Institutional investors say it’s a “risk-on” environment when stocks rise. However, a better descriptor of this runup’s environment is “fundamental-lite optimistic”. The “lite” means shifting from the heavy Covid-19, what-could-go-wrong risk analysis to the following, easy-on-the-mind list of why things can go right:
New stock market highs. Trillions of “underinvested” dollars. The Federal Reserve’s promise of pumping into the future. Pfizer PFE stockpiling millions of vaccine doses around the country. Ready-and-willing consumers and organizations itching to return to an optimistic, growth-oriented, pursuit-of-happiness life. New government leadership expected to fully support those desires.
Stock investors today appear to have filed away those previous concerns and negative issues that drove the stock market over the past months. Optimistic hope, the maker of bull markets, looks to have replaced pessimistic worry.
Okay, let’s first quickly review the now-ignored negatives
The Covid-19 surge and promised worsening. The plethora of lackluster economic reports. The fast-approaching December 31 expiration dates for Covid-19 support programs. Economists reducing 2021 GDP growth expectations.
While some pundits credit good quarterly earnings reports for some of the November rise, over 60% of the S&P 500 companies reported prior to the October 30 selloff bottom. The view then was that earnings reports were lackluster.
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As to the stock market, many see the stock market as too hot and investors as too wild-eyed. The view has moved beyond “overvalued” to “rampant’ speculation. For example, Jim Cramer’s current view (underlining is mine):
CNBC: “Cramer calls this stock market environment ‘the most speculative’ he’s ever seen”
CNBC’s Jim Cramer said Tuesday that some of the stock gains in the market are ‘insane,’ with investors recently buying certain names from Tesla TSLA to Royal Caribbean RCL seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them.
“’Where are the profit-takers’ after these dizzying moves higher? the ‘Mad Money’ host asked.
“Cramer called the current environment ‘the most speculative market I’ve ever seen,’ hitting on a recent theme in which he’s been dumbfounded by the kinds of moves in so-called Robinhood stocks, names being gobbled up on the online trading platform favored by younger investors.”
Cramer is correct in saying investors are disregarding negative fundamentals, including Covid-19. However, he is incorrect in saying the disregarding is insane. Attributing craziness to investor actions means Cramer hasn’t yet identified the true rationale behind the investors’ behavior.
Now, let’s refocus on why stocks are a good investment in this speculative market
My first paragraphs, above, lay out the “fundamentals” that are driving the market now.
As to investor mentality, it has moved on from the negatives. Why? Because 2020’s two major selloffs based on those negative fundamentals were both fully offset by V-shaped recoveries. Thus, the mindset now is “been there, done that,” with the rebounds showing that the stock market has moved on.
Moreover, the market indexes are now at all-time highs. Granted, the composition of stocks that have produced the recent gains has changed from earlier days, but that simply represents an acceptable “rotation” among stock groups and changing expectations of Covid-19 effects.
Okay, but what about overvaluation and rampant speculation?
Valuation has become virtually irrelevant. It’s the story behind the stock that counts, particularly the possibility of growth. Wall Street’s activities and investors’ actions underscore this view with the popular SPAC (Special Purpose Acquisition Company) IPOs, any-exciting-story IPOs and merger-acquisition-divestiture proposals. For income-oriented investors, there are new convertible bond offerings.
Use Barron’s as a barometer
Barron’s usually makes timely moves when Wall Street and investors change the dance music. The November 30 issue is a good example. The cautionary articles dropped to one: Ben Levisohn’s “A Euphoric Market Is About to Face a Tough Test.” Everywhere else in the publication, it’s, “Get with the program and climb aboard”:
Cover article: “Ford – Retooling an Icon” – “… the stock could double”
Up & Down Wall Street: “Move Over, Millennials! Baby Boomers Fuel The Rally’s Latest Leg”
Streetwise: “Elon Musk’s Tesla Storms the S&P 500. What’s in It for Me?” – “As for bull cases [about Tesla], those are becoming a bit easier to find. Among analysts who cover Tesla, 35% now say to buy shares, recently near $600. That’s’ up from 19% who said to buy during the March stock downturn, when Tesla fell below $100, spit-adjusted.”
Follow-up: “Big Money Has New Respect for Bitcoin” – “Bitcoin rode another ferocious bull run into Thanksgiving this past week, rising 50% over a month, to a new 52-week high of $19,345 on Tuesday. That was 2% off its all-time high of $19,783 in December 2017….”
Review: “A Big Year for Hedge Funds” – “Let the bonuses flow. Stocks favored by hedge funds blew out the doors in 2020, returning 32% through Nov. 19. That was 20 points better than the 12% gain for the S&P Index in that period, the best showing by hedge funds since 2001, according to Goldman Sachs GS .”
The bottom line: Shifting to fundamental-lite speculation looks to be a winning strategy
“Speculation” sounds risky. However, realize that when the stock market investing gains popularity and favored stocks rise to higher levels, “investing” without an appreciation of increased risk becomes a dangerous game.