Events
- The S&P ended the week up 2.21%, the Clean Tech Index rallied 2.25% and the Nasdaq OMX Water Index appreciated by 2.86%. Year to date returns for these three indices now stand at 12.77%, 31.43% and 15.38% respectively.[i]
- Relatively positive reports and forecasts from Clean Tech and infrastructure companies such as Tetra Tech and Enersys continued in the past week.
- Favorable news from Pfizer and BioNTech elevated hopes for an end to the pandemic.
On Bubbles and the Great Gatsby
May you live in interesting times is an old expression with various attributions. An ongoing pandemic, a contested election, and a severe economic downturn exposing many imbalances (read 10 million people in the US who have lost their livelihoods) unfortunately comprise the narrative of our interesting times. It makes me yearn for simpler times when we obsessed about the next episode of Survivor or wondered how to use Napster.
The prevalence, or dominance, of retail investors in the equity markets is another interesting recent occurrence. Since March it is estimated that 8 million new brokerage accounts have been opened and small option trades, an indication of retail investors, have doubled.[ii] Moreover many retail investors, or stocks favored by retail investors, are not only beating the S&P, they are also handily outperforming equities preferred by professional investors according to data from Goldman Sachs. Stories highlighting Hertz trading up on a proposed bankruptcy filing, cruise ship operators with zero revenue at present soaring off their March lows, the gyrations of Tesla at its current high valuation, or Twitter users attaining celebrity – in the case of David Portnoy enhancing their celebrity – based on their trading are legion right now. All this occurring while the S&P trades at the highest PE ratio since the late 90s yet margins have significantly legged down.
Institutions ignore this action at their peril. You might sense from this I am bitter or derisive of current valuations or the market action. Quite far from it, I applaud it. Let’s be honest: we all want a good bubble. Anyone who says otherwise is either deluding themselves or attempting to do so to their audience. John Maynard Keynes said: markets can remain irrational longer than you can remain solvent. Whether or not we are in an irrational period remains to be seen; certainly, things are not as sober right now as they have been at other times. But there is a persistency to valuation; an asset can remain wrongly priced for a long time.
And predicting any type of regime change in the markets, recall that the phrase Irrational Exuberance first gained currency in 1996 years before the TMT bubble popped, is a risky enterprise in itself. Expected market returns are not even probabilistic, let alone certain, they are stochastic. We don’t know what the distribution looks like. We may well be in Bubble territory with many stocks or portions of the market but, right now, what else is there? 10s are yielding 90bps and 10 year High Grade Corporates are yielding around 60 bps more. Real Estate has its issues and crypto currencies are even more speculative than stocks. Gold is at a nominal all time high but how fun is it to chase that? There is no other game in town. Accommodative Central Banks are once again pushing investors into risk.
As for the new day traders and individual investors bidding certain elements of the market up, like cruise ship operators (okay that was a gripe) why complain about their success? A bad quarter or year can cause an individual a great deal of pain in losses but hopefully not financial ruin. Those same returns can end a professional’s career. It’s a structural advantage that individuals hold over many who are paid to manage money. Institutional investors are free to criticize a lack of analytic ability or rigor on behalf of day traders or retail investors but complaining about other actors in a competitive enterprise isn’t exactly the root ideal of capitalism. Besides many institutional investors have done themselves no favor. It’s hard to ask for a 2 and 20 and then neither beat an index nor achieve any desired covariance[iii].
Day trading or aggressive speculation on the part of retail investors may, or may not, cause dislocations in asset prices but so be it. Fitzgerald, in the Great Gatsby, wrote of a man who was able to reinvent himself and be what he wished to be. While Fitzgerald’s Gatsby struggled to regain the love of Daisy Buchanan at least he had the opportunity to do so; the American dream writ large. That is not to say the decadence that accompanies Gatsby’s success is something to be idealized, certainly not given the imbalances that exist today – and in the 1920s – but we have to recognize that idealism and drive as a feature of our collective character. I may be the first to compare David Portnoy to Gatsby, and the comparison may well be specious, but the idea of reaching for something else is part of the American Dream. That is also not to claim that the perambulations of the S&P are even an accurate barometer for the well-being of our economy or society.
The speculative excesses we see today on the part of individuals, institutions and sovereigns will likely end in another crash or retracement. I suspect that over a long period of time an accommodative FED coupled with continuing deficits will cause a significant imbalance but that doesn’t seem likely while the market is now is focused on a recovery and vaccine. And we just got past an election and are in a seasonal period – 2018 aside – when nothing much happens usually. A reasonable bet is to expect more of the same, and to be careful out there.
Opinions are expressed are solely my own. Any investments mentioned do not constitute a recommendation to buy or sell anything. If you do act on the opinions of errant writings without doing your own research you might consider talking to an investment advisor, a psychologist, foregoing that third drink or reexamining your decision-making process. I do cite sources and use end notes but amidst other responsibilities and foci I apologize for any plagiarism or regurgitation of other’s ideas though we all know there are not many original ideas. If you disagree with my content or opinion don’t read it.
[i] Bloomberg; Index returns include imputed dividends not just price return.
[ii] Bloomberg
[iii] Having served on an investment committee that oversaw hedge fund returns as an ancillary activity for years, I manage with a hurdle before attaining any performance compensation.
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