Has the eye of a Very Major Storm just passed?
Welcome back to Strategy Thoughts, and thank you to all the readers who contacted me wondering whether I was ever going to publish again. It was almost nine months ago that I last put out an edition of Strategy Thoughts, at that time markets had enjoyed a rebound from the pandemic stricken lows and hope, at least in investing circles, had rebounded dramatically with a New York Fed survey showing that a majority of Americans believed that the stock market would rise even if the real economy continued to sink. Well, they certainly got what they were hoping for and what I had felt was nothing more than a ‘Dead Cat Bounce’ turned into something quite historic.
Throughout the second half of last year, I felt writing a new Strategy Thoughts, just to reiterate the same message of caution and capital preservation, was pointless. I still believed that the 2020 rally would eventually be looked back upon as the end of a move, rather than the beginning of something meaningful, but did not feel that this view needed to be published again and again each month. However, now, with a number of vaccines being rolled out across much of the world, hope, and with it, expectations, have risen to historically dangerous levels and the need for caution once again needs to be reemphasised.
Those extreme expectations, the absurd idea that low interest rates guarantee higher stock prices and with them the idea that the dangerous levels of valuation seen currently are seemingly easy to brush aside, and the idea that somehow disasters such as the pandemic are in fact an economic positive due to the fiscal and monetary stimulus they pull out, will all be explored in this latest edition of Strategy Thoughts. There will be no change in my overriding conclusion, but hopefully these thoughts will prevent readers from getting swept up in the nonsense captured in this New Yorker cartoon from around 2001.
When the eye of a storm passes over it feels like the worst may be over as a calm settles in only for this seeming return of normalcy to be abruptly turned upside down when the other side of the storm rolls in with just as high winds, only from the opposite direction. The relative calm and normalcy of the second half of 2020 may be looked back upon as such a ‘calm’, and when the other ‘side’ of the storm hits it will be from a different direction. It is quite likely that the next downdraught in asset prices has already begun but it may well turn out to be quite different from that endured in the first quarter of last year.