OUT WITH THE OLD AND IN WITH THE NEW
Issue 197
By Jeffrey Trusheim, Chief Financial Officer, Mortgage Solutions of Colorado, LLC DBA, Mortgage Solutions Financial and MSF Agriculture.
Mortgage Solutions presents Issue 197 of Market Pulse. This commentary will provide Trusheim's perspective of the economic, political, and technical considerations that will have an impact on the global & domestic financial marketplace. The report will provide a recap of the previous week's activity as well as a look at the important market-moving factors in the week ahead.
Good grief, what a year!! TGI 2021! On New Year’s Eve, an old Irish tradition is to open your front door at midnight and let the Old Year out and the New Year in. I think 2020 deserves to have all of the doors, windows and even the garage door to be open!!
Thanks to the rapid and unexpected spread of COVID-19, the stock market got crushed in March, producing the quickest 30% drop in history, which led to the shortest bear market as a result of the quickest recovery on record. From its peak in late February to its trough on March 23rd, the market fell 34% in 33 days. With massive monetary stimulus from the “whatever it takes” Fed, coupled with the “helicopter cash” fiscal stimulus from the government, the stock market got back to breakeven on August 18, which made it the fastest recovery on record and since then it has scored 20 new all-time highs.
In my 30+ years as an investor, 2020 has been one of the toughest years to track, trade, and forecast the markets. While 2020 ended-up being a very profitable year in the markets, the human and economic pain and suffering will go down in history as one to forget. Our thoughts and prayers go out to all that were affected by this horrible event.
Before we move on, see if you can guess what the #1 asset was for last year. Answer at the end of this missive.
WHAT’S NEXT?
Recent economic data continues to suggest the recovery is on track. However, we need to realize that a good part of the “positive” developments surrounding the “vaccine” and the associated re-opening of the economy is priced into this market. It would also appear that the recently approved stimulus package was already built into the recent rally. It would not be too surprising if we see a slight pause in the bullish economic data and markets, which is to be expected from time to time.
Next up is the reaction to the Georgia Senate races this week on Tuesday, January 5th. If the Democrats win and take control of all three branches of our government, it could be a game changer. I do not plan to trade this event, as being bullish or bearish, but will be an interested spectator watching the market’s reaction from the sidelines. One looming positive may be in the form of yet another stimulus deal out of the Biden administration, this time dealing with “infrastructure”. Such a deal would foster economic activity as well as improve our dire employment situation, with more than 10 million U.S. workers currently unemployed.
Housing data continues to impress. Existing home sales continue to come in at some of the highest levels since 2006. Inventory numbers have been nothing short of remarkable, with only 1.12 million single-family homes listed, which is the lowest level in 20 years. We currently have only a 2.2 months’ supply, which is a new record low.
Pending home sales have dropped for three straight months, from the all-time high in August at 132.9 to a reading of 125.7 in November. The index currently sits at a 16% y/y pace, down from 19.7% previously. The recent slide is all about inventory levels.
We are seeing positive readings from the Dallas Fed Index, indicating expansion in Texas factory activity. Also the Chicago PMI bounced better than expected to 59.5 in December. The index has been above the 50 expansion/contraction line since July. Holiday spending really picked up heading into Christmas, with the sales pace accelerating to a 5.0% y/y clip, which is it’s highest since the week of April 4th.
THE STOCK MARKET
The S&P 500 is up more than 65% since the March low, and up 16% for the year. We just had a 14% year-end rally, which is the best ever. The NASDAQ is up an unbelievable 44% for the year. Although these numbers are very impressive and bode well for 2021, it would not be surprising to see a pullback in the early part of the new year. At some point valuations do matter. The average 12-month forward price-to-earnings ratio for the S&P 500 since the year 2000 is 16.7. Valuations right now are trading at a 42% premium over that average, and have gotten to levels we haven’t seen since the internet stock market bubble in the late 1990’s. Most of last year’s rally is based on multiple expansion, rather than increased profit and revenue margins. It’s OK for stocks to be at these highly elevated levels…but the companies will need to make a lot of money this year to justify their valuations.
One of the newer components that helped facilitate last year’s rally was the onslaught of 10 million new online retail accounts, 6 million of which were opened at the Robinhood brokerage firm. These firms let you trade commission free, and some will also let you trade fractional shares of the more expensive stocks. I suspect that many of these newly minted traders are simply following momentum, and not paying attention to valuations. My advice to them is simple: Use stop-loss orders to protect yourself and remember (in the words of Warren Buffet) that price is what you pay…value is what you get.
Technically, the S&P 500 broke-out of the trading range (3725) last week and continued higher to the 3760 level on Thursday, before closing the week at 3756, up 53 points. The next upside targets are in the 3811-3825 region, followed by 3922. Initial support should develop near 3700, and if penetrated, downside targets in the 3570-3620 region could be seen. I continue to buy pullbacks in this market, the lower…the better. After a normal and expected correction, my upside targets for 2021 rest in the 4200-4300 region. Remember, these markets are non-linear, and should zig-zag to much higher levels in the months and years ahead, with pullbacks/corrections along the way. We usually get at least a 10% correction every year, so be prepared when/if it comes.
THE BOND MARKET
The 10-year Treasury traded between .91% and .96% and finished the week unchanged at .92%. It was the end of a very quiet December, with a monthly range of just 10 basis points, from .87% to .97%. The tailwinds for the interest rate complex continue to be a very accommodative Fed, low inflation, and a weak dollar. I do not see any of these three reversing direction anytime soon.
However, I have taken note of record “short” positions in the U.S. dollar on the futures exchange, and we all know by now that the Fed is desperately trying to move the needle on inflation to a level above 2.0%. Additionally, we continue to see record amounts debt being issued, and the world is quickly approaching a total debt level of $300 trillion. Eventually, these three will reverse from tailwinds to become headwinds, and all of the markets (stocks, bonds, and commodities) will experience a painful “reset”. IMHO, the “reset” is still several years away, probably in the 2023-2025 time frame. Until then…relax and enjoy the ride!
Answer: The asset with the biggest gain in 2020? Hi Ho SILVER, with a 47% gain!
MAKE IT A GREAT WEEK AND A GREAT YEAR…AND STAY SAFE!
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