for the first 10 minutes of the new year. That was followed by a thud and then another rebound.

So, what’s on deck for this year? We can expect that the Federal Reserve will continue to provide support to the market. Also, both political parties will want to keep the economy humming, so we can expect continued fiscal and monetary stimulus from the government. Specifically, we can expect a stimulus package and infrastructure spending.

Inflation should run about 2 percent – the Federal Reserve’s sweet spot – to keep dreaded deflation at bay. Upward pressure on inflation is being provided by the unprecedented scale of money printing. The supply of U.S. dollars has increased by almost 15 percent from March 2020 through […]

Published December 11, 2020

The stock market climbing a wall of worry is a cliché in these columns, and indeed, the market is doing it again. The elections, the coronavirus and the economy have provided plenty for all of the markets to worry about. In the course of this year, they have had generational gyrations.

The elections

As the markets processed the presidential election, they had even more on their plate than usual. Markets do not like uncertainty, and a change in government at the top can be a serious threat to stability. But so far, the markets have aced the threat. Contrary to fears and some remaining challenges, the democratic process has held, and a peaceful transition seems to be possible.

Nevertheless, we still have hurdles to surmount. The expected peaceful government change appears to be bringing with it stability in our foreign relations. To date, no significant international event has manifested itself, although it still could. Often our enemies test us during the transitional period from one administration to another. Our democratic process seems to have met its tests.

The orderly election process at the state and local levels has also displayed confidence in our system and thus our economy. Yay for us! And for the many local election officials and volunteers. And for the U.S. system of governance. Are we good or just lucky? Maybe another 250 years will reveal the answer.

The coronavirus

The virus threatened our economy, our government and our people. We are not out of the woods yet, and will not be for quite some time, but it appears we are making progress and restoring stability to the system.

The economy

Corporate profits across a broad spectrum […]

Published November 13, 2020

Former Vice President Joe Biden, Democrat nominee for president, gathered the largest vote total for a candidate in the history of U.S. presidential elections. President Trump repudiated the results, claiming that he had the most legitimate votes; few people backed his claims. Trump says the election is far from over. No doubt extensive litigation is still to come.

The election process was exceedingly slow, but exceedingly meticulous, as Biden ground through the primaries, defeating foe after foe. Newscasters are framing his election as an example to all of us of the importance of never giving up on one’s dream. The general election saw record voter turnout, not only in person but also by mail. Because of the turnout, the counting process took several days, but in the end America’s democracy survived and stood firm. The election was a triumph of our democracy. The result will be noted all over the world and in history books.

In transitional times like these, our enemies perceive an opportunity to undermine us. China and Russia are pointing to the aftermath of our election as an indicator of our failing democracy. There are many autocratic regimes that see the success of our democracy as the biggest threat to their illegitimate holds on power. They may seek to take advantage of our troubled times. Fortunately, Biden’s experience with our allies will help ensure that we won’t have to deal with these threats all on our own.

Now the work begins. The work is to restore balance and trust in our nation and restoration of the rule of law. Those who supported Biden believe he is up to the task. The first […]

Published October 9, 2020

Although the Federal Reserve is doing as much as it can to stimulate the economy, it has said repeatedly that the executive and legislative branches need to do likewise. There is little downside risk to taking action, the Fed chairman says. But even as the economy remains soft and layoffs continue, Congress and the White House have been dragging their feet in reaching an agreement on another stimulus package. It should be noted that nearly 4 trillion dollars have been spent so far in shoring up the economy from the effects of the virus.

The White House has continued its trade war with China – the second largest economy in the world. The trade war seems to have little positive benefit for the U.S., as our trade imbalance widens but the Chinese economy grows.

The coronavirus, which has been shaping the economy for months, took on the executive branch this past week. The personal health of top military officers and legislators suffered. The result is paralysis for both branches: an attempted coup by the virus to take over the government fewer than 30 days before Election Day.

The ability of the Senate to preside over the hearings for President Trump’s Supreme Court nomination has been thrown into doubt. At a time when the nation needs leadership, the virus usurps control.

Equity markets took heart from the notion that the president’s virus diagnosis would encourage Congress to pass a stimulus package. Yet after pushing hard for legislative action, the president abruptly stopped discussions, saying they would resume after the elections.  The Dow fell 375 points on the day. It is hard to rationalize the change of heart, […]

Published September 11, 2020

After the markets hit new all-time highs, the tech bubble burst and erased $1.7 trillion in value. However, investors are still up $13 trillion, or more than 56 percent, since March lows.

The Nasdaq is up about 26 percent year to date and up 63.58 percent from its 52-week low of 6,631.42 on March 23. After remarkable gains in August, the market started September with more gains and then losses. The Dow Jones dropped 1.8 percent in the week leading up to Labor Day, while the tech-heavy Nasdaq dropped 3.3 percent, losing nearly half of its August gains.

Some observers blamed earnings disappointments, and some blamed whale-size option trading by SoftBank. Possibly it was concern over the virus, lack of progress on another relief bill and increasing tensions with China. Was it a warning?

Like the chief in “One Flew Over the Cuckoo’s Nest,” investors seemed stoic. By Friday afternoon, prior to Labor Day weekend, selling had turned to buying. Apple turned an 8.3 percent drop into a 0.1 percent advance. Was it a buying opportunity?

The day after the holiday weekend, all the indices nosedived again. Then, on Sept. 9, the Nasdaq was up strong on the day in a continuance of market volatility.

Why is there still such buying interest at lofty (by historical standards) multiples? Low interest rates make the market look cheap. Federal Reserve Chairman Powell says low interest rates will last for years, and the Fed isn’t even thinking about thinking about rate increases. We can expect easy monetary policy for years to come, and that’s generally good news for […]

Published August 7, 2020

The U.S. economy contracted at a record rate last quarter. A slowing job market became another sign of a slowing economy. A summer surge in virus infections added to worries.

The Commerce Department said that the U.S. gross domestic product declined at a seasonally and inflation-adjusted 32.9 percent annual rate. It was the steepest drop in 70 years of record-keeping. The U.S. economy is driven by consumer spending, which represents about 70 percent of the U.S. economy. But if one can’t go to a restaurant or the hair salon, spending will decline. Spending on nondurable goods such as clothing and groceries fell by 15.95 percent. At the same time, spending on durable goods fell only by 1.4 percent. Plenty of stimulus money was not spent. The personal savings rate swelled, as worries over the virus and the economy caused people to retain cash.

The unemployment rate increased, with the number of people receiving unemployment benefits rising to 17 million in the week ending July 18.

While the economy slowed, the tech-heavy U.S. Nasdaq stock market traded at its highs, owing to stimulus from the government and the increase in money supply from the Federal Reserve. Without the stimulus, the economic decline would have been worse. However, some of the stimulus is running out.

Because of job losses, housing will become an issue as people are no longer able to afford their rent or mortgages. Commercial and retail real estate, which historically provided reliable cash flow and income, is also under pressure due to the bankruptcies of many well-known companies and the reconfiguration of how and where people work.

The time of late August and early September normally […]

Published July 10, 2020

With the first half of the year in the record books, we can reflect back. The S&P began the year at 3,231 and climbed to 3,386 on Feb. 19, when it took a sharp drop ending at 2,237 on March 23. Then the market began a seemingly V-shaped recovery and bounced up to the current level of 3,100 on June 30.

The market was aided by very supportive actions from the government. The Federal Reserve announced that it would do whatever it takes to keep the economy strong. The administration offered strong fiscal support through stimulus packages. The virus appeared to take a breather, which gave the market optimism.

As the stimulus packages began to wear out and the virus began to resurge, only the Federal Reserve was able to continue its support for the market. The Fed has almost unlimited ability to support the market through monetary policy, including even buying assets.

The administration has an appetite for disbursing money through various methods, but that could have a practical and political limit. The virus seems to be in charge. Hope for a vaccine stimulates the market, but fears of a new virus and resurgence of the current virus raise market concerns. It is too early to tell who or what wins this contest. Individuals have the ability to influence the outcome by employing safe health practices, but will they oblige?

In the meantime, the market seems to have disconnected from reality, with stocks surging and soaring to ever higher levels. Every new hope for a vaccine elevates stock prices.

Investors should practice caution, even as they fear missing out on the uptick in the market. A barbell approach may be in order: […]

Published June 5, 2020

Financial results for the first quarter of 2020 have been reported by most members of the S&P 500, showing corporate earnings down 11.2 percent year on year, even though revenues were up 1.9 percent. Due to the COVID-19 virus, S&P earnings for the full year 2020 are expected to be down 23 percent or more. Growth is expected to resume next year, largely because of the easy comparisons with this year.

In the meantime, unemployment remains very high and rising. The Labor Department’s monthly employment report for April shows the jobless rate soared to 14.7 percent – the highest level since the Great Depression. The U.S. has lost 20.5 million jobs amid the coronavirus pandemic. Almost all the job growth achieved during the 11-year recovery from the Great Recession has now been lost in one month.

On June 5 (after this column was written), the Labor Department was to have released May’s employment report, and expectations were for 9 million additional people to have lost their jobs. This would increase the unemployment rate to slightly more than 20 percent. The Labor Department says the real unemployment rate is likely higher, because about 7.5 million workers should have been classified as “unemployed on temporary layoff,” instead of employed but not at work.

The stock market has gone up even as the economy has weakened and riots in many cities have destroyed businesses already teetering from the impacts of virus-related shutdowns. The market seems to have disconnected from the economy and the social unrest, largely because the White House and Federal Reserve continue to provide monetary stimulation.

European economies burdened with troubled industries, like car manufacturing, energy and […]