Happy New Year! It was an unusually uneventful final week of 2020. The Broad Market Index was up 1.43% last week and only 31% of stocks out-performed the index. In short, very low volatility with only two companies reporting financial statements. It was an equally frustrating month of December as day-after-day of unusually low volatility made it difficult to execute trades at depressed share prices.
Q3 2020 hedge fund letters, conferences and more
If you still had a long list of pending trades at the end of 2020 and were faced with the decision to pay-up or cancel. Then it is useful to observe that long treasury bond prices were down 1.5% in December and stocks were up 2.5% in the month. This strength in stocks vs bonds has been underway since the vaccine breakthrough was announced and indicates extraordinary optimism about an imminent and rapid recovery in corporate growth.
We have been lulled into a dangerous complacency by now with 12 years of round-after-round of massive money-printing by global central banks. As discussed in previous blogs this has the effect of increasing the value of assets and decreasing volatility. The central bankers have blown an enormous asset-price bubble. From here, we contemplate three recovery scenarios for 2021.
2021 Market Recovery Scenario 1 - Goldilocks
First, corporate growth continues to fall and the central bankers will be called on to create a new round of $Trillions. There is currently financial statement evidence of this scenario. However, this is the goldilocks scenario and suggest that the bubble will not burst and stocks will remain extended relative to bonds.
2021 Market Recovery Scenario 2 - Pie-in-the-Sky
Second, corporate growth recovers with sales growth broadly rising but at a moderate enough pace that interest rates will remain at all-time lows through the recovery period. This is the pie-in-the-sky scenario and appears to be most consistent with recent stock-market strength and the highest valuation of stocks ever.
2021 Market Recovery Scenario 3 - Inflation
Third, the trade disruptions and damage to aggregate demand done by 4 years of global policy disaster and the virus will result in inflation as growth recovers. This inflation scenario is the most dangerous and according the financial theory is the more likely. Capital markets will fall as higher inflation and higher interest rates depress valuation and increase risk.
Result will be higher volatility
Regardless, we should expect lower share prices and higher market volatility as evidence of the strength and shape of the recovery evolves over the coming quarters.
Keep a large cash position and sell all your stocks of falling growth companies with extended share prices. It will be an exciting and volatile year. We will want a bit of cash to exploit opportunities so stay tuned.
Otos Inc. makes it possible to make an active decision on every stock, industry, sector or style in your portfolio.
www.Otos.io has the technology to monitor the evolving condition of the US financial markets more effectively than ever before. The 2021 New Year will bring challenges and opportunities to make active decisions on every stock, industry, sector or style in your portfolio. We at Otos are committed to making it all fun and profitable.
The more stable the pot appears, the better the attributes. Green and gold are good. Red is bad and the more intense the red the more urgent the call to action.
