September-18-Frothy-Bubbles

I’m not writing to you about cappuccinos, champagne, or bubble baths.

We’re talking stocks.

You may have noticed that the shortest bear market in history is over, and some markets recently hit new record highs. A few stocks have gotten to nose-bleed heights without some of the traditional fundamentals, like earnings, to justify their stock prices.  Recently, one particular car company was worth more than virtually all of the other car companies in the world combined even though it only produces a tiny number of cars and loses money on each one. There is certainly some irrational exuberance in parts of this market.

Will stocks keep going higher? Will they stay volatile?

Is another equity bear market around the corner?

Maybe. Maybe not. Will stock markets stay volatile? Definitely yes.

As is standard in these situations, market strategists are split. (What else is new?)

Some see a new equity bull market that reflects a recovering economy.

Others see troubling signs of a bubble that could burst.

What could push stocks higher?

  • A market-ready COVID-19 vaccine or major treatment breakthrough that reignites optimism.
  • More government stimulus that supports consumers and businesses.
  • Good economic numbers that suggest we’re on the other side of the recession, and the recovery continues.

What warning signs are flashing?

  • A rally mostly powered by tech mega stocks that aren’t reflective of the broader market.
  • Uncertainty around a November election that’s already contentious. (understatement.)
  • A possible “Minsky moment” market collapse fueled by the Fed’s easy money policy and unsustainable stock prices.
  • Predictions of a second wave of infection that could provoke more shutdowns.

The bottom line, we can’t predict what comes next, and it’s too soon to claim victory for markets. Maybe we’re in a new equity bull market. Perhaps we’re about to face a second correction.

Since we can’t predict the future, we’re focused on helping our clients cover their financial bases for the next year and take advantage of the opportunities volatile markets can offer. This may mean raising cash for next year’s expenditures early or taking advantage of stocks’ move higher to lower our overall risk allocations at favorable prices. Volatility, when viewed opportunistically, can often be a friend to long term investors if their short-term needs are probably addressed.

On a personal note, my kids have been back in school for over a month now, and that’s been a shift for all of us. We are trying to find some sense of normalcy during this very abnormal year.  We even went to a movie last weekend in a real theater with an actual popcorn machine. Unfortunately, the theater was at 5% capacity (maybe), but at least it was open, and we could go. Baby steps.

As the pandemic continues to drag into the fall, we’re thinking a lot about how to fit regular activities into a “risk budget.” For example, we can group multiple low-risk activities into a bi-weekly budget (go for walks, shop for groceries, etc.) but only one higher-risk activity (like eating out or socializing).

We do feel like there is some light at the end of the tunnel. The economy seems to be picking up, and there has been an uptick in car traffic around the area.  Anecdotally, this is very good to see and gives us hope that we are getting nearer to that light. Realistically, our local businesses could use some northern snowbirds to come back early and spend some money down here. For that, I’m ok with more traffic and congestion on US-41.

Take care of yourself and stay safe.