So far, 2021 isn’t having as much strength or conviction in the stock market as I would have thought or even hoped. As of close yesterday, the S&P5001 is only slightly above break-even on the year at just under 1%. And while the index started out relatively strong and was up around 2.8% at one point, it didn’t take much to give back what little gains had been made (FastTrack data).
As we mentioned last month, the valuation of the stock market measured by the Shiller PE Ratio is still uncomfortably high. It’s far too early to be calling a top in the stock market, but I can’t help but think we’re getting close. Or at least will be pushing the boundaries over the next few months or quarters.
The buzz I’m seeing this past month is the suggestion that the next “bubble” to burst will be debt. There is no doubt that everything from Student Loans, to Auto Loans, to Home Equity Loans are all being stretched to their limits and have the potential to set up bigger problems across the economy.
In addition, we’re now seeing euphoric activity in stocks from individual investors (looking at you Reddit and Robinhood). The activity in a few specific stocks that I won’t name here is feeling a bit too much like 1999: excessive excitement over investments that really aren’t worth much of anything at all. We’ve seen this before and know how it can end. Spoiler alert: it isn’t pretty.
Going global – one shift we are seeing is that stock market valuations around the world are, in several cases, less over-valued than the U.S. domestic markets. Will and I both have been researching where those opportunities exist and how we can shift our models into those areas. You’ll likely see more exposure to global funds and stocks in your account in the coming months to reflect those findings.
Volatility is back! This month’s chart shows the VIX (Volatility) Index, and we can see that it spiked back up into the high 30’s (green line). The last few times it spiked like that, it corresponded with market pull-backs of around -7.5% (in June, September, and October – some more and some less). So far, the pull-back off of the January high has been around 2.5%, so it is possible that the market could continue to go down for the next few days and into early February. But if volatility is short-lived, then we could see the market rebound into February. At this point, it’s anybody’s guess.
Bonds – the bond markets started off the year in negative territory and can’t quite seem to go positive. The Aggregate Bond Index AGG is down -0.63% Year-to-Date (FastTrack Data). So far, bonds haven’t been a good diversifier or risk-off asset that they normally can be, but they also aren’t falling apart. So, for now, there doesn’t appear to be much to be concerned about. But after last March’s craziness in the bond markets, we do watch this market much closer than we did before.
What We’ve Been Doing in Our Models – we’ve been backing out of the market and reducing our allocations, expecting the drop we’re now (finally) seeing in the last week of January. However, we were able to grab a piece of the Inauguration Day bump that only lasted a couple of days. Now we’re looking at where we can improve our allocation holdings when the next buy signal occurs. That could be as early as next week – which is what we are hoping for.
I hope your 2021 is off to a great start!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.