“Digitalization is the single biggest investment opportunity in mankind’s history.”
– Keith Fitzgerald.
Bottom Line: The bulk of the evidence remains bullish for stocks. I’d like to shift and not distract people with short term correction talk. This is a primary bull market and I think wealth building opportunities will remain for years yet.
Stocks get extended, stocks go through corrections. That’s life in the market. It pays to be cautious from time to time when markets get stretched, but it does not pay to get bearish when the Primary Trend is up.
In the Markets
Three reasons the Primary Trend in stock markets is likely to continue higher, correction or not.
1) Huge Liquidity
I completely disregard any analysis that uses government cited statistics about inflation. Believing government provided stats on inflation is like believing in the tooth fairy. I also do not care to engage in inflation/deflation debate. Being right or wrong on this subject is academic. Considering that some of the smartest people in finance completely disagree on this topic, I think spending time determining the ‘truth’ on the issue may be time better spent elsewhere. What matters is that commodity prices are rising and, as investors, we need exposure to those areas in the market.
Recently, famed investor Doug Kass said this. “The anticipated cumulative injection of fiscal stimulus (including $1.9Trillion Biden stimulus package and previous $2.2T & $0.9T packages will total 5T over the last twelve months. This represents almost 25% of expected 2021 GDP of $21T…..all to non productive ends.” That doesn’t even touch on the $Trillions injected into the system by the Fed. A trillion here, a trillion there, and pretty soon we are talking about real money.
So those who say there is no “velocity”, meaning that banks aren’t lending, and money isn’t flowing through the economy can think they are ‘right’ all they like. The idea is that Money supply, (which is high) multiplied by velocity (how that money travels through the economy) is equal to economic output. Frankly, I find it questionable that you can define a complex system like the economy with a 3 variable equation anyway. We’ll just continue investing in metals, energy and hopefully more agriculture commodities, as long as the trend is up.
This week, taking some time away from climate change and issues of “equity”, Fed Chair Jerome Powell again turned his attention to the economy. In essence he said that the Federal Reserve will maintain its irresponsible accommodative tone until the economy and unemployment improve a lot.
So again, you can say that isn’t the definition of “printing money” or “there’s no velocity” or “all that money sits on the balance sheet of the banks as idle reserves”, and you may be right. But if you believe that the Fed and every G7 central bank’s actions, and the US, European, Chinese Japanese and Canadian governments spending money like drunken sailors is not affecting asset prices, well beware of men selling bridges.
2) Mr. Market is Healthy – SWM Primary Trend Indicator Inputs
The chart by Ned Davis Research, shown below looks complicated, but the information is significant. Let me explain.
The top line is the Nasdaq composite index. The second line shows the advancing/declining (A/D) stock line. When more stocks are rising then the A/D line rises and vice versa. This line can be used as an indicator of future behaviour in the underlying market (in this case the Nasdaq) when it diverges from that market, either up or down.
The Nasdaq index has easier listing requirements than the NYSE which makes it easier for startups and high-risk companies to get a listing. Once listed, these companies must meet certain financial and reporting requirements or face the prospects of a delisting. These companies suffer when liquidity is tight or during a bear market so the Nasdaq has many more delistings than the NYSE.
Because of this, the A/D line for the Nasdaq index has a downward bias. Even in the 674% rally from March 2009 to February 2020 the A/D was range bound. Recently it broke out to its highest level since March of 2008!
The red section at the bottom is supposed to be a histogram showing how many stocks hit new 52 week highs. The recent posting of 706 new highs is a record back to 1979.
This is rather an incredible technical picture that truly reinforces the broad-based strength of the current market. Breadth trends like this do not reverse quickly.
3) Big Future Investment Opportunities Abound
We talk to a lot of people. A somewhat common theme today is a confusion and concern about how to invest in a time of Covid, impeachment trials, unemployment in leisure and restaurant sectors and whatever other headline you can find. Of course those items are serious issues, especially if they affect you or someone you know. They also don’t matter much to the markets and don’t matter at all to some of the best investment opportunities of the next ten years.
Digitalization, referred to by Mr. Fitzgerald in today’s quote is about bundles of data driven by complex engineering behind the scenes which deliver applications and technologies that will change the way we live. That’s a bit vague perhaps but consider estimates are, that within 5 years 75% of the world’s population will touch some online data every 18 seconds. By 2030 big data is expected to add $17.5 Trillion to the global economy and, at current rates, 50% of the 500 companies that make up the S&P500 will be replaced by 2027!
The economic and technological ground is shifting beneath our feet and, as I come to understand these shifts, I’m beginning to think Mr. Fitzgerald could be correct.
Do not get distracted by headlines. The media today is doing a great job of creating an atmosphere of confusion and concern. I continue to recommend the great 2010 article by Rolf Dobelli entitled, “Avoid News; Towards a Healthier News Diet.” Google it.
As individuals I think we are better off turning off the television, and mainstream news completely. If there are issues that concern us, we are better off to pick up a book, or read multiple scientific papers on a subject and forming our own opinion, rather than listen to what a politician or “news” personality tells us to think about the subject.
As investors, using the news media to form investment opinion is actually counter-productive. By the time something is in the “news”, it’s old news. Tracking investor behavior by following price and volume trends is a much clearer way of telling us what is happening now, and the odds of that continuing or not.
Yes, going into this North American long weekend, we have made some shifts and raised some cash in our portfolios. We did this because the data we are seeing suggests the prudent move was to try to protect the sizeable gains already made in our portfolios in February. Not because the data suggests the primary trend is about to turn down, because it does not suggest that.
We remain completely open to any eventuality that the markets bring. Our strategies, tactics and tools will help us to successfully navigate whatever happens as we focus on monitoring supply and demand signals that the market provides us.
I hope you are having a very good weekend. If you have any questions about this update, or anything else please do not hesitate to reach out.
Peter Schenk, CMT, CIM | Portfolio Manager
Words we operate by:
“Deliver to the world what you would buy if you were on the other end. There is huge pleasure in life to be obtained from getting deserved trust. The way to get it is to deliver what you would want to see if you were on the other end.”
“Strive not to be a success, but rather to be of value.”