The Covid Bull market in stocks is sledding through the Holiday season as if every day were Christmas. Airbnb more than doubled on its opening day as a public company this month. Luminar, Snowflake, Lemonade and many more also doubled within hours of their initial public offering (IPO) price in recent weeks. The Renaissance IPO Index of new companies less than 2 years old shows that the race for the Gold is reaching extreme levels that will come back to earth when interest rates rise and liquidity shrinks as the economy opens up later in 2021. For the next 3 to 6 months however, an extended Christmas of easy money will continue making profligate insiders instant Billionaires at a record pace.
While the US leads in most categories, good and bad, neither Covid nor the instant rich are unique to America. The Japanese Nikkei Index just reached a 30 year high today due to its own massive stimulus and tethering of exports to the US.
With tech leading the way, the benchmark SP 500 Index and Nasdaq have rocketed 65% and 94% respectively from their lows since the Trillions of Fiscal stimulus and the Fed’s imagineering of money creation began in the Spring. As record setting as this Bull market has been, these indices have seen similar rapid gains in the past when exiting a major Recession. With record low interest rates elevating valuation multiples, plus the record liquidity added to the system, it would be logical for this rally phase to exceed all others in amplitude and velocity.
Bad news in the economy and the Virus are no match for the Fed’s digital printing press and Vaccine makers, as investors increasingly realize Good News and Bad News are both good news for stocks at this stage. More lockdowns, more Covid fatalities and a contracting economy have failed to dulcify the stock market as buyers realize bad news means more Santa Claus money for everyone. At the nadir of the mortgage bubble bust, it seemed that our Central Bank threw everything but the kitchen sink at the imploding econ0omy to avoid a 1930’s style Depression. Twelve years later our Fed almost tripled its liquidity injections over the same period to the delight of investors. An additional incentive to keep bidding up stock valuations is that the more the Global economic reopening is delayed, the more energized society will be with pent up demand when the world moves past the pandemic with excess balance sheet liquidity. While the official Santa Claus rally ends on January 5th, it may take an avalanche of bad news to bury this sleigh ride prior to the economy reaching the point of self-sustaining lift off.
With the next round of Stimulus locked in and nothing but increasingly positive vaccine news flooding the airwaves, investors continue buying the expected 2021 corporate earnings boom. Extreme overbought forward valuation metrics are also holding back many who wonder when they can invest their growing cash reserves at better prices. This relentless market rally will eventually lose its luster when the economy opens in the Spring, but the current record run in equities may not be as anomalous as it appears. In the context of previous Bull markets after major market corrections or Recessions, it’s typical to experience just over a year of non-stop upside without any ‘fear’ inducing corrections. The past several Bull markets in stocks were kicked off with 12 to 15 month runs to the upside before volatility returned and investor sentiment soured. In 2021 we will begin seeing the positive Corporate earnings comparisons to 2020 peak as the economy opens in the Spring and Summer. The timing of Covid vaccine inoculation coverage that will lift widespread economic restrictions and fear of movement will be a pivotal juncture when economic prosperity soars while stock market corrections deepen. Most of 2020 was about investing for the 2021 Sales explosion. In 2021 investors will begin positioning for the earnings plateau and credit tightening of 2022.
Business and leisure travel have been suppressed for 10 months and will continue to operate with 50 to 60% below normal activity until Q2. This one year pandemic anomaly with building cash reserves and net worth will convert to above normal economic activity when Covid free mobility returns. Air travel has rebounded to a still very depressed 60% below normal plateau the past several months and remains similarly repressed throughout Europe. Readers should note that even Germany’s vaunted track record against Covid vs rest of Europe is being tarnished with recent per capita fatality rates from the virus exceeding peak levels in the US. In fact almost every country in Europe has had higher per capita Covid deaths at their December peak than the US peak. US virus enforcement may be less unified than tiny European countries, but this malady is now afflicting most first world countries without bias.
Air travel in Europe is nearing the extreme March levels of Lockdown while the US will stay relatively more open. Yet the US is also a trending to stay at home habits during the winter Covid19 surge along with Government enforced business closings. The good news is that multiple vaccines appear to have broad spectrum immunity to Covid and its variants and will be in surplus quantities by Spring. The longer the viral winter of discontent lingers and the more that lockdowns suppress travel and leisure, the greater will be the outsized rebound when the reopening party kicks off in 2021. We expect significant labor shortages across the supply chain by this time next year.
The desire to travel again and socialize is building and the deep $1 Trillion excess savings pool will help fund the travel boom. Consumer net worth is already $6 Trillion ahead of “pre-pandemic” levels. Cheap credit, rapid employment and healthy wage growth will keep the fires burning through 2022. Should Biden gain control of the Senate with a double win in Georgia on January 5th, then the markets will have to elevate forward stock valuations again to reflect larger infrastructure and stimulus injections.
Our Buy the Dips mantra has become exceedingly difficult since the election as there have been no notable corrections from seemingly nosebleed altitudes for months. Even the deeper 10% September pullback was modest relative to the preceding rally. The market is valued richly and virtually all technical indicators we track indicate a market vulnerable to a 10%+ correction. However, our view is that stock market declines will remain sparse until the the Spring of 2021, waiting to “Sell the News” of economic reopening when fears of future credit restrictions arise. This doesn’t preclude a news shock such as: Covid variants that vaccines can’t stop, talk of premature tax hikes or other more exogenous occurrences. For now the stock market valuation crescendo is building. Tremendous tailwinds and a growing army of agitated investors anxious for ever smaller pullbacks to climb aboard Santa’s sleigh with their newly created Robin Hood bitcoins may continue to leave investors wanting.