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This week: The Melt-up and Up and Up; “If You’re So Smart…” ; The Post-Pandemic; Reading List.
The Melt-up and Up and Up
The market melt-up that we first projected in June is back in full force after its September and October swoon. When conditions are very stimulative, as they were in late 1999, any positive news, no matter how trivial, can send a stock, a sector, or indeed the entire market up and up again by 20%, 30% or more. This is where we are now, with major indices recording fresh highs. The S&P 500 is now up 13.4% this year, a better performance than its historic average of 9% and the Nasdaq Composite is up 37.7% making this a year for the history books (in yet one more way).
These numbers mask the big crash in March and the concentrated recovery in leading tech names. Similarly the Dow Jones Industrial Average was up 10% in 1918, year of the last great US pandemic, and then 30% in 1919.
With more stimulus promised, the current tech exuberance can last a few more weeks or months much as its 1999 predecessor lasted into the new year and until March 2000. What happens afterwards will depend on the condition of the economy starting in the spring. The seasonal fade of the virus combined with the wider availability of vaccines would push bond rates up and could lead to a very large sector rotation with this year’s winners losing some gains and the losers effecting a swift recovery.
Value investors, if there are any left, would now be loading up on names that were worst-hit by the pandemic. All should keep an eye on the Georgia run-off senate elections on January 5th. Should the Democrats take the Senate (two wins in Georgia would be a 50-50 senate with Vice-President Harris casting a tie breaking vote), there will be some retrenchment if raising taxes looks like a priority on their agenda. In this vein, there is a non-negligible probability that the market will retreat in late December if some investors decide to take profits in the current year in order to lock in 2020 capital gains tax rates.
“If You’re So Smart…”
When a bubble is forming, the event that pops it is only knowable in hindsight. Every week, on the way up, there are a number of statements or events that would qualify as triggers to stop the mania. But until the last day, they are just empty warnings that may be heeded for a day or two before the climb resumes in earnest. In his book The Great Crash 1929, John Kenneth Galbraith tells of many admonitions on the way up. He attributes the ultimate turn, which interestingly he places on September 5th (not October 29th), to the following:
“The immediate cause of the break was clear, and interesting. Speaking before his Annual National Business Conference on September 5, Roger Babson observed, “Sooner or later a crash is coming, and it may be terrific.” He suggested that… the Dow Jones market averages would probably drop 60-80 points [meaning percent]. In a burst of cheer, he concluded that “factories will shut down… men will be thrown out of work… the vicious circle will get in full swing and the result will be a serious business depression.””
Prophetic words but mainly recognized as such in hindsight. How many said something similar in 1927 and 1928 and 1984, 1996, 2005, or 2018, years before the crash? The more important fact is that bravado, playing decreasing odds and distrusting intellectuals are ingrained American qualities whereas pessimism and caution are seen by many as un-American, as for example in reactions to the pandemic this year. This sardonic observation by Kurt Vonnegut in Slaugterhouse-Five is illuminating on this account:
“It is in fact a crime for an American to be poor, even though America is a nation of poor. Every other nation has folk traditions of men who were poor but extremely wise and virtuous, and therefore more estimable than any one with power or gold. No such tales are told by the American poor. They mock themselves and glorify their betters. The meanest eating or drinking establishment, owned by a man who is himself poor, is very likely to have a sign on its wall asking this cruel question: “If you’re so smart, why aint you rich?””
Today’s market mood is all bravado and a similar skepticism about contrarian investors.
Those who, like investors, try to internalize today events that lie six months into the future can imagine the pandemic to be nearly over. Confirmed cases are not peaking fast enough, and deaths are still climbing, albeit at a less bad rate than previously expected. But six months out, it will be the beginning of June and everything will look different. It could be an unprecedented summer and year of activity in 2021.
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