2021 Stock Market Thesis

Investing Environment:

  • The stock market is overheating. Lots of money is chasing after very few issues and sectors.
  • On a Price to Earnings Basis, there are no bargains in the stock market. A good site to get visuals on the current overvaluation: ( https://www.longtermtrends.net/sp500-price-earnings-shiller-pe-ratio/ ) Basically it shows that the market is more overvalued than in 1929, but not as bad as 2000.  I use the Shiller CAPE PE (below the raw data chart) rather than the raw data itself. Shiller normalizes the data and eliminates anomalies like the 2008-2009 period where it was a bear market but appears bullish.
  • There is no decent returning fixed income investment into which to flee, with the sub-optimal exception of Treasury Inflation-Protected bond funds.

Investing Assumptions (personal view)

  1. Along the continuum of the market cycle, we are closer to the The Point of Maximum Financial Risk than we are to the Point of Maximum Financial Opportunity. Observe the simplified view in top right of the following chart to understand my view:
Wall Street Cheat Sheet — Psychology of a Market Cycle | Trading charts,  Cheat sheets, Bitcoin chart

The only way to observe the continuum is on a long-term chart from the last trough. This is of the NASDAQ ($COMPQ)

Investing Assumptions (Continued)

  • Federal stimulus for COVID ends with the current Biden Administration effort. It will over the short term continue to fuel the market and mask the awful underlying fundamentals of the economy. No later than late summer, the true damage of COVID pandemic will begin to express itself in equity prices.
  • Federal Direct Payments: To individuals is inherently inflationary. The two Trump and one Biden payments will directly impact prices of goods and services.
  • Unsound Fiscal and Monetary policies of the Federal Reserve and the USG will continue and grow worse. Ties back to the #3 inflationary assumption.
  • Retail investors Strike Back (See GameStop) is evidence of a market top in next 12 months. Retail investors since the Dot Com frenzy have had little impact (as a % of trading volume) in last 20 years. In coming months will drive market to complete Euphoria stage.
  • Interest Rates rise in next 12 months as the secular rate bull market ends and a secular yield bull begins. Since the early 1980s, rate trend has been down. It hit zero. Fed announced on Jan 27 an intent to keep rates low. Fed only controls the short-term Fed Funds rate. The market, through supply / demand based on an assessment of inflation control the LT rates. Yields will rise. Loser: Real Estate.

Stock Plan: 

  1. Ride the current “Euphoria” level of this bull market until it kicks me off.
  2. Use the “Complacency Rally” to exit remaining positons
  3. Biden Administration Policy: Themes are green energy, Anti-Trust for tech firms, legalization of marijuana and reducing deficit spending as a way to offset coming COVID Stimulus #3. Winners: Clean energy stocks (electric car stocks problematically overvalued at this time), Pot stocks, Financial firms. Losers: FB, GOOGL, Amazon/ Corp Taxes/ High income people / and Dirty energy (already suffering) Disappointed:  Progressives. Green New Deal never happens. Minimum wage does not rise.  
  4. Post COVID: Winners: 5G, CRISPR, Travel and leisure sectors / airlines / casinos / sports betting / venue operators / certain restaurants (DRI) / Crypto. Losers: fast food / home improvement stocks. People are sick of fast food and they have fixed up their houses enough to last a couple years…

Extended Comments on topics discussed above:

  1. Post COVID Fiscal / Monetary Policy: Watch to see if the USG gets serious about the deficit and the Fed starts raising rates over the next 24- 48 months. If it does- Winner:  The USA. Pols love to talk George Maynard Keynes. “Keynesian Economics” is just a 1930’s British adaptation of the Book of Job. A theory on how to set aside and then deploy “rainy day funds” for national emergencies. Ideally (so the theory goes), nations lower taxes as the economy slows and raise them as the economy rises. The US has a 40-year bi- partisan history of cutting taxes in good times and bad. That has no basis in Job or Keynes. The USG now is now buying ‘groceries’ on credit. Post COVID, taxes must rise, or the US Govt finances get so poor it has direct impact on everyone, every day… for decades.
  • Fiscal Policy & You: Before you dismiss #1 out of hand as irrelevant, one impact might soon be the mandated 25% cut to Social Security is based on exhaustion of the SS Trust Fund. That is being burned by Federal deficit spending. Prior to 2015 the cut was projected to hit in 2046. In 2018 recalculated to hit in 2034 and now it will probably kick in during FY 2025.

For all you folks in the military, when Social Security takes a hit, it will become a political necessity to come after the Veterans Administration. Pensions and disability will get cut. Hanging onto those old  Thanks for your service, we will never forget!” sentiments people whispered to you as sweet nothings just 10 short years ago?!  Just Google the fate WWI Pension Protesters suffered on the Washington Mall during the Great Depression when General McArthur sent Major Patton’s cavalry in to “re-negotiate” that pension deal. ‘Sweet nothings’ are called that for a reason! Military pension security is an illusion. It’s ‘security’ based largely on your naive faith in the hollow words muttered by talking heads wearing US flags on their lapels. Lapel flags don’t equal patriotism- usually, it means the opposite!

A Chart View:

A generational look at current market valuation.  Alan Andrews’ “Pitchfork” depicted below is a calculation of a theoretical fair value High / Median/ Low based on three pivot points. I used 1995 (New bull market after Gulf War correction), the 2000 high and the 2008 low. Its purpose is to indicate where valuations stand compared to the past. Its highly likely that ST this overvaluation is exacerbated Tight sell stops. You don’t want to fall too far down this cliff!

Courtesy: MarketWatch. Accessible at: https://www.marketwatch.com/story/the-incredible-backdrop-to-the-global-stock-market-rally-profits-are-flat-since-2008-11611226707?mod=home-page

At the risk of well-deserved ridicule, my SWAGs…

  1.  NASDAQ (current 13,543) will top at 18,769 in September for a maximum rise of another 27%. The vast majority of those gains will be in the big tech stocks and the Biden Theme stocks.
  • Aug, 2021, financial hardship for individuals and businesses will rapidly increase. Dems will press for CARES #4
  • The GOP, with its eyes set on the 2022 mid-terms will not be willing to go along with the Dems to fund another Stim package (After CARES#3 next month). The result will be a declining GDP that will hit the market by Oct 2021. I anticipate the end of the bull run in this timeframe.
  •  Inflation: (Current: 1.3%) Will rise to 2% by Dec 2021 and push 30 year rates towards 4%. The difference between Bush/ Obama and Trump/ Biden is that the former Presidents didn’t push much bail out money to individuals. They rewarded institutions. The Trump/Biden tendency has been to push Stim to individuals. Individual choice drives inflation. Inflation fear will shake the markets. Inflation fear will push money into Precious Metals.
  1. Gold: (Current $1856) Will rise to $3118
  • Silver: (Current $25.58) Will rise to $56
  • Bitcoin: Will fall ST to test $25000 and then rise to $43,000 in ST. Will fall with the stock market if a significant correction happens but is tracking towards $100,000. My call- BTC at $30 million in 2051. Feel free that year to visit my grave and tell me if that worked out!