–Unthinkable events … the market sails right through
–Balancing changing politics, insurrection and asset allocation
–Potential flies in the ointment—Interest Rates, Taxes and Inflation
–The VIX provides a clue on market sentiment and direction
Protest, insurrection and the market
What is depicted in my opening image is civil disobedience, rightful protest to redress grievances. What we saw this past week in our nation’s capitol was pure and simple insurrection, a crime against the Constitution of the United States. Since the market has no moral compass and is only interested in profits and the making of money it did not miss a beat (up 400 Dow points on Wednesday) in the face of a disgusting attack by some aggrieved by the outcome of the November 2020 election. For some reason, all of the failed legal challenges alleging fraud, many adjudicated by Republican appointed justices, meant absolutely nothing to these people. I guess some people just do not want to be confused by verifiable facts.
Only one other time in the 244-year history of our republic did the outcome of an election result in violence, the election of Abraham Lincoln in 1859. That outcome was the Civil War. It is time to turn down the divisive rhetoric and work together to solve the many important problems we face as a nation.
The Market and The Mob
As I have said before you cannot let your political predilections get in the way of your investment policy. Just because you don’t like a political party or what they ostensibly stand for, not to invest or to sell based on those biases is not wise. Shocking and appalling as the events of the past week were, investment based on fear or bias generated by them is also ill-advised. On this count we have to hope we get through this period, coming out the other side as a better stronger country. MEANWHILE, THE MARKET DOESN’T CARE.
What it does care about is the generous amount of rocket fuel in the tank of the economy from the recent injections of stimulus via tax cuts, two rounds of COVID-19 stimulus (with another potential batch on the way). Not to mention one of the upsides of a Democratic Congress, the potential that they may get something positive done on our declining national infrastructure (more stimulus). Lest we forget, the Federal Reserve, is committed to keeping rates low until we begin to approach full employment (I think that number would look like about 3.5%).
On another front the savings rate in this country, which had been running at about 7.5%, ballooned to 33.7% in April. and now stands at 13.6%. (Statista) This is more fuel to make the economy and earnings in the second half of 2021 surprisingly strong. My bet is that the second half of 2021 is just the beginning of the positive surprises.
Flies in the ointment
–-Tax increases, probably coming but not this year and probably not as draconian in their amount or market impact as the punditry corps will warn.
–Higher interest rates, probably coming and initially welcomed as a sign of a much healthier economy than the ‘beginning of the end’ (as the market seers will opine).
–Inflation, will be worrisome in the beginning but will initially work as a positive because corporations will be gaining pricing power plus the replacement value of their assets will increase. In the end, inflation and higher interest rates will probably be the this secular bull market’s undoing.
I believe we are no where near the final curtain on the market but would urge those who believe their bond portfolio is a safe place to hide to please reconsider that notion. In a re-inflationary environment those bonds offer neither safety (unless they are very short maturities) nor do they provide inflation protection.
Market Sentiment and the VIX Index
I’ve spent a lot of time lately writing about market sentiment and various popular measures of sentiment. My conclusion has been we are not there yet , secular bull market euphoric type sentiment … not close.
The performance of the CBOE Volatility Index (VIX) offers a potential clues to the plausibility of my thought process where we might be on the sentiment continuum.
Over the past two decades the VIX index has resided during periods of complacency, lack of real concern about stocks and the market in the 11 or twelve range. With the index in this area (and it can remain in this area for a long time) market performance can be quite good. However, the investor is essentially being set up for the next negative or shaky market.
In periods of extreme stress this index can easily register in the 80s. There were two times in the last twenty years the VIX spiked to 85, October 2008 and March 2020. Both marked extraordinary long-term buying opportunities. Even thought we would not hit the ultimate bottom until March 2000. If you had bought into that panic in October ’08, just buying the S&P 500, you would have easily tripled your money in the next 12 years. These were true ‘blood in the streets’ fear events. Right now, even with the market making new highs daily, the skepticism continues so high that the VIX is nowhere near the 11-12 range. In fact, it still has not been able to breech 20 on the downside (closed 21.56—-01/08/2021).
The moral of this story: next time you see a 70 or 80 handle on the VIX, it might be a good time to come up out your bunker and buy something.
What is your take?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.