We have been out for several days due to the holiday, so although we have certainly kept an eye on the markets over the past week, we don’t have our fingers on the pulse of the markets to the degree we usually do. With this in mind, our comments this morning are going to deal with what has been taking place generally over the past several weeks...and what will likely take place as we move into the first half of 2021.
As much as many pundits try to say that the rally over the past few weeks has been fundamentally based...or at least based on the fundamentals that we’re likely to see next year...the real reason for the continued rally has been central bank liquidity. Let’s face it, much of the news of the past two weeks has been negative for 2021. (Yes, we did get the relief packages passed, but that was already known...and priced-in. The unknown developments have mostly been on the negative side of things.)
First, the new strains of the coronavirus (or “variants”...as they’re calling them in the UK) have raised further questions about the dept, severity, and length of this newest wave of the coronavirus. Second, the news we’re hearing from Dr. Fauci and others about how the implementation of the “warp speed” plan to distribute vaccines says that it is taking place in a much slower fashion than officials had been hoping for. Thus this is another reason to think that the rebound in the economy next year could take place much later than later than most pundits have been assuming in recent months.
No, this does not mean that 2021 will become as bad as 2020. In fact, unless these new strains of Covid turn out to be a major problem (that the vaccines cannot help), 2021 will STILL be a much, much better year than 2020...no matter when the global pandemic is finally put behind us. However, the stock market is now priced for perfection...and it will take a level of growth that is much higher than the consensus is looking for next year to justify a further rally of significance next year.
At 22x forward estimates, the stock market is pricing-in something better than what the consensus estimates are for economic growth and earnings growth. Therefore, if the full recovery is pushed-out further into 2021, it’s going to be impossible for these all-important fundamental factors to reach the levels the stock market is pricing-in right now.
In other words, the stock market is pricing-in something that is very unlikely to take place in 2021...and this tells us that the only thing that is really pushing this very expensive market higher is the excess liquidity that is being provided by the Fed and other global central banks. Don’t get us wrong, this liquidity is EXACTLY why were have been calling for a strong year-end rally since October. It’s also why we have also been saying that it could/should continue into the new year. Therefore, we’re not saying investors should suddenly start dumping their shares...either now or just after New Year’s Day. However, the easy money has been made...and thus we’re becoming much less bullish. In fact, even though we’re staying with our 3,800 target for the S&P 500 for right now, we’ve become more neutral than bullish. The market can...and probably will...rally a bit further over the coming weeks. However, the risk/reward equation is shifting...and the upside potential for the stock market is shrinking.
Of course, we could be wrong. The Fed could keep the pedal to metal even when this current wave of the pandemic subsides. However, since that would risk pushing the stock market into bubble territory (some would say FURTHER into bubble territory). If another major stock market bubble were to form... the (eventual and inevitable) bursting of that bubble cause a situation that will all but impossible for the Fed to control...given how much more debt there is in the world today. Therefore, we don’t think the Fed and other central banks will keep the liquidity spigots wide open once the global economy begins to open back up in a meaningful manner. Once the liquidity becomes less plentiful, investors will have to hope that the economy is strong enough to play catch-up with the stock market. That’s not a scenario for significant gains in the broad stock market.
Then again...maybe the pandemic won’t subside (God forbid). Maybe the vaccines won’t work against these new strains. If THAT’S the case, the global central banks WILL keep the liquidity flowing in a massive way. HOWEVER, since that scenario would also include an almost complete shut-down of the global economy, the liquidity will only soften the decline in asset prices. It will not keep asset prices from falling in a material way.
Matthew J. Maley
Chief Market Strategist
Miller Tabak + Co., LLC
Founder, The Maley Report
275 Grove St. Suite 2-400
Newton, MA 02466
Although the information contained in this report (not including disclosures contained herein) has been obtained from sources we believe to be reliable, the accuracy and completeness of such information and the opinions expressed herein cannot be guaranteed. This report is for informational purposes only and under no circumstances is it to be construed as an offer to sell, or a solicitation to buy, any security. Any recommendation contained in this report may not be appropriate for all investors. Trading options is not suitable for all investors and may involve risk of loss. Additional information is available upon request or by contacting us at Miller Tabak + Co., LLC, 200 Park Ave. Suite 1700, New York, NY 10166.