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  • Chip Barnett

Stimulus Party Like It's 1999

July, 2020

Had Punxsutawney Phil woken up February 2, checked his portfolio, and gone back into hibernation until June 30, he would have re-emerged to find his investment portfolio almost unchanged. He would have missed March’s paroxysm and the spring’s stimulus keg party.

It’s been an expensive party. Through February, the U.S. had a deficit of $625 billion (since Oct. 1, 2019). Through June, it was $2.7 trillion. The non-partisan CBO projects the full fiscal year deficit will be about $3.7 trillion. Wowza. That is a raging stimulus party. The Federal Reserve brought its punch bowl (like other central banks did) and spiked it like a 17 year-old by lowering rates, boosting access to capital and buying bonds in order to lower the rates it doesn’t directly set.

Everyone is having good time - the stock market is back up and jobs are recovering quickly - for now. Covid cases are up but the death rate is down. My experience (from what my friends tells me) is that the longer the party, the bigger the hangover!

However, the party can continue. I’m not saying it will; but it can.

There is still a massive amount of institutional investment dollars that are in cash. Those will likely come in to support stocks. By setting rates at 0%, the Federal Reserve wants investors to de-emphasize bonds and shift toward risk capital, like stocks. Do you want to bet against them? Historically, no, you don’t. The healthcare industry is working overtime to craft a vaccine. And, we have a track record of always getting beyond a crisis. So the good time for stocks can continue to roll.

Not all stocks act the same. The FAANG stocks are stealing the show. Facebook, Amazon, Apple, Netflix and Google - add in Microsoft and Tesla - are predicting an incredibly robust future. Banks, energy, transportation, utilities - all are foretelling a moribund story. “New economy” is hot and old economy is not. That’s fine - I know in my house we subscribe to Netflix and Google Fiber, and have Amazon deliver lots of stuff to us. But we still bank and use electricity and water. Here are the two chart patterns in the stock market so far this year.

Those FAANG businesses are doing well - but at this point, the stock prices are a little like roulette. If black/new economy has won 7 spins in a row, do you think they continue to win? Or, if red/old economy has lost 8 out of the last 10, do you think investors will start to reward them soon?

I think there is no doubt the new economy businesses will thrive and take market share away from old economy competitors. We should want them to. That dynamism is capitalism. I also think short term investors think of these names as the only game in town. They’re betting the roulette ball continues to land on black. It may well, but at some point, like in 1999, I think there will be a reckoning. That chart on the right is simply not sustainable.

As I suggested with my May trades, at some point the mega-caps will relinquish their most-favored status with investors, and small caps will benefit. We also have a Federal Reserve who is committed to keeping rates low and buying corporate bonds, so I like high yield bonds here.

Bottom line, if you are of the mind that you should have sold everything in February, it’s tempting to think that now is your 2nd chance to sell. My risk with that is the Fed. It’s hard to be positioned opposite the Fed. The Fed’s setting rates at 0% and buying bonds sends a powerful message of support, for bonds and stocks, and they’ve committed to keep rates at 0% for the next few years.


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