“I think this will be one of the historic restorations, up there with the end of major wars,” he told MarketWatch around the turn of the year. “There is enormous demand from consumers. Can you imagine getting everything clear and getting back to normal? “
But three months a year, Andersen is gloomy. In an interview last week, he spoke about how major segments of the market seem to have an advantage one day, the next. “We switch between value and growth, staying home and reopening almost daily,” he said. “I don’t know who is running this, but it has to follow some sort of algorithm.”
Andersen tries to be patient, realizing that the economy is at a turn-in-a-generation turning point and that everyone is operating under unprecedented conditions. Still, he said, the financial markets sometimes feel like a house of cards.
“It’s confusing,” he said. “The market is fragile, and surprisingly enough. This whole year has been a real challenge for me to find out if there is momentum, in which direction it is going and what is responsible for it. “
As if the horrors of the global coronavirus pandemic weren’t enough of a curveball, the past 12 months have created a slew of other headwinds against smooth market travel. There is a wave of retailers looking to use the stock market as a gambling casino, and national politics are so bitter that the presidential election turned bloody.
Not even counting the more existential questions: what is the right level for a stock market that plummeted by 33% about two weeks ago? How much of that profit comes down to policy incentives and how much is real? How much of the expected economic recovery has already been priced in? What happens if the vaccine promise is not fulfilling? What if this is the best it can be?
All told, it leaves people who manage money, their clients, and the companies that advise them, as confused as Andersen, with almost as many perceived red flags as there are theories as to the cause of it all.
“The most common observation we get from customers is that markets don’t” feel right, “and we absolutely get that,” Nicholas Colas, co-founder of DataTrek Research, wrote in a recent note. “For us, much of this unease stems from the new fact that capital markets are moving from need to euphoria in such a short time.”
Market observers point out all sorts of weird quirks that seem to confirm that something is skewed. Among other things, trading volumes have plummeted to begin 2021.
Certainly, the increased volumes in 2020 were just that – an outlier. But by some estimates, inexperienced amateur traders now make up as much as 20% of all volume in the markets. And even if not all of them are after short sellers, they still have very different priorities and incentives than the rest of the market.
Also worrying was the spike in US Treasury yields BX: TMUBMUSD10Y
In just a few weeks into the first quarter of this year, investors in the stock market were shocked, followed by several weeks from Federal Reserve policymakers reassuring markets that any interest rate hikes would not start until 2023 and be wired well in advance. Oddly enough, the rosy economic data seemingly caused bond yields to plummet in mid-April.
“There are other weird things going on,” mused Evercore ISI’s Dennis DeBusschere in a note trying to explain the government bond rally. “SPACs and Solar are relatively hard hit, which is strange given the decline in 10-year yields. Some point out that private investor-sponsored names generally get hit as they move away from the market. And why are homebuilders underperforming with a 10-year yield collapse? “
Dave Nadig is a longtime student of market structure, including being one of the first developers of exchange-traded funds to help markets stave off another eruption like Black Monday in 1987.
Nadig thinks markets are healthy – that is, operating efficiently and remaining resilient, even through hiccups like the meme-stock rampage in recent months and the explosion of the Archegos family office. What, in his words, has become “very fragile” is price discovery.
“There are some fundamental underpinnings of how markets are disappearing,” he said in an interview. “What we realize is that there is much more noise and arbitrariness in the market than people are willing to admit. What has usually changed is the flow of information and data moving faster and faster. Any model you build today does not, by definition, take into account the acceleration of tomorrow. “
Take the Gamestop Corp. GME,
frenzy that erupted in January. After a group of disgruntled traders focused on short sellers for several weeks by driving the price of that stock higher, “It is no longer a normal stock – it is an external effect in the market that has ripple effects that some investors may not even disagree with. be aware, ”Nadig said.
Older investment models – and algorithms – collide with new ones that take new circumstances into account, a process Nadig calls “an arms race,” and one that is accelerated due to the modern speed of information flow and reaction functions.
“We’re starting to see cracks in the traditional ways we’ve always analyzed markets,” he said. “We no longer process reality, we process information and it is instantly priced. We have stopped analyzing. “
That means a headline, say, a pause in the use of Johnson & Johnson’s COVID-19 vaccine doesn’t just mean Johnson & Johnson JNJ,
stocks are trading lower, Nadig said. It means that for that day the whole “reopening” trade – and by extension some cyclical trades and some value plays – is suffering.
For Peter Andersen, who has managed money for nearly three decades and has returned more than 40% for his clients in the past two years, the vulnerability of the market is frustrating. Andersen prides itself on its “fierce independence” in stock selection, resulting in a macro-agnostic portfolio. Some of his recent investments have been in cybersecurity, data storage and animal care.
In the year to date, one of Andersen’s top picks, Trupanion Inc. has been TRUP,
is down 33% for no logical reason, he noted. “It’s like someone thinks everyone is going to euthanize their pets!”
Stocks looked past the Johnson & Johnson news to close higher for the week with both the Dow and S & P500 index on new records. The Dow Jones Industrial Average DJIA,
1.2% won, the S&P 500 SPX,
rose 1.4%, and the Nasdaq Composite COMP,
1.1% added.
Over the next week, US housing economic data will be released, including sales of existing and new homes, as well as a series of corporate earnings reports.
Read more: The new bull market is about to enter its second year. What now?