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Will the Post-Pandemic Roaring 20s Start in 2021? The Overdue Market Correction of September 2020

Why and Action Plan

The Roaring Twenties occurred after the Spanish Flu pandemic. Some predict a new Roaring 20’s  once the economy potentially soars from pent up savings and demand for travel, restaurants, and large gatherings. This is possible by mid-2021, assuming an effective vaccine gets widely distributed. The market is forward-looking for future earnings potential, especially in the growth sector.

CNBC’s Closing Bell 9/23/2020 reported that nearly $4.5 trillion of investor’s cash was on the sidelines in money market funds, compared to $2.8 trillion before the market high in February.

“US consumers built up an astounding $12.5 trillion in excess of savings from April through July, according to Morgan Stanley economist Ellen Zentner,” reports Yahoo Finance 9/22/2020.

The market has been dominated by momentum traders, such as young folks on Robinhood (more later). Many are day-traders looking for short term- volatility using option bets.

The US economy is strong, but with 14 million unemployed, new coronavirus cases rising, and without further fiscal stimulus from Congress to bridge the economic gap, the recovery is expected to continue, although at a slower pace.

September Market Correction The early September correction was from overvaluations of the prior few months. The technology sector was especially overbought. Many analysts see the correction as positive in the long run.

ECONOMIC DATA 9/25/2020 The Commerce Department reported that new orders for essential US-made capital goods increased more than expected in August and shipments raced to their highest level in nearly six years. Core capital goods orders are now above their pre-pandemic level.

Gross domestic product is expected to rebound at as much as a record 35% annualized rate in the third quarter, after tumbling at a 31.7% rate in the April-June period, the worst performance since the government started keeping records in 1947.

“An epic factory jobs boom is on the way, signaling manufacturing and construction may be poised for the kind of V-shaped recovery that we haven't seen in decades," Bloomberg Opinion's Conor Sen writes.

September Manufacturing Strong - The IHS Markit US Manufacturing PMI flash estimates beat forecasts. The reading pointed to the most vigorous expansion in factory activity since January of 2019. New business rose at a solid pace that was broadly similar to August’s 19-month high.

9/24/2020 New Home Sales Crush Forecasts, Soaring to 14-Year Highs. Sales of newly built homes were an astounding 43.2 percent higher than they were the previous August. It was the sixth straight month of rising sales.  

We are having a Christmas Nightmare - CNBC reported 9/25/2020 that global supply chains are being pushed to their limits and could reach 5% overcapacity with a massive pre-holiday inventory buildup of imported stuff into the US. UPS, FedEx, and USPS are already seeing holiday level volumes in August. Consumers have been saving lots of money by limiting going out due to COVID-19 and already seem ready to splurge in their holiday shopping. 

9/25/2020 Thousands of US Firms Sue Trump Over China Tariffs - CNBC - More than 4000 companies have filed suit to recover $10s of billion paid in tariffs. Companies include Tesla, Home Depot, Target, Ann Taylor, and Ford. Attorneys say in part - "Our clients filed this complaint because the US government exceeded its authority in prosecuting an unprecedented and unbounded trade war against China in defiance of congressional limitations." If successful, this could be a big boost for many US companies.  

COVID-19 Status - Currently, the 2nd wave of COVID-19 in many states is fueled substantially by college students and other young adults, who may have a lower risk of death, but without masking, can spread the virus to those at higher risk. Even if people don't die - and sadly, many do -  others are developing strange, serious medical problems long after they are over COVID-19.

Universities worked for months to prepare their campuses for reopening. Party-hard students ruined many of their plans in a matter of weeks. Officials are now scrambling to end the contagious gatherings, sometimes going so far as to monitor local bars, expel students, or ban socializing altogether.

Much of Europe is also having a 2nd wave, especially in Spain, France, and the UK.

As of 9/25/2020, Israel tightened restrictions in the fight against the coronavirus, one week after a second lockdown came into effect. Businesses not officially considered essential were ordered closed, and travel restricted to 1km (0.6 miles) from people's homes.

Early September Tech Sector Collapse In my August update https://dhutch.news/WhyIsMarketSoaring I analyzed why the market was soaring amid a pandemic and the risks. In September, most of the fundamental economic data is still recovering. However, the major news was the broad market correction, led by overvalued tech stocks that quickly spread to the rest of the market. For example, Tesla fell 21% in just one day due to a combination of overvaluation and not being included in the S&P500 index as investors had expected.

On 9/3/2020, investors began to question the valuation of high-flying technology stocks, and buying ran out of momentum, dragging the rest of the market lower. Tech stocks, and the overall market, had not had an awful day since June, so this was a healthy pause.  Many analysts believe the tech sector has the best outlook for high long-term growth.  Investors just needed to recalibrate their valuations.

As CNBC said, many outstanding companies just got overvalued, and many believe technology has some of the best potentials for future profit growth.

Softbank and Robinhood trading platforms may have helped drive the overvaluations in the most favored tech companies.

Softbank:  As reported by Financial Times (FT) on 9/9/2020: SoftBank had fueled a long rally in tech stocks by placing billion-dollar bets on derivatives.  In a regulatory filing, SoftBank revealed that it had bought nearly $4bn in tech stocks. Over the past month, it has also snapped up $4bn worth of mostly call options — bets on further price gains, taking on options with a notional value of $30bn.

An FT editorial points out that Softbank was the mystery "whale" that drove tech stocks to record highs and points out investors and regulators should be alert to the consequences of one large, determined investor to influence the world's largest, most liquid stock market.

Trading volumes on NASDAQ – where most tech stocks are listed – had doubled since before the pandemic. It appears that active day traders on Robinhood buying stocks and derivatives also drove the overvaluations.

Robinhood - makes buying stocks a game: Forbes reported, "They have slick interfaces. Confetti popping everywhere, referring to the shower of colorful confetti Robinhood routinely deploys after customers make trades. They try to gamify trading and couch it as an investment."    

Robinhood charges no commissions. However, it makes its profit by order flow - a more hidden cost to investors, although many brokerages do the same. Robinhood accounted for about half of all the new brokerage accounts opened in the first half of 2020 – mostly millennials – and Forbes reports that over half were first-time investors.

Forbes and other sources report the shocking suicide of a 20-year old Robinhood customer when he saw a $730,165 negative balance in his account. He was a student home from college and living with his parents.

A note was found by his parents, filled with anger toward Robinhood. He wrote, "How was a 20-year-old with no income able to get assigned almost a million dollars’ worth of leverage?" He used the complicated option strategy of a "bull put spread" that went terribly against him. His final note says that he had "no clue" what he was doing.

Outlook - Nothing is assured, but fundamental analysis points to this being another buying opportunity. Remember that for every stock sale, someone is buying and getting a bargain compared to before stocks declined.  Markets have always returned to all-time highs; of course, timing is unknown.  But with solid economic fundamentals – absent a new financial crisis – the outlook looks favorable, especially leading into 2021 when we probably will have a suitable vaccine. Markets look forward to future expectations.

Personal Notes I have not had any in-person meetings since March, although much of my advice with clients all over the US is mostly by phone and email. I am going to set up Zoom if clients wish to use it. I purchased a high-quality camera, microphone, and have studio lighting equipment. Now I need to set it up and learn Zoom! 

My usual Summer trips to Canada to escape the heat have been missed. I have over 100k of frequent flier miles plus two vouchers from canceled trips to Toronto and Montreal.  I am glad I went to Frankfurt, Germany, in 2019 using frequent flier miles. 

I applied to renew my Nexus pass (bypass customs and includes Global Traveler) in July 2019, six months before it expired after five years. However, I have to do an interview again.  Pre-COVID-19, US Customs was far behind in processing since most agents were at the Mexican border. Then with COVID-19, the Canadian Customs agents are shut down, and of course, we cannot travel to Canada. Joint US/Canada Customs has now extended Nexus cards for 18 months since millions cannot get renewed. 

Action Plan Recommendations

I can discuss individually specific recommendations based on one’s goals, objectives, and risk tolerance.

In general related to a total portfolio, I suggest investors have a diversified portfolio using managers with long-term track records of outperformance compared to the category they invest in and the risk taken (Alpha vs. Beta in investment terms) – not just raw returns.  While the US has a significant COVID-19 risk, we have a comparatively stronger recovery potential than most global economies, even those who have done better in fighting against the virus.

US Small-Mid Caps often have the potential for faster growth, and with so many more smaller companies than large, good research can potentially find hidden gems.  Smaller companies' stocks are often more volatile with less trading volume but have rewarded investors over the long term.

I avoid “dumb” index funds with no stock selection based on individual company outlooks, or similar ETF’s (only make sense for traders, not investors). For those seeking income or for the more conservative allocation in a diversified portfolio, I suggest various bond alternatives, without the interest rate risk of many bonds at this point in the economic cycle.

Part of our "participate-yet-protect" strategy in a growth-oriented portfolio is to have alternative investments so that in a significant equity market decline when you also need cash, you do not have to lock in large losses in a market downturn.  Markets have always returned to new highs - only the timing is uncertain

Your Future - Our first priority is helping you take care of yourself and your family. We want to learn more about your personal situation, identify your dreams and goals, and understand your tolerance for risk. Long-term relationships that encourage open and honest communication have been the cornerstone of my foundation of success.

Our site in the bottom quick links section is filled with educational videos, articles, slideshows, and calculators designed to help you learn more. As you search our site, send me a note regarding any questions you may have about any particular investment concepts or products. We'll get back to you quickly with a thoughtful answer..

Required Disclosures:  Past performance does not assure future results. There is no assurance that objectives will be met. Investments in securities do not offer a fixed rate of return. Principal, yield, and/or share price will fluctuate with changes in market conditions, and when sold or redeemed, you may receive more or less than originally invested.  No system or financial planning strategy can guarantee future results.

Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.

The S&P 500 is an index of 505 stocks chosen for market size, liquidity and industry grouping (among other factors), designed to be a leading indicator of US equities, and is meant to reflect the risk/return characteristics of the large-cap universe.  

The views and opinions expressed are as of the report's date and are subject to change at any time based on market or other conditions. The material contained herein is for informational purposes only and should not be construed as investment advice since recommendations will vary based on the client's goals and objectives. Information is believed to be from reliable sources; however, no representation is made as to its accuracy. Hutchison Investment Advisors, Inc. is an Arizona registered investment advisor. Part II of Form ADV (Disclosure Statement) has been given to advisory clients and is available upon request, and is also at http://dhutch.news/RIADisclosure