Stocks that I hadn’t even heard of three months ago have topped the list of most active stocks for more than two months now.
…That is not where investors want to go. That’s where traders, or maybe even hobbyists, might go, but if you’re a wealthy investor, you have to avoid thinking that you’re missing out on huge returns in stocks that we know are stupid.
With the S&P 500 up more than 80% since hitting March lows, the fear of missing out (FOMO) has fueled buying by day traders such as those on the commission-free brokerage Robinhood. With mom and pop investors opening record numbers of new trading accounts, Wall Street pros are trying to figure out to what degree retail appetite has become a self-fulfilling prophecy in certain parts of the market and what risks it poses to the rally.
But just because day traders are a more frequent presence and don’t have professional training doesn’t mean they’re wrong. While expected earnings of their top picks may not always justify their surging stock prices, many retail investors are encouraged by the U.S. Federal Reserve’s stimulus measures and the economic bounce we’re enjoying as we come out of hibernation.
Besides, investing in any mutual fund manager’s favorite stock probably isn’t much safer than investing in any given meme stock anyway when you consider just how many “banana republic” type tricks we’re trying to get away with right now. We’re not even three months into the year, and the U.S. budget deficit — $1.017 trillion — is already larger than the total national debt incurred between 1776 and 1981.
The US debt-to-GDP ratio reached 135% in 2020 and is expected to reach 155% this year, which puts us right up in the ranks of economic powerhouses such as… Italy.
Good grief.
The Fed’s balance sheet is currently twice as big as anything that anybody has ever seen:
What I find more than a little troubling is that we have collectively decided to handle that debt by printing more money. In June 2020, we printed more money than in the first two centuries of our nation’s existence, which is one of those games known in such economic stalwart nations as Greece, Argentina or Zimbabwe as “debt monetization.” The Chinese have another name for it; they call it “currency debasement.” I call it “having my cake and eating it, too.”
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We’ve been emphasizing risk management for a few months now, and that’s not changing. However, it has become pretty clear that vaccines are an incredibly important factor in assessing economic growth prospects. It’s difficult to overstate their importance to the outlook for the US economy and financial markets.
Thanks in large part to the efficacy of the vaccines, we expect the economy to move closer to a full reopening over the next several months as the end of the pandemic approaches.
Plus, while there are lots of reasons to see the current accommodations being made by the federal government as problematic over the long term for the reasons described above, markets generally cheer stimulus, and I can trade with my pom poms as well as anybody. Interest rates may go a bit higher this year, and we expect that a vast majority of corporate earnings growth is already priced into the market, but for now, vaccines, federal policy and pom poms are directing traffic.
Our resulting counsel is to avoid chasing profits. These are times when it’s helpful to lean on your personal financial plan. Understand what would be enough, and manage your assets accordingly.
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Since the end of 2020, we have recommended that investors:
Broaden global exposure that focuses on company-specific opportunities rather than geographic beta-- especially in China.
Move down in market capitalization to seek exposure to secular growth themes while reducing the concentration and regulatory risk of current mega-cap growth companies.
Complement high quality core bonds with private credit for potentially attractive yield premiums and diversification benefits.
Invest sustainably through environmentally, socially, and economically aware strategies.
Still not deviating much from that. …If it ain’t broke, don’t fix it; just wave your pom poms, keep calm and chive on.
For disclosure information please visit: https://www.rgbarinvestmentgroup.com/terms-and-conditions
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