Looking Ahead - 1/18

The beginning of the year has brought with it much of the stock market volatility we have been seeing for many months now.  The major indices had been rallying to all time highs and then fell last week after the announcement of President-elect Biden's fiscal stimulus plan (perhaps a "sell the news" event or simply concern that it will go smoothly through Congress in substantially current form).  There may also be growing unease over the COVID-19 pandemic and the disorganized, slow rollout of vaccines which could hamper economic recovery a bit longer than expected.  I should also mention more grim unemployment figures were reported with the weekly jobless claims rising to a level not seen since the last virus spike in August.  

Most investors seem to be expecting earnings season to be a blowout due to low expectations (less about strong year over year growth), so over the next several weeks after the presidential inauguration, the implementation of further stimulus legislation and as earnings season continues to roll along, there could be some upside catalysts to the stock market.  Indeed, individual stocks have performing well in some key cyclical areas (real estate, utilities, oil, banks, autos, for example) while technology has been lagging and materials / industrials have been mixed.   Some bank stocks have run up quite a bit and then have seen sell-offs (some significant) after reporting earnings last week as investors took profits (JPM, C and WFC), despite reporting good to great earnings.  Most banks are expected to outperform this year due to the steepening of the yield curve, which allows banks to borrow money at low rates and lend it out at higher rates.  

Hopefully borrower solvency isn't an issue for the banks and they find themselves unable or unwilling to lend or having to set aside larger loan loss reserves.  Time will tell.  While these have been great trades lately, I find it hard to get excited about banks and energy for the long haul since both seem on a steady long-term downward trajectory for different reasons.  For banks, its simply disruptive, innovative competition both in the form of fintech and crypto (and acknowledged by at least one CEO - Jamie Dimon of JPM).  For energy, it's the inevitable rise of alternative energy driven by consumer demand, government mandates and a growing realization that global warming is real, not to mention the incredible investor demand for all things ESG.  

Unfortunately for investors, low short term interest rates continue to lead to negative real yields in bank and money market accounts, which forces many investors to abandon cash for risk assets especially as inflation expectations rise.  Many investors also seem to be carefully watching for signs of inflation, although certain key indicators like the dollar (which has been steadily declining), gold / silver (which have been flat to down), bitcoin (which although off its recent all time highs has held up pretty well) and commodities (which have been mixed) are sending mixed signals.  In the medium to longer term, I think it's safe to assume gold, silver, commodities and bitcoin will continue to rise as the world economy recovers from the pandemic and demand increases strongly in the face of constrained supply.  The unprecedented fiscal and monetary stimulus will serve as a powerful force driving this and if inflation does indeed spike, it could be very difficult politically and take quite some time to tamp it down if history is any guide.  Here are a few charts that highlight some of the challenges:  

M1 Money Supply Continues to Grow Exponentially  
Dollar Continues to Struggle
Inflation May Be Hiding in the Numbers
My game plan in the coming weeks and months is still essentially unchanged and my overall portfolio requires very little adjustment since it is already broadly diversified according to the Financial Fortress methodology I follow.  I am looking at moving some excess cash into Bitcoin in the coming weeks to increase my exposure slightly (still less than 6% of my total portfolio even after that move).  Despite the volatility, I see Bitcoin as a superior asset to hold long term, continuing its long steady climb higher as adoption increases (especially growing institutional ownership) and supply remains constrained at ultimately 21M coins.

I hope you find this post useful as you chart your personal financial course and Build a Financial Fortress in 2021.  To see all my books on investing and leadership, click here. 

Stay safe, healthy and positive.