Now What...
One thing that we can feel a little bit better about as we approach the anniversary of the start of this pandemic is that we have a better understanding of this particular virus. We have a fairly comprehensive understanding and a solid plan on how to get to the point of herd immunity.
It didn’t start out that way for sure, and the unknown was scarier than the known. Information came in and then was contradicted and then new information would appear and then that was contradicted and all this confusion led to what we saw in early March, a selloff in equity markets unrivaled in history in terms of speed.
Hindsight is always the best trading strategy. No one has ever lost money trading with hindsight. Unfortunately, it’s impossible. What hindsight does however give us is historical context. Events play out pretty much the same as they have multiple times before and specific patterns emerge relatively quickly. Technical analysis is based on this replication of patterns and can predict fairly accurately what will happen next.
Last March did not fall into any pattern recognizable at the time. It became a new pattern for technicians to use in case it happens again. Thats where hindsight and patterns diverge. This was a unique period of time where no amount of training or experience could have prepared you properly. It was that fairly long period of not knowing that made it so dangerous. No one really knew what the short term or long term impact of this virus was going to be. That lack of “knowing” is precisely why markets tanked and tanked with such speed. The last thing investors ever want to hear is “We just don’t know”. Companies published present day earnings but refused to forecast future earnings, be it three months out or longer. They just didn’t know the impact.
As frightening as that may have been, investors decided at some point to put risk back on and the market righted itself fairly quickly and we have seen that risk-on pattern for over ten months now and maybe, just maybe, it’s time to take another look at where the market is.
There are obviously some positives: An accommodative Fed. Several stimulus patterns that have supported a weak economy with one more on the way. China’s strength, which few want to acknowledge but that strength is imperative as far as a global recovery is concerned.
Then there are the negatives: We still have Covid and the associated costs (lives, lost wages and lockdowns that refuse to go away). A very mixed bag as far as job growth. Possible inflationary pressures that may create unwanted pressure on the Fed in the months to come. Lastly, my biggest pet peeve, the price-earnings multiples of most of the S&P are way ahead of where they should be in a recovery.
As usual, there are lot of cross currents and the markets usually respond to the strongest signs first.
That would be technology. From the very beginning, investors recognized the sectors that will have been least impacted by the many facets of the pandemic. Money has flowed into those sectors and even though earnings have been very good considering the economy, they are getting to a level where those comparisons with the late ‘90’s are inevitable. The dot com bubble needed to happen because of an overly enthusiastic investing public did not see the warning signs. Are we there again? I don’t think so, but I do think we are nearing a point of no return and we will need some sort of correction to realign markets with reality. Any corrective phase at this point will be healthy, and while initially painful to some, it should be welcomed by most. Without a correction, the market will once again get to that bubble bursting point and hindsight will again be the trade that never happened.