Rising unemployment, a public health crisis, slowdown in economic activity, mayhem amid widespread civil protest (Black Life Matters & US Capitol Attack) AND a stock market that marches higher in 2020.
Stock market is not the economy and this divergence makes sense for several reasons. Stock market investors are forward-looking, and they were buying with an anticipation of better days ahead. Also, with central banks coming into action, unleashing colossal amounts of monetary stimulus and a series of interest rate cuts, together with Congress providing huge fiscal stimulus in the form of trillions of dollars in Stimulus checks and forgivable loans to business, propelled markets to all-time highs.
At the current juncture, there are several factors that are at play in the background of the change in administration, the continuing pandemic, as well as the frenzy of retail investors. The direction of the market shall be influenced by one or more of the below-mentioned factors coming into play.
Positives for the market
This factor is probably the most important. The Fed indicated that it sees enough danger in the economy that will force them to keep the Fed Funds rate near zero for the foreseeable future, perhaps all the way till 2024. They have indicated that even if inflation rates rise above their stated targets modestly (which is 2%), they will continue with their interest rate and monetary stimulus policies. This liquidity is a very big factor that could drive markets.
The new administration (under President Biden) has indicated that they will do all they can to help revive the US economy. Currently, the new administration is pushing hard to pass that $1.9 trillion stimulus to tackle the economic fallout from the pandemic.
Other policies championed by the administration, such as a big infrastructure spending plan and legalizing 15 million illegal aliens, if enacted, would be a boon for the economy and should be considered fiscally stimulatory.
The world is innovating faster and faster and the US continues to be leading the pack. This is indicated by the rush of innovative companies from around the world, including those from China, looking to list in the US markets.
Professional investors are underweight
Professional money managers have been skeptical ever since the relentless rally started in March of 2020 and have been underweight in the market. According to a recent note from JP Morgan, institutional equity positioning is still at 30% of 15-year average. This is a bullish contrary indicator which says that FOMO (fear of missing out) can drive markets higher.
Negatives for the market
Higher Taxes/Newer Taxes and more regulations
Expect higher individual and corporate taxes to be enacted and a lot of pushback against big tech paying hardly any taxes by using loopholes. There is also talk of newer ways of raising capital such as a wealth tax/transaction tax on trading/inheritance tax/carbon tax and a slew of new regulations etc. The success of these measures depends on how well the liberal wing of the Democratic party is able to assert itself.
Risk of normalcy being delayed
Current consensus is that the economy will be back to near normal by late spring and would be humming briskly by summer. Delays in vaccine distribution and the emergency of vaccine resistant mutations of the virus may delay normalcy by many months.
The world continues to be a dangerous place and conflicts around the world, particularly relating to US/China rivalry or nuclear developments in other hot spots can shock the market at any time. However, the Biden administration is re-engaging with the world leaders to cooldown the situation.
As noted, the markets are highly valued by many historical yardsticks though much of it is explained by low interest rates as well as fiscal and monetary stimulus in play. Any Fed policy moves to tighten or failure to enact projected fiscal stimulus measures will have a deleterious effect on the market.
“Tomorrow Ready” Thematic ideas
By many measures, the US market is overheated, so we do expect a correction sometime this year, perhaps in the first quarter. However, we do expect the markets to close out the year decently higher than where we are at the time of this writing (end January).
For sustainable long-term performance, we need to identify the themes of tomorrow, not the winners of yesterday. Identifying the right theme, and avoiding the wrong ones, is key to getting an Alpha over the markets. Some of these themes are quite inevitable and unique, which are available in the US markets. The route of Global Investments allows for domestic investors to explore these ideas and benefit from their long-term growth story.
The second step is to identify the stocks that are most aligned to these themes. With over 7000 listed shares, and over 1500 ETFs to choose from, this task is extremely important so that we can filter our winners further.
Our framework for theme selection and creation of investment portfolios is based on this principal.
Please see our article on the themes we have selected for Global investing.
In our subsequent article, we will identify a few more themes, focused on what is happening on the ground at present, including “return to normalcy”, “Democratization of power”, and “Genomics and Robotics”.
About the Author:
Mr. Sarkar serves as Chief Executive Officer and Portfolio Manager of Sumit Capital LLC. Founded in 2010, Sumit Capital is a New York based registered investment advisor. Prior to founding Sumit Capital, Mr. Sarkar spent 25 years as principal portfolio manager for two major Wall Street firms – From 1995-2010, he was a Managing Director and Founder of the Matched Book Arbitrage Group at Deutsche Bank, an equity proprietary trading business with offices in New York and London. From 1990-1995 he formed and led an Equity proprietary trading group called Equitech at Credit Suisse. In these positions at CS and DB, he developed a unique thematic style of trading and personally managed multibillion $ annual AUM portfolios deployed in long / short books. His annualized net returns were in excess of 25% and his team had no down years and this includes the market crash years of 2000 and 2008. Prior to Credit Suisse, Mr. Sarkar held various research and programming roles for over five years with Solomon Brothers, Merrill Lynch and Lehman Brothers. He has an MBA from the University of Iowa’s Tippie School of Management and a BTech from IIT (BHU), Varanasi, India. We believe Mr. Sarkar brings an extensive understanding of finance and wide range of experience.
Over the past 8-years in the Indian financial markets, Kumar has developed an intrinsic understanding of different asset classes and built an excellent product knowledge by working for top wealth management firms like Motilal Oswal and IIFL Wealth. He was a core member of the team that created the processes that were used for fund selection in both these previous organizations and is now working to bring the same level of research and advisory to financial advisors.
Fintso is an open architecture fintech ecosystem that brings together financial advisors, financial product manufacturers and vertical aggregators. With the aim of democratizing wealth management through existing unorganized players, Fintso provides a white labelled platform-as-a-service for financial advisors to operate their business of serving their investors and grow their brand and identity. Staying abreast of the best mutual fund distributor software in India and the best financial adviser back office systems are earnestly needed along with keeping a track of the best wealth management software, which is where Fintso comes in handy, as a platform extending the best of everything. The platform also provides multi-product transaction execution capabilities along with proprietary research and advisory to financial advisors. Acting as a demand aggregator for asset managers and a means to become omnichannel and connect to a physical distribution network for online-only vertical fintech aggregators, Fintso is enabling them to reach wider audiences.