The Tug Of War Continues

This market continues trudging forward and weighing good news with bad. After stocks closed last week with their first weekly declines in nearly a month, stocks staged a mild recovery on Tuesday (Jan. 19th) led by tech, big banks, and small-caps.

Today's gains were primarily thanks to renewed stimulus hopes, faster vaccine distributions, and strong bank earnings. However, this is far from an “all clear.”

It still reminds me of the Q4 2018 pullback (read my story here). I remain steadfast that there is way too much complacency in today’s market- despite long-term tailwinds. In the short-term, we are truly walking on ice.

For one, valuations are absurd. Tech IPOs seem more like Barnum and Bailey than a capital market, the S&P 500 is trading near its highest forward P/E ratio since 2000, and the Russell 2000 has never traded this high above its 200-day moving average.

Signs are starting to point towards the return of inflation by mid-year as well. Despite declining Tuesday (Jan. 19), the 10-year yield remains around its highest level since March. Economist Mohammed El-Erian believes that “if we were to see another 20 basis point move in yields, that would be bad news.”

Edward Jones also claims that the 10-year breakeven rate, a market-based measure of inflation expectations, is at its highest level since 2018 thanks to rising commodity prices, a weaker dollar, and broad stimulus policy.

There are also some signs that the market is already pricing in Joe Biden's $1.9 trillion stimulus package.

On the one hand, according to Jim Cramer, “when an event occurs and the market gets exactly what it wants, but nothing more, it’s treated as a reason to sell, not to buy.” What happened in the market last week reflects this.

On the other hand, some of the economic benefits may not have been priced in yet. For example, JP Morgan believes that this stimulus plan could cut unemployment to less than 5% by year’s end.

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Disclaimer: All essays, research, and information found above represent analyses and opinions of Matthew Levy, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be ...

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Kirk Sheffield 1 month ago Member's comment

Good stuff.