Forever Blowing Bubbles
Market highlights: Week ending 12th February 2021
Another week, another record high. All Stock Index’s climbed more than 1% over the week, with the S&P 500 recording its 10th record close of 2021 alone.
Positive earnings results continue to feed the upbeat market sentiment, with over 80% of reports beating analysts’ expectations. As we have discussed previously, this positive surprise is both a function of stronger earnings and lower analyst expectations, so this higher-than-expected earnings scenario needs to be taken with a pinch of salt.
As discussed in last week’s update, Bitcoin jumped early in the week following an announcement from Tesla that it had purchased $1.5 Billion worth of Bitcoin and will start accepting the crypto as a payment method for its cars in the not-too-distant future.
The much-touted fed infused inflation jump looks set to remain elusive for some time yet. January consumer price indices (CPI) showed muted inflation pressures, with core CPI flat month-over-month, up 1.4% for the year.
The small cap resurgence also continued with the Russell 2000 outperforming relative to large caps. Energy was the best performing sector again this week as oil continues to rebound following its price implosion last April.
Weed stocks got too 'high' this week (Sorry, it was right there). This week's dose of Reddit-infused retail trading mania was directed at cannabis stocks. The WallStreetBets forum hyped-up stocks like Tilray and Aurora by claiming the newly elected Democratic Party could give U.S. cannabis companies greater access to more traditional banking methods and open up the industry to new, institutional investors. Long story short, Tilray jumped 50% only to fall 50% the very next day. Great news for those that got out on time, a cruel lesson for those who didn't.
Relatively muted movements in yields this week. The 10 year Treasury yield closed marginally higher at 1.20%. The expectation for an imminent approval of a $1.9 Trillion stimulus package was largely offset by Federal Reserve Chairman Jerome Powell’s pessimistic outlook on U.S. employment as a result of the pandemic.
Elsewhere the dollar recorded its first losing week in three as signs of weakness in the U.S. jobs market dented investor expectations about the pace of economic recovery from the pandemic. The weaker-than-expected weekly U.S. jobless claims data on Thursday added to concerns the dollar’s previous rally had priced in too fast a rebound for the U.S. economy.
While Tesla’s announcement functioned as the catalyst for the latest Bitcoin surge, it wasn’t the only news exciting bitcoin bulls this week. BNY Mellon, the world’s largest custodian bank, announced that it is set to roll out a new digital custody unit later this year to help clients deal in digital assets. Mastercard also announced that it is planning to offer support for some cryptocurrencies on its network this year, joining the likes of Square and PayPal, who launched similar initiatives last year. These household names add to the ever-increasing line of big business institutes looking to adapt to the Crypto-wave in recent months.
The question that everyone is asking… ‘are we in a bubble?’.
We tend to try and categorise market movements into ‘bubbles’ when something does not fit the narrative or is off-trend, but I would argue that the market spends much of its time moving outside the norm in one form or another.
For me, the bubble discussion is just another unnecessary framing mechanism that doesn’t actually offer any utility. Whether or not we are in a bubble is essentially an easily digestible but largely irrelevant media storyline that tells you nothing about future short-medium term movement in the market. If we are in a bubble, answering that question still fails to bring you any closer to how long that bubble will last.
Some would argue that we have been in a bubble since 2015. Others are adamant that market movements are rational, stating that while the historically high valuations may lead you to instinctively conclude that we are in a bubble, the fiscal and monetary support structures in place will protect the bubble and prevent it from bursting.
So instead of wasting your time on a neatly packaged narrative discussion that doesn’t really answer any of your pressing investment questions, let’s explore ‘where do the opportunities lie?’ A far more worthwhile discussion. Commodities, crypto, real-estate and emerging markets all offer exciting opportunities for those willing to explore more alternative investments.