Things Change, But Do They Last?

2021 is nothing like 2020. The change started in early November following the election and the vaccine data. The change accelerated after the Dems won the Senate in January and the vaccine distribution went well after a tough initial launch in December. Sentiment has dramatically shifted since late October. The momentum stocks are now banks and energy. That probably sounds hard to believe for some readers.

The most popular new trend is to bet on the reopening. Critics of this trend say it has gone too far because it’s a one-time event. The market has never shied away from pricing in a short term benefit as if it is a long term game changer. That’s why stocks cratered in March and software stocks exploded in the summer.

Everyone knows the market can act unpredictably in the short term, but the recent moves in stocks in the past 15 months have been extraordinary. It is common to see stocks triple and quadruple when they become part of trend. The FOMO trade even tempts the most hardened long term buy and hold investors. It’s also turning the bears even more bearish than ever before. Many acknowledged that value stocks were cheap last year, but now bears see little opportunity at all and are calling for a massive crash.

Part of the sentiment shift has been the steepening of the yield curve which has been supported by the selloff in the long bond and the Fed’s refusal to discuss hiking rates. We will get an update on monetary policy this week. We aren’t holding our breath that a hike is coming. A steepening curve is now the consensus trade. As you can see from the chart below, Goldman expects further steepening by the end of this year.

We Have To Discuss It

Whenever there is a short term cyclical move, there are always calls for it to extend indefinitely. As we just mentioned, last year investors thought software would grow indefinitely and this year investors think the boost in vacation spending will go on for years. The same was the case for oil. More investors like oil stocks now than they did when it went negative last spring. These are the caveats for when we discuss the potential for sustained higher rates and higher inflation for the long run.

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Disclaimer: The content in this article is for general informational and entertainment purposes only and should not be construed as financial advice. You agree that any decision you make will be ...

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