Last week would be marked as one of the historic week in America. The brutal murder of George Floyd by Minneapolis Police in plain-sight brought centuries of racism in US to the fore-front. The peaceful protests were just and warranted to bring attention to this ongoing pandemic in US society (and many other countries). Some of the protests turned into riots due to opportunistic looting by some criminal elements. It's time for US to root out the silent racism and reform the police departments across the nation! And looking at Amy Cooper's infamous racist video, we all must internalize and root out whatever un-conscious or silent racism which we may have!
Exactly in same week, markets were ignoring all of these events and almost partying like it's late 1990s-2000. That reminds me of the famous speech by former US Fed chairman Alan Greenspan's about "Irrational exuberance" in Dec 1996.
As Yale Prof Shiller wrote in his 2000 book (source: Wikipedia)
We are seeing exact same behavior in the markets. Markets are looking at if COVID-19 spread is over, economies fully opened up, unemployment again making records (on reaching low) and want to resume its upward journey where it left off on Feb 19. There are some positive news about opening of economy going better than expected, containment of COVID spread and unemployment report is not as bad as feared (expectations were 20% unemployment. It came at 13.3% which is still much higher than 2008-09 great recession). The Fed actions and giant stimulus by US government replaced/supported nearly 50-60% of GDP which is more than one quarter GDP loss due COVID. The cheap and plentiful money has to go somewhere and equity markets is the only bet which can provide some return in ultra-low or negative interest rate world.
So what's direction for markets for rest of year and what should individual investor do?
Here are my market predictions (which could be way off the mark if another black swan event comes)
Exactly in same week, markets were ignoring all of these events and almost partying like it's late 1990s-2000. That reminds me of the famous speech by former US Fed chairman Alan Greenspan's about "Irrational exuberance" in Dec 1996.
As Yale Prof Shiller wrote in his 2000 book (source: Wikipedia)
Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.
We are seeing exact same behavior in the markets. Markets are looking at if COVID-19 spread is over, economies fully opened up, unemployment again making records (on reaching low) and want to resume its upward journey where it left off on Feb 19. There are some positive news about opening of economy going better than expected, containment of COVID spread and unemployment report is not as bad as feared (expectations were 20% unemployment. It came at 13.3% which is still much higher than 2008-09 great recession). The Fed actions and giant stimulus by US government replaced/supported nearly 50-60% of GDP which is more than one quarter GDP loss due COVID. The cheap and plentiful money has to go somewhere and equity markets is the only bet which can provide some return in ultra-low or negative interest rate world.
So what's direction for markets for rest of year and what should individual investor do?
Here are my market predictions (which could be way off the mark if another black swan event comes)
- After going up by some more (S&P around 3300), markets would trade side-ways till Q2 GDP and earnings clarity.
- Once earnings are out and state of economy openings become clear, markets would be looking at Nov elections. As of now Biden is leading Trump by defensible margin. It would come down to if Democrats control all three branches (President, House and Senate) or GOP is able to hold at least 1 or 2 branches. If GOP is able to retain either President or house or senate, markets would be ok since split government is always better than one party rule.
- Before year-end markets would regain all time highs. It could come as soon as summer before it takes pause or go down by 5-10% before elections.
So in these frothy markets, I would recommend following.
- Don't chase the market highs
- Take out some of the gains for future opportunity
- Even in these exuberant markets, one can still find many opportunities for slow and steady returns. To uncover such opportunities, apply "Shyam's Rule" - more details on this in next blog!
Looking back at history, 2020 would be like 1968. In 1968, world had to face H3N2 (also known as HongKong Flu) Pandemic, civil unrest and protests against US-Vietnam war, assassination of Dr. Martin Luther King and Robert Kennedy and election year. Despite all of this, In 1968, the S&P 500 fell 9% from January to March, rallied 24% off of the bottom, and finished the year with a total return of 10.8%
As Mark Twain said, “History Doesn't Repeat Itself, but It Often Rhymes”
/Shyam
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