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North American markets today, Friday, viewed several hours before the 9:30 a.m. EST opening are deeply in the red. Optimistic vaccine news is colliding with TV charts showing rising deaths, surging case numbers and interviews about vaccine shortages and delays. While stock indicators can – and sometimes do – change before and after market opening, they are so deeply in the red that slipping into the green today seems unlikely at best.
European markets are open at time of writing and major indicators there are also firmly in the red for similar reasons. They unlikely to climb out during European trading hours today. The safe havens of gold and silver as well as the British pound and Canadian dollar are all down.
This amounts to a pause following a mixed day yesterday in which the S&P 500 and NASDAQ closed at record highs driven by optimism about pandemic relief from the Biden administration. The DOW rose but fell into negative territory late in the day.
While some analysts and investors view financial journalists as the proverbial wet blankets it seems necessary to suggest some caveats currently looming over the market and some cautions for dealing with them.
At the top of the list, we need to balance the optimistic outlook for the incoming administration of President Joe Biden with some sober realities. The Economist points out that the death toll from COVID 19 in the U. S. has passed 400,000 and suggests that it could very well hit 500,000 during Biden’s first 100 days in office.
The Economist report attempts to reconcile the optimism of the Biden inauguration with necessary pragmatism, “It is not an auspicious start. Yet, unlikely as it sounds, in the next few months the view from 1600 Pennsylvania Avenue could improve dramatically.” it says.
Certainly, the Biden government can borrow funds at nearly zero to support its pandemic spending and he certainly enjoys the ‘honeymoon’ usually accorded to American presidents taking office. However, the road between touting legislation and passing it may not be smooth, according to some analysts. “The Biden administration has set to work with a will, overturning via executive orders a host of decisions made by the old regime, but Biden, as a grizzled veteran of the Senate, will know that getting legislation through the House is a much tougher prospect,” says Chris Beauchamp, Chief Market Strategist at IG Group, a London stock firm. “Already there are signs that the great stimulus package promised earlier in the week may have to be pared back, as the messy business of governing gets underway.”
Beauchamp adds that the rotation away from tech and into value stocks may have to wait. “…with strength in tech stocks apparently reminding investors that giants like Amazon and others continue to throw off huge amounts of cash and still have huge potential for growth.”.
With the Democratic Party not completely unified behind Biden and the Republican Party looking for its future, predictions are dangerous.
Biden also has ambitious environmental and infrastructure programs to pilot through Congress. Also unknown at this early date is the extent of tax increases and their potential impact on corporations.
Where all of this leaves investors is that while Biden’s priorities are certainly admirable and clear, their actual implementation – and their impact -- remain to be seen. That being the case, investment decisions based on perceptions of his intentions require careful consideration and for some investors, holding off for the time being may be appropriate.
Let’s watch the valuations of high-flying stocks. In some sectors and with some equities they have become so stretched that the math could keep an investor awake at night. If TESLA Inc. shares were to continue increasing at their current rate, they would be worth about a trillion dollars by the end of the year. That obviously will not happen and in fact, TESLA pulled back $5.46 yesterday to close at $844.99. The moral of this particular story is that those who invest in the highest of highflyers need to keep a finger on the trigger at all times.
The place of the consumer and consumer spending in the recovery is another mixed equation. Notwithstanding the pent-up savings, consumer debt is higher than ever before, and many will understandably feel bound to reduce debt more than increase spending. Moreover, strong increased spending requires increased employment stability and it’s clear that many jobs lost during the pandemic will never return. It’s also clear that job losses will continue. While the number of Americans filing new applications for unemployment benefits fell to 900,000 last week, a Reuters analysis points out that they remained stubbornly high as the COVID 19 pandemic continues across the U.S. Reuters says this raises the risk that the economy will shed jobs for a second straight month in January. At the same time, housing and manufacturing are providing a boost.
On the more positive side, we cannot know at this early date the eventual extent of what some analysts call ‘revenge spending’. This refers to spending more than otherwise would be the case after the kind of limits imposed by the pandemic and lockdown. After China’s lockdown, consumers there went to high-ticket purchases for a kind of therapy after the restrictions.
Not knowing in advance how these factors will play out does not mean avoiding consumer discretionary stocks, but, depending on the contents of an individual portfolio, it may mean holding off or not increasing them until the recovery seems more assured. Consumer staples stocks are a different matter.
We also need to examine the impact of one of the largest drivers of the market – the availability of so-called easy money. In effect, the markets are hooked on stimulus money, according to James Athey, Investment Director at Aberdeen Standard Investments in London. Athey sees this as a serious problem. “The market is buying U.S. equities with fervor because the Democrats are going to boost growth,” he says, cautioning that this could be a problem in the longer term since markets exert no discipline over policy makers. “There are precious few apparent limits, and the costs are hidden and in the future,” he says.
Geopolitics also need some consideration on both sides of the United States-China divide. On the U. S. side, the New York Stock Exchange decision to add China Mobile Ltd., China Telecom Corp and China Unicom Ltd. to the roster of de-listed companies could erode confidence in otherwise unconnected companies such as Baidu Inc. which dropped $8.99 yesterday to close at $251.91.
From the Chinse side, the government’s determination to sit on the board of all Chinese companies and its clear antipathy to Jack Ma, the president of Alibaba Group Holding Ltd. should be taken into consideration by anyone investing in that company. Alibaba shot up when Ma re-appeared after nearly three months but dropped by $5.64 to close at $259.85 yesterday. This is not to suggest complete avoidance of Chinese stocks but rather careful consideration of their risk with a licensed financial advisor familiar with the individual’s risk tolerance.
So yes, let’s do what we can in the markets but let’s be more careful than ever previously.
More about the risks on Monday.
Disclosure: I do not own any shares in any company mentioned in this column.
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