Happy Fri-YAY, fam. A couple of weeks into the year, and the markets are more or less a dumpster fire. Some would call it a technical market correction or multiple contractions, but we like DUMPSTER FIRE because when we really look at what’s being sold, it fits. The overall stock market indices are down for the year whether we look at the S&P 500, NASDAQ, or Dow. However, if we look one level deeper, there is a great disparity in the individual stocks.
We touched on this a couple of weeks back with Cloud-based technology companies coming back down to earth. That selling has now broadened out to most technology companies and the “fun” stocks like Peloton, Netflix, online gambling stocks, meme stocks, electric-vehicle makers, and anything/everything associated with cryptocurrencies – the horror! A lot of the aforementioned are down 50% or more from recent highs. Peloton, for example, has gone from a recent high of about $170 a share to $23 in the time it takes to complete a couple of cycling sessions.
The “fun” part of the market getting beat up is probably a good thing for overall market stability as it takes a certain speculative risk off the table. Additionally, there has been some contagion into less exciting parts of the market like the tech giants of Amazon, Google, Apple, etc., which are all down for the year as well. Not fun for those needing to sell, but that’s not us, so if anything, it helps calm things down and makes for an attractive setup to the second half of the year.
So, what’s really going on? It’s a couple of things, and we could drone on for days, but there is a pretty simple explanation: The Federal Reserve is slowing down the money-making machine and raising interest rates (you can call this the “taper,” ever heard of it?). When the market gets their allowance taken away, they get BIG MAD (you can call this the “tantrum”). And like many toddlers, the market tends to overreact when things don’t go their way. So, there will be some kicking and screaming the first part of the year, but that’s part of being a parent (investor). It’s not enjoyable at the moment, but we know it’s for the best in the long run.
The reason the Fed is taking these actions is to slow down inflation which isn’t something they have had to deal with in a long time. Essentially, inflation is like the critically acclaimed Netflix reality show 2 Hot 2 Handle. If you put a bunch of hot, single, twenty-somethings on a tropical island, things are going to get messy. Similarly, if you keep rates low and money flowing, markets are going to get messy. Sometimes guard rails are necessary to keep things under control.
The takeaway is we expect this volatility to continue for the first half of the year. As we said, markets love to overshoot to the up or down when they aren’t getting exactly what they want. For us as long-term investors, it’s all part of it. If anything, volatility presents many opportunities for additional investment, rotation, and rebalancing.
Thanks for reading. We appreciate every one of you and would be happy to discuss this further. All the best.
High Note Quick Hits
Covid Didn’t Happen
As mentioned above, interest rates are on the rise. Rates were so low that the move up still feels subtle, but mortgage rates have now come full circle. Thirty-year fixed rates are more or less back to where they were before the pandemic started. Inventory (homes for sale) is still super low, so the rate increase hasn’t caused prices to fall. If inventory substantially increases, prices will likely come down.
Grandboomer’s Baby Boom
Years ago, in one of our market notes, we were pontificating about the long-term economic outlook of the old USA and concluded that the country needs to increase its population to retain economic prosperity. Obviously, you can get there two ways: produce the little people in-house or subcontract them from other countries. Avoiding all political conversations on the topic of immigration it’s simple math. The USA (along with China) has a demographic problem – as in, as the population ages if you don’t have someone to replace that consumer, you have a decrease in demand. We got here with a steady decline in birth rates around the country and really nothing on the horizon to indicate that would change. Enter the pandemic, and we have our catalyst.
June of 2021 saw an increase of 3% year-over-year. That’s a big jump. This data is slow-moving given the length of pregnancy, but when it all gets compiled, we could be in the era of a Mini Boom. It will take another year of data to really know. If so, it’s very helpful to the 10- and 20-year economic outlook. Article here.
And as most of you know, we at High Note are trying to do our part …
