A Fresh Start

After a robust 2020, stocks measured by the S&P 500) began the New Year on a mixed note, returning -1.01% for January.  However, there is no need to read a lot into this.  Stock prices, for the most part, are still attached to the conditions that prevailed in December of last year.  Not much has changed: the stock market is expecting another stimulus package to be passed, and the Federal Reserve continues to signal it has no intentions of raising interest rates anytime soon.   Stock prices are remarkably interest rate sensitive, and with rates at rock bottom, any upward move will pressure the market’s P/E ratio and bring prices down.  This is not on the horizon yet but talk of higher inflation and higher levels of GDP will spur concern.

As we lap the first anniversary of the date the WHO declared the COVID-19 outbreak a global health emergency, news on the virus is finally, marginally improving.  Johnson & Johnson is applying to the FDA for emergency use authorization for its single shot vaccine.  AstraZeneca and Novax also have vaccines on the cusp of approval by the FDA.  23M Americans have received the vaccine, and over 26M Americans have confirmed cases, according to the WHO Coronavirus Disease Dashboard.  With the total population of the US @ 330M, it remains unclear what needs to have had the vaccine or the virus in order to establish herd immunity.  It is possible the virus becomes endemic and vaccinations and re-vaccination to sustain immunity become the norm.

The popular news this past week echoed the roaring ‘20s.  Techniques akin to the “pump and dump” schemes popularized by Jesse Livermore over 100 years ago took hold of trading in GameStop shares.  In today’s world of social media, “meme trading” has become a thing on Robinhood Markets Inc. free, app-based trading platform and the surge in trading caused Robinhood to raise $2.4B as collateral for clearing requirements. The episode is largely a distraction and shows the capital sensitivity of small broker-dealers.  It’s not clear whether or what type of regulation the SEC may need to bring as the use of message boards, AI and social media scraping appear to have been used to knowingly manipulate the price of a stock, which is a violation of securities laws.  

There is a vast difference between trading and investing – clearly to make an investment, you must trade (buy or sell) a stock,  but short term, spontaneous and uninformed bets on short term price movement have nothing in common with investing.  The issue is not likely to threaten the underpinnings of the broader market, which is organized to allow for the creation of and access to capital. There is considerable evidence that only a tiny percentage of people involved in day trading make money and this type of activity in today’s social media world begs for some updated regulations.  Sadly, one trait of stock market behavior is that those who can least afford a loss (those with fewest resources) are the most likely to take outsized risks.

For us, the basics of fundamental investing remain in place.  Quality, transparency and liquidity are primary criteria in all our investment models.  When prices move without any fundamental reason/underpinning there may well be a profit opportunity, but it is not tied in any way to earnings or other measurable fundamentals.  The earnings outlook for the S&P 500 remains strong, and the market is beginning to look forward into 2022.  According to FactSet, S&P 500 companies are reporting 4Q ‘20 earnings well above expectations, and are producing the highest level of positive surprises for any quarter since 2008.  We view our opportunity set as a market of stocks with attractive themes, such as clean energy, emerging technology, EV technology and stocks still in the recovery phase from the pandemic induced recession. 

It’s that time of year, and taxes are upon us.  Unlike last year, we are back on a regular tax filing cycle.  You will receive your 1099s in the mail, and you can also access them from the Schwab web site. Please let us know if we can help, and as always, we look forward to hearing from you.  Please do not hesitate to call us if we have not been in touch recently.

Be safe out there.


Bruce Hotaling, CFA

Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice.   Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed.  Investments are subject to market risk, including the possibility of loss of principal.  Past performance does not guarantee future results.  The S & P500 is an unmanaged index of 500 widely held stocks.    Investors cannot invest directly in an index.   The PE ratio (price/earnings) is a common measure of relative stock valuation.

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