Novum Alpha - Daily Analysis 12 January 2021 (10-Minute Read)
Top of the Tuesday to you as markets took a topsy turvy tumble on concerns that equities may have gotten ahead of any signs of an actual economic recovery.
In brief (TL:DR)
In today's issue...
Another manic Monday saw a broad selloff in stocks on the second trading week of the new year. But it wasn't all doom and gloom across the markets.
As indices increasingly weigh tech-heavy, shares in the largest tech firms corrected sharply even while bank stocks eked out decent upticks on a day when most of the market was bathed in red.
In the morning open, Asian markets were mostly a mixed bag, weighing a bounty of considerations from a declining U.S. market to the prospect of more fiscal stimulus in the U.S. buoying Asian stocks.
Sydney’s ASX 200 (+0.12%) and Tokyo's Nikkei 225 (+0.27%) were up slightly at the open while Hong Kong's Hang Seng Index (-0.05%) and Seoul’s KOSPI (-0.68%) were lower.
1. This Year May Be Great For Jobs, Bad for Stocks
To the casual observer, our current epoch seems to be one simmered in irony, stewed in contradiction and poured over with a reduction of paradox.
Because even as the coronavirus pandemic continues to rage through much of the world, especially in the rich economies of Europe and the U.S., markets don’t appear to have received the memo.
Drunk on a heady cocktail of near-zero interest rates as well as monetary and fiscal stimulus, stocks and other risk assets have spent most of this year setting new records and then beating them just as quickly.
But that may be set to change.
Data from IHS Markit suggests that employment growth in the U.S. this year is on track to hit 6.7 million non-farm jobs by December, putting it well above the record 4.6 million jobs added to the U.S. economy in 1946, during the unprecedented post-war boom.
In terms of percentage growth however, job growth is forecast to be 5%, or slightly less than half of the 11% the U.S. enjoyed in 1946.
And while employment growth in 2021 is forecast to mark a sharp turnaround from the 9.4 million jobs lost last year, it’s still well short of fully recovering all the jobs lost because of the coronavirus pandemic.
The job forecasts also assume a successful coronavirus inoculation program and no additional shocks to the U.S. economy.
But such a rapid recovery in jobs presents investors with a dilemma.
On the one hand, job recovery could lead to more robust consumer spending, fueled by optimism over the economy.
But a robust return towards full employment could also provide the platform for more hawkish U.S. Federal Reserve policy, a gradual raising of interest rates and a reduced appetite for the expansive fiscal policies that have fueled the most recent rally in stocks and other risk assets.
And that could trigger unexpected pullbacks in the market.
The other issue is that investors who had paid eye-watering valuations to participate in growth stocks will now have to contend with the prospect of those chickens coming home to roost.
During dire economic times, postulation allows for inflated valuation, but when real numbers start being parsed through firms, a sudden withdrawal of stimulus could very easily catch investors off guard.
In this regard, a reliance on the familiar themes of growth stocks via the tech sector may not necessarily be the most prudent path forward.
And while value stocks have seen their “value” languishing, as the economy picks up, the deployment of that capital stock could quite rapidly translate into real returns.
Depending on one’s view of the next phase of economic growth, much can be said about investors taking a bet on value retailers such as Target (+0.87%) and Walmart (+0.45%) and affordable airlines such as Southwest.
2. Dollar, Gold & Bitcoin
With the prospect of greater fiscal stimulus emanating from a Democrat-led Washington on the horizon, gold was quietly languishing as investors poured into stocks and even Bitcoin.
But Goldman Sachs (+1.29%) and Citigroup (+1.64%) which had both forecast gold’s continued performance right through 2021 and onwards to 2023, appear to be seeing their predictions bear fruit.
On the Monday of the second week of 2021, gold finally stopped its longest string of daily declines since November as investors weighed the impact of a recently resurgent dollar and a rise in Treasury yields against expectations of trillion-dollar fiscal stimulus.
Up till Monday, a rising dollar and bond yields as well as reduced fears over inflation, had seen both Bitcoin (often touted as a hedge against inflation) and gold flushed in a mighty selloff.
But as incoming U.S. President-elect Joe Biden is already mulling over fresh multi-trillion-dollar stimulus, those earlier concerns, ever present, have returned into sharp focus.
Now that the Democrats have won control of the Senate, it will be easier to pass more substantial stimulus packages which the incoming Biden administration has already indicated is on the cards.
One of the first priorities according to the Democratic President-elect is to ensure that more substantial sums reach the vast majority of Americans who are still continuing to suffer the economic effects of the pandemic.
Inflation fears however, may still be somewhat overstated.
With plenty of spare capacity in the U.S. economy, and elevated levels of unemployment, there remains little risk of overheating as yet.
Where the excess liquidity is likely to show up however is not necessarily in consumer price inflation, but asset inflation, hurting fixed income investors and inflating dangerous asset bubbles.
Case in point has been the U.S. property market, where deferring mortgage payments supported by the government as well as near-zero interest rates has seen real estate prices in a majority of American cities remain stubbornly high despite an ongoing pandemic.
And with the U.S. Federal Reserve continuing to soak up mortgage-backed securities, real estate investors may be lulled into a false sense that property prices only move in one direction.
Regardless, momentary spikes in the dollar can still be expected from time to time, with investors taking bets that the greenback may be oversold, but the longer term trends are evident.
3. Balking at Bitcoin's Bubbling?
To the uninitiated, Bitcoin’s wild and extreme volatility can be heart-stopping.
Compared to traditional financial assets, a bet on Bitcoin requires more than a strong constitution, it requires Professor Xavier-levels of mindfulness.
On Monday, investors who had potentially taken their first foray into the cabal of cryptocurrencies were in for a rude shock as Bitcoin and other cryptocurrencies were dumped out of the weekend, when trading volumes are typically lower.
Sliding as much as 26% over Sunday and Monday, Bitcoin saw its biggest 2-day slide since the Ides of March last year.
An estimated US$185 billion of market cap has been shaved off the world’s largest cryptocurrency by market value, more than the market cap of 90% firms listed on the S&P 500.
But accurate numbers in the cryptocurrency space require a combination of estimation and divination and depending on where one draws their data from, can paint vastly different portraits of Bitcoin’s prospects.
Open interest on the world’s only fully regulated cash-settled Bitcoin futures exchange, the Chicago Mercantile Exchange, continues to be higher than at any time in the past, suggesting that institutional investors are continuing to take a bet on Bitcoin, one way or the other.
And considering that Bitcoin has more than quadrupled since 2020, some correction should be welcome.
After rallying to almost US$42,000 on the back of a flood of retail investors, some degree of profit-taking from investors who had bought Bitcoin in 2020 was bound to happen.
While many investors in Bitcoin, including some of the biggest institutional names, still believe that the long term trend for Bitcoin is bullish, they are also well aware that the cryptocurrency is likely to continue experiencing sharp and volatile swings in the interim.
And as more investors (especially retail investors) avail themselves of Bitcoin and other cryptocurrencies, regulators are casting a wary eye over what continues to be a largely ungoverned industry.
Regulatory intervention, whether through legislation or more aggressive enforcement could serve to put a damper on Bitcoin’s seemingly relentless ascent.
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Jan 12, 2021