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Markets are Frothy

Here's an interesting juxtaposition. There are currently just over 25 Million Currently Infected Patients of Covid-19, with 2.4 million deaths*. However,

The point is, main street continues to grapple with the Coronavirus. However, if you were looking at the financial markets, you would've thought we were in one of the largest economic expansions in history.

Warren Buffet's favourite indicator is signalling mania

So much so, Warren Buffet's favourite indicator is flashing signs of mania. Currently, the U.S equity market cap is more than double the GDP of the United States. The last time this happened was during the bubble of the 2000s.

That is a long, convoluted, and somewhat poor segue to the main point of this article. A lot has happened in the past couple of days, with many asset classes at significant highs during one of the worst pandemics in history – here's an article to summarize them.

Pound Has Broken 1.39 Against The U.S Dollar

GBP/USD breaks 1.39, eyeing up 1.40 and beyond

As vaccinations pick up in the United Kingdom, alongside lockdown restrictions starting to show results in lower cases and deaths, investors have been flocking the pound as optimism for the United Kingdom's economy. It is important to note that 1.45 was the bid before Brexit was announced in 2015, making it a ripe target for bulls to take.

United Kingdom's decision not to join the European Union's vaccine effort has helped them attain a high vaccination distribution rate
Cases are way down from all-time highs

Vaccines have played a considerable part in the strengthening in confidence in the United Kingdom, helped by the fact that they did not join the European Union's vaccine effort. This enabled them to approve and administer vaccines at a faster rate than their European counterparts.

Brent Crude is at $63 a barrel

Nearing the same time last year, we had an unprecedented event occur – traders saw the price of WTI Crude Oil on their terminals go negative. A year of supply cuts, recovering demand, and recently a rise in tensions in the middle east has pushed the black Gold back to pre-pandemic levels.

Bitcoin flirting with $50,000

Bitcoin's volatility is less than it was in 2017, making its insane rise in value less intimidating

After an influx of institutional attention dawning upon the digital currency, including the likes from Mastercard, JP Morgan, Morgan Stanley, and of course, Tesla, Bitcoin has reunited with bulls taking the price up to just under $50,000 per Bitcoin. To note, Around the end of November last year, we saw Bitcoin at around $20,000.

Stocks are at all-time highs

S&P 500 at all time highs

The S&P 500 has closed at an all-time high, touching 3,950 in futures trading. The index is up 7% year to date. If we lived in an ordinary world, all-time highs in the equity markets would be the headline of the day.

However, it seems like stocks are too boring nowadays, and everyone wants to know which altcoin is next to return 1000x. However, many companies in the index are producing blowout or at least better than expected earnings. Considering the macro-environment we are currently living in, is quite an achievement.

Gold doing its job as a safe-haven asset

I had concerns about the notion that investors were considering Gold's valuation – not something you want to be talked about in a safe-haven asset. I believe a safe-haven asset should be there to ballast your portfolio in times of risk-off periods, meaning investors should be able to flock to it / rely on it to hold their portfolio in steady shape.

Gold's steady decline eases my concerns, with Gold trading at around $1,816 an ounce, way off its $2,000 highs. We can see a continuation of the trend should see prices around the $1,700 - $1,750 level.

Markets are frothy – stay safe, and trade safe.

*For you tinfoil hats-wearers out there, I will entertain you by including the fact that there are up to 650,000 deaths due to the flu each year. Take that what you will

NADSAQ Hits 14,000

The NASDAQ hit a legendary milestone, touching 14,000 as vaccines pump optimism in the markets.

89% From The March Low's In 2020.

NASDAQ Has Become The Defensive Trade

Investors were looking for a defensive asset in a low-interest-rate environment that can appreciate risk-off environments amidst the Coronavirus Pandemic. Investors found that in tech stocks, they showed their ability to generate pure cashflow during the Pandemic's peak.

Stocks like Facebook, Google, Netflix, and Amazon were able to continue to beat estimates while the bulk of the world was in lockdown. This became an overcrowded and popular trade amongst institutions and many retail traders. However, many are questioning whether they still justify the hefty premiums they gained during the global lockdown. Facebook currently trades at 26 times earnings, Google at 35.5x, Netflix at an astonishing 91.5x earnings, and Amazon at 78x earnings.

NASDAQ Will Get A Further Boost On Stimulus

With the Federal Reserve continuing their $120 Billion buyback scheme, investors are now looking at the progress of President Joe Biden's $1.9 Trillion Stimulus Plan, bolstering the growth in the U.S labour market and the U.S economy. Matthias Scheiber, global head of portfolio management at Wells Fargo, stated that equities were driven by accommodative monetary policies and optimism on fiscal stimulus. However, analysts warn that this stimulus bill will have to be paid somehow, which will likely come from a higher corporate tax rate.

Luca Paolini, Chief Strategist at Pictet Asset Management, stated that "With the additional risks of corporate taxation, not only in the U.S but also in Europe like the U.K – there is a debate about raising corporate tax. So, for the next year, I think the riise in earnings will be much more moderate".

With all this euphoria in Wall Street, Main Street continues to suffer. While down from its all-time highs, daily new and the seven-day average cases are still over 100,00 in the United States, crippled by the lack of infrastructure regarding the rollout in vaccines in the United States.

Crypto, Oil & Stocks Hit All-Time Highs

The headline says it all – market euphoria has reached an all-time high. However, given the events that have occurred in 2020, it feels like it is just another day at the office. For the most part, it is.

Bitcoin Reaches All-Time Highs

Bitcoin Licking $44,000

Bitcoin reached an all-time high earlier in the U.S Trading session, touching $43,000. This is primarily due to Tesla CEO, Elon Musk, revealing in an SEC filing that they had purchased over $1.5 Billion in Bitcoin in January.

They stated that they invested “To further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity” - or in other words, a bet on Bitcoin using cash not required to run the business. They also stated that they “expect to begin accepting bitcoin as a form of payment for our products in the near future.”

Musk x Dogecoin - All-Time Highs

Elon Musk Continues To Talk About Dogecoin
Elon Tweeted This Photo About Dogecoin

This interest in cryptocurrencies does not just stick to Bitcoin. The meme currency Dogecoin has returned to all-time high levels at around 8 cents after many celebrities like Snoop Dog and, of course, Elon Musk, continue to talk about the currency.

Like I wrote in my previous article, it was relatively common for people to hold hundreds of thousands, if not millions, of Dogecoins in 2014. Assuming those people held them till now, we would have miners and investors with life-changing wealth – all from a meme currency.

Oil Back At Pre-Pandemic Levels

Brent Crude Back To Pre-Pandemic Levels

In the commodity markets, Oil has made a legendary comeback. Brent Crude topped $60 as vaccines, and unexpected Saudi cuts have made tailwinds for the Black Gold.

However, some analysts are concerned about the quick rise in price, stating that further tension between Russia and Saudi may ensue due to the higher prices. The last time Russia was not on board with OPEC, prices plummeted below $30 a barrel. Brent currently sits at around $60.60 a barrel.

Equity Markets At All-Time High

S&P 500 In Orange, NASDAQ in Blue, Dow Jones in Teal - All Positive Year-to-Date

Equity markets saw a breath of fresh air, with the Dow Jones, S&P 500, and the NASDAQ up over 0.4%. Stimulus positivity, alongside vaccination numbers, boost the possibility of a strong fiscal 2021.

John Stoltzfus, Chief Investment Strategist at Oppenheimer, stated, “as people feel safer, investors can expect the economy to experience a rebound that should contribute to revenue and earnings growth as the economy reflates.”

At such inflated valuations in many asset classes, investors and traders should be ready for a sudden pullback on any negative sentiment.

Stocks coming into 2021 – Boom or Bust?

Here are a couple of fun facts from equities in 2020.

· The NASDAQ returned 46% from the start of 2020. If you purchased at the peak of the recessionary period in mid-March, you would've made a return on investment of 85%.
· Meanwhile, the S&P500 only returned 17% from the start of 2020.
· The average price/earnings ratio for stocks in the NASDAQ was pushing 23
· The best performing stock that is in the S&P 500 and NASDAQ was Tesla, providing a 743% Return.

With that in mind, what are we expecting for stocks coming into 2021?

Stock Euphoria is at an all-time high

NASDAQ in the Candles, S&P500 in the Orange

I expect institutional investors (and retailer traders) to take significant money off the table this year if they haven't already. Given that there was a laggard inflow in capital to US equities in the latter part of 2020 trying to catch the bull run, I expect those inflows to take profit if equities tick up in the earlier part of this year.

With that said, I believe euphoria in inequities will continue to rise as the hunt for yield is expected to get more difficult as nations worldwide are predicted to cut rates to take advantage of the economic recovery. Furthermore, lower interest rates significantly affect discount rates for models institutional investors use, favoring equities with longer-dated cash flows – usually associated with value stocks such as banks and telecommunication companies.

Popular stocks that makeup indices are relatively overpriced

When Tesla entered the S&P 500, it had to be indexed in stages because it's market cap was so large. However, it is equities like Tesla which retailer traders have been inflating. Popular names such as Zoom, Netflix, or any essential "work from home "stock has passed the eyes of retail investors, with eye-watering price/earnings multiples. Netflix continues to trade at an 80x multiple, Zoom at a 274x multiple, and Tesla at an absurd 1,673x multiple.

The issue with overpriced equities is that their influence on the indices' fluctuations rise as their market cap increases. With the NASDAQ and the S&P 500 based on the companies' market caps in the indexes, investors in ETFs that track these indices are getting heavily weighted to tracking the large companies in them. With companies such as Tesla being prone to wild swings due to its overprice valuation, anyone holding the S&P 500 will also be prone to the wild swings.

With that said, Goldman Sachs analysts are telling investors to buy stocks on any market weakness, with Peter Oppenheimer saying that the market is in the early stages of a bull phase. "The market is rising on good news but choosing to largely ignore weaker data and rising infection rates."

Global equities may be more favorable

With extremely low interest rates in the US, which is predicted not to increase anytime in the future, paired with the Coronavirus situation in the United States, large institutions may be wanting to look elsewhere for value – specifically in places where the Coronavirus has been controlled. I believe banks in Australia will benefit from this thesis, as not only are they the parent of New Zealand banks whos economic outlook is looking far better than many other nations in the world, but they also are in an economic environment that is similar to that of New Zealand, Barr a couple of setbacks due to Coronavirus flareups.

I believe we will see another substantial year in equities due to positive sentiment, paired with a recovering economy.

Nothing can scare off Investors.

It has been 15 days into the new year, but it feels like a year’s worth of events has already occurred. Most notably:

Strip what happened in 2020 out of the question, and this would be run a racket on the equity markets. However, it seems like nothing can scare off investors in this day in age.

Equity Markets in the United States continues to edge higher, with the Dow Jones and the S&P 500 up 0.1%, with the NASDAQ saying as is. European equities too end slightly higher, with the DAX 30 edging up 0.4%. With turmoil continuing to disrupt the world, why are investors continuing to plow money into equities?

Interest rates providing no real yield

With the Federal Reserve stating that they “are not even thinking about thinking about raising rates,” alongside the introduction of their new tool of letting inflation run higher than their mandate portrays that low yields are here for the foreseeable future. The time to raise rates “is no time soon,” Powell states.

Federal Reserve's Interest Rate

This has forced many managers to search for yield across equity markets. However, this can’t be the only reason, as real yield has been low for the past couple of years, even before the Coronavirus. Mario Draghi, former ECB President, was known for saying that “for rates to be higher in the future, they need to be low today.”

S&P 500 in Blue, Dow Jones in Teal, NASDAQ in Orange

Specific equity markets make sound investments.

Many companies continue to thrive even amidst the Coronavirus, notably technology firms such as Salesforce, Facebook, and Slack, alongside retailers such as Walmart and Amazon. Their current price premium reflects their ability to generate free cash flow in recessionary periods. Today, value equities in the industrial, financial, and energy sectors led the edge higher today.

The word “reflation” has recently been the buzzword as of late, providing an extra boost to equities. Scott Knapp, chief market strategist of CUNA Mutual Group, stated that “everybody acknowledges the high valuations, but most people say yes – but the stimulus?”. He further continues stating that “Markets are anticipating that reflation is under way.” Reflation may help the backbone of the US Economy, the consumer, to thrive once again and pull the US economy out of the slumps.

Investors mindset of “things should get better eventually, right?”

Motley Fool, an advocate for long-term, stock-picking mantra, believes that “time in the market, is better than timing the market,” alongside the belief that profitable businesses with high valuations should still be invested in. With a massive influx of retail investors, it would not be surprising that many of them share the same mentality.

Are you plowing your money into stocks?

Dow reaches 30,000 as equity euphoria heightens

A combination of positive vaccine news, political certainty regarding the next President, and positive data coming from the United States edged equities to all-time highs.

The Dow Jones is sitting just above that coveted 30,000 level, which makes it up year to date by 4%.  The S&P 500 is up around 11.6% for the year, with the NASDAQ up an impressive 36%.

Dow Jones in Blue, S&P 500 in Orange, NASDAQ in Teal

Equity markets aren't the only markets benefiting from positive sentiment. Oil prices have reached an eight-month high, with Crude and Brent touching $46 and $48 a barrel, respectively.

Vaccine woes pushing markets higher

One of the main factors that help push equities higher was the consistent positive vaccine news in the past couple of weeks. AstraZeneca yesterday stated that its Coronavirus vaccine's large stage trials were "highly effective" in preventing the Coronavirus. Professor Andrew Pollard, the Chief Investigator for the AstraZeneca trial, stated that "[the results] show that we have an effective vaccine that will save many lives. Excitingly that one of our dosing regimes may be around 90% effective." This is after Pfizer and Moderna reporting vaccines that have 95% efficacy.

Political stability also pushing markets higher

Furthermore, there are signs that Trump is starting to accept his defeat for a second term. Markets have interpreted this as a soothing in political volatility. President Donald Trump has stated that it is "in the best interest of the country" to begin the transition to Joe Biden's future government and instructed officials to "do what needs to be done." However, Trump has still not conceded. President-Elect Joe Biden has started to assemble his government, with his latest pick, Janet Yellen, for Treasury Secretary.

Positive PMI's pushing markets higher

Lastly, Manufacturing and Services PMI's were better than expected at 56.7 and 57.7 with a market expectation of 53 and 55.3, respectively.

Investors and Traders will be looking forward to the FOMC minutes for guidance on the Federal Reserve's opinion for the future of the American economy.

Risk off as markets plunge

Markets sold off as risk-off sentiment continue to seep into investors and traders' heads.

Dow Jones in Orange, S&P 500 in Blue, NASDAQ in Red, Brent Crude in Teal

The largest move downward was in the Oil markets, where Brent Crude and WTI were down 7 and 8% respectively, fearing that the demand recovery as stalled. The Summer Holiday in the United States, primarily associated with peak demand in Oil, currently marked its close on the Labour Day Holiday.

Stephen Schork, the editor of the oil market newsletter The Schork Report, highlighted that "demand recovery at this point is certainly done" and that the "entire oil complex is under threat right now."

As suppliers slowly bring back their supply to the oil markets alongside demand tethering off, the weak fundamentals play into any risk-off sentiment the needs may have. IHG Markit analysts, Roger Diwan, stated that "The weak state of fundamentals and the lack of any catalyst improvement in the near term are resetting price expectations."

However, it wasn't just the oil markets that sold off. US equities had a deep day in the red, with the NASDAQ down 3.67%, with the Dow Jones and S&P 500 down 1.68% and 2.16%, respectively.

Risk-off continues in the equity markets

As expected, tech stocks being the highest growers, were also the fastest fallers. The question arises whether the current situation is a healthy pullback or a continuing trend. Tom Essaye, a former Merril Lynch trader, stated that "some froth has come off the market, which is a good thing, but keep in mind we still remain well over levels that could be considered as "fair value" in stocks.."

This pullback in the markets comes at a turbulent time politically and economically. Amidst the pandemic, Brexit talks have continued. US-China tensions are heating up again, China Hong Kong relations are heating up again. Elections are not in months – they're in weeks. Federal Reserve continues to pump liquidity into the markets. It is interesting to note there is not much movement in Gold, suggesting that the sell off may be due to profit taking, not pure risk off sentiment.

What was interesting about today's sell-off is that if you re-read the text before this, you will see no fundamental change/data released to suggest a sell-off. Whatever the actual reason is, be it options traders unwinding their positions, or general profit-taking, stick to your analysis and don't get swayed by a swing in price during a turbulent period – as it is to be expected. Remember, volatility goes both ways. If you're a trader, you may want to sit this period out or take the time to backtest your strategies. If you're an investor, you may want to buy the dip as your analysis shouldn't have changed today just because of the sell-off.

Trade safe!

Pullback in risk on – and that’s a good thing

De-risk! The market pulled back today on expensive tech stocks, overstretched valuations, with investors questions whether the stock market still has legs.

Broad Pullback

Steep valuations forcing a pullback

The FAANG stocks took the biggest hits as investors start to question their lofty valuations. Facebook and Apple are currently trading at 37 times price to earnings, with tech companies such as Salesforce and Zoom trading over 100 times their valuation. However, some consider this a healthy thing for the markets. Alec Young, chief investment officer at Tactical Alpha LLC, stated that “Frankly, the deeper the pullback in tech, the healthier it is for the overall market.” He further noted that the “market was overbought; too many people chased the tech names. It is all Healthy; the valuations have been stretched.”

U.S Dollar seeing gains on a pullback

The U.S dollar is set to record a weekly gain after a near ten-week downwards spiral for the greenback. However, with the Federal reserve continuing to pump liquidity into the markets, there are still plenty of headwinds against the U.S Dollar.

Take advantage of the pullback.

If you are an investor, try not to look at your investments to prevent any impulsive actions. Use this opportunity to buy your favorite stock for cheaper. Remember, this is a marathon, not a sprint.

Your stock market app? Delete it

Outside of work and trading, I believe everyone should have a stock/asset investment portfolio working for them.

However, we all are swayed by what we hear and what we watch.

If you're an investor, you're probably guilty of doing something similar – waking up, checking Facebook who knows you're an investor and gives you an article from CNBC saying that either

Either way, you check your portfolio. And on good days, you're like, "So why didn't Citi hire me?" However, on bad days you contemplate your decision to purchase said stock, and you think of all the cons in buying the stock. "Oh, they were overvalued, Goldman put a sell rating on it" etc. etc. However, the chances are that it is just your emotion getting to you.

I believe the whole point of owning assets is that it works for you. By looking at the returns daily, you get into this mindset that you're working for your investments – getting stressed when it goes down, wondering whether to sell when it hits all-time highs. An excellent way to alleviate this issue? Delete the app. Remove the tickers off your Stocks app. You invest in the business, and the only time you should consider divesting in your assets is if the business changes from your original thesis. Here is a couple of reasons why you should "Delete the app."

Apps like Robinhood have made stock investing easier by presenting it almost like a video game

Stock works best when left alone

1. In the short run, the market is a voting machine. But in the long run, it is a weighing machine. – Benjamin Graham

In the short run, a stock price reacts to technical factors, news, and irrational behaviors by investors. Take the Coronavirus pandemic, for example – risk assets sold off, even tech equities. However, as seen by many of their Q2 earnings, they weren't so effected at all. Comparing the pandemic to daily market moves is a stark contrast to what happens most of the time. However, it helps highlight the benefit of not having access to your portfolio's returns daily – you're not swayed by the change in the price daily. You should only be swayed by a change the original thesis you put on the business

2. Reduces your stress

This flows from the first point. By not being exposed to the green/red text, you can go on with your day without stressing whether your investment is a good one. Remember, time is your best friend. Time in the market is better than timing the market.

3. The most important – buy not looking at it every day, the assets work for you!

This last point (and this whole article) hinges that you invest in good businesses in the conventional sense and not wildly speculating on the stock price.

If we compare, for example, stocks to houses. It would be crazy to get your rental property valued every day So why should you do the same for stocks? If you believe in the company you invested in, you should have no problems letting it run along as normal. If you cannot comfortably let the investment sit and generate capital gains, you may want to re-evaluate

With all that said, investing may be scary for many. And that's not to say I am a perfect example either. Especially with my job, it is hard for me to ignore what is happening with my portfolio. However, I try my best to – and it starts with deleting the app.

QQQ x GLD – The perfect portfolio?

Take a look at this chart:

Gold in Blue, NASDAQ in Yellow. For reference, QQQ refers to a well-known NASDAQ ETF, and GLD refers to a well-known Gold ETF

If we ignore the dip during the peak of the Coronavirus lockdowns, both have experienced high double-digit returns for the year. The NASDAQ and Gold have returned around 30% Year to date – and it is only mid-August. For reference, the NASDAQ returned 37% in 2019 – and that was before the pandemic.

There has been this interesting correlation between Gold and Equities recently, with both rallying in risk on situations. To explain this, we should look at the principles behind the 60/40 stock and bond portfolios.

Old fashioned 60/40 stock and bond portfolio lagging behind

The fundamental premise behind a 60/40 stock and bond portfolio is that bonds are supposed to be the ballast for stock when they dive. Stocks retract in risk-off scenarios, demand for safe assets such as bond increase. However, with real interest rates at 0% or lower, yield in bonds has matched the return in holding straight cash – even falling behind with real negative yields.

However, recently we have seen that both Gold and Equities have been rallying in unison – with a pullback in stocks further pushes higher.

There has been a saying that diversification is the closest to “having your cake and eating it too” in investing. However, with the Coronavirus pandemic and current macro environment, this may be your best shot in hedging your portfolio while maintaining strong equity-like returns.

Is Gold a safe haven or a bullish bet in a portfolio?

We’ll take a look at the first half of the equation: Gold.

Two things have been fueling a push higher in Gold. First, many investors and traders believe that Gold is a safe haven with no actual fundamental basis. They think that Gold will rally when there are risk-off periods in the market. Therefore, inflows in gold increase when equities dip.

Secondly, many investors believe Gold is a good investment when inflation and bond yields are low. This is because they think that they may attain higher returns from Gold while retaining that “safe haven” status bonds have. Furthermore, there has been a historical correlation between a weaker dollar and a stronger price in Gold. Therefore, there have been constant inflows throughout the year as the dollar weakens, and inflation comes into question. We can see that inflation-protection trade in the lower bond yields for Treasury Inflation-Protected Securities (TIPS) – with the Barclays 1-10 year TIPS ETF up around 5.6% year to date.

Barclays 1-10 Year TIPS ETF gaining traction

NASDAQ being a staple in many portfolios

Now we have the NASDAQ. There is nothing new with the NASDAQ trade. FANG has dominated the rise in the Index, with everyone staying at home and using their services. It is important to note that Facebook and Google are operating using an advertising model that offers its services for free in return for advertisement eyeballs. That is why they have been able to rise to the top, beating analyst estimates during the Coronavirus pandemic. With fortress balance sheets, they, too, have turned into a safe haven trade while retaining their growth status.

Analysts might argue that this space has been an overcrowded trade and that soon we will see the switch into cyclical and value such as energy and financials. However, the difference between tech and value is that tech continues to generate free cash flow today. Financials and Energy (ehem. Oil companies) are having a harder time.

The pandemic has forced macro-economic conditions around the world, which have been the perfect breeding ground for the tech and gold trade. The pandemic has forced people into their houses, relying on technology to connect them with the rest of the world. Furthermore, the pandemic has also forced governments and central banks to implement drastic measures to keep the economy afloat. This has lowered the need for investors to have that bond ballast in their portfolio, as there are safer assets that thrive in the current financial macro environment we currently find ourselves in.

I can’t give advice on the articles I write. However, I can see that I currently hold both stocks in QQQ alongside a generous holding in GLD ;)

Anish Lal, a senior analyst at BlackBull markets, made an excellent technical comparison between the NASDAQ, Gold, and the U.S Dollar. You can watch it here.

Safe trading!