Zooming To Booming

The pandemic forced us all to communicate via Zoom. While nobody wanted to attend a Christmas dinner or Passover seder on video, it was better than nothing. Thankfully, even though video communication is here to stay, vaccines are allowing us to return to normal. Meanwhile, the economy, now booming thanks to massive government stimulus and zero interest rates, should accelerate further in the near term as pent-up demand is unleashed.

Pedal to the Metal

Trillions of stimulus dollars have flooded into economies around the world. And it has stimulated beyond expectations. The global economy is flying. Economic stats in the U.S. are exhibiting record growth rates. Manufacturing and service sector expansion is surging. Commodity prices are soaring—industrial commodity prices have barely had down days since last July. Retail sales have spiked higher. Used car prices too. House inventories are at less than 2 months—a record low—and prices are up at a record year-over-year pace. Consumer confidence is at highs, despite the pandemic. There’s been record demand for mattresses and condoms—va va voom. And once everyone starts returning to the office, going to events, and vacationing, the economy should further strengthen.

The economic revival has returned corporate profit expectations to all-time highs too. Earnings per share results this quarter have exceeded expectations by a record level and forward guidance has been strong. Markets have taken note and stocks are at all-time highs. All this positive news caused speculation reminiscent of the dot-com bubble, though the frenzy isn’t as pronounced. The speculation now appears to be abating, with overdone stocks way off their highs. Even Zoom has declined about 50% from its high, though it’s still up 90% from its 52-week low.

Sentiment remains at the 100th percentile—most are bullish, which is bearish. Though sentiment has been unusually elevated since last November, an extremely long streak of such heightened investor optimism, one should not be complacent. Frenzies aren’t your friend. They always end with a separation of you and your money.

Despite a steep correction in high-flying stocks, overall market valuations in the U.S. are also at the 100th percentile of historical valuation levels. Therefore, the indexes are ahead of themselves and a sizable correction could occur at any time. Importantly though, underlying intrinsic value should continue to rise along with economic growth, especially while central banks’ policies remain highly supportive. Valuations should ultimately catch up.

Our preference now is to be fully invested in undervalued positions in our Growth accounts while being partially hedged by shorting U.S. stock market ETFs (or holding inverse ETFs in registered or long-only accounts). We normally reserve shorting for recessions or the rare occasions when prices fall below our TRIMTM line; however, with valuations and sentiment so elevated, we are comfortable maintaining hedges.