20th Nov '21 by Edmund Shing

4 comments 1190 reads

Market Musings 20/11/21:
When will the markets call time?

Recent podcasts you may care to listen to:

Bubbles again!

No-one rings a bell at the top...

A fantastic stock market run since March 2020, but…

All good things must finally come to an end. When I see zero revenue companies like Rivian in the US valued at over $100 billion market capitalisation, I do wonder if investor euphoria has not finally taken hold of these financial markets, raising the risks for all involved. Investor sentiment is clearly running very high in stock markets, on the back of very strong performance.

Judging by the ETF flow data from State Street, retail investor fund flows have been very clearly into equities this year, dwarfing other asset classes like bonds::

US ETF flows all into Equity this year, mostly US stocks

VrbaplLhhntgSrqMEDhWSOenDoDuZq9ymBKUm1Pu3L4ylrOpvREioUt1IsAyVNMwC6U8mb8no-Frox8uSw7b7LWvoDFMrrU8YhdNbNrFFEBaTz9X7nwMTYraAzLh9voGL_QTchAL

Source: State Street. As of October 31, 2021

Overall stock market sentiment is also running at multi-year highs looking at measures of sentiment such as Bank of America’s Sell Side Indicator:

Warning: Sell-side (broker) sentiment close to highest since 2007

ElAU8UATMj9XmLlwl2wgbqoQNUxB58BMzHPuLBdmmSUOOJL3W8p8O26i3oWYKg8x54iTPoiwqR3eUYhuScSjlyLJz5n5i-Cd2sd61GomSCZ0j1Alph50c-o3n6FHtBRHFjZMFgXN

Source: Bank of America

But no-one rings a bell at the market top… So of course, the $1 million question is: “When?“.

More has been lost by turning defensive too early than in market crashes, over time

Stock markets are often said to be “climbing the wall of worry”, for good reason. There are pretty much always a number of economic, geopolitical and financial market-related concerns that bearish commentators can point to as potential triggers for a market correction or even bear market.

The Wall of Worry: There are always reasons for the stock market to fall

9L5z5Do3fffhEoyDq1f3weWXqgFQED6Zxx1xHtBDIFkGgBKOBfuhjDHgEQqF0ezavY13UpFU5r7yyibW-PgkcwgdnLJFCU4r3bEVPG9kdMeVar-cLwFywv5eVEkRT4LIC8fVJlBb

Source: Berkshire Money Management

But we should bear in mind the following points:

Economic forecasters are bad at predicting recessions, according to academic research such as Ahir & Louganis (2014) of the IMF. So we should not spend too much time listening to the prognostications of so-called professional economists…
As Nobel prize-winning economist Paul Samuelson put it, “the stock market has predicted nine of the past five recessions”. In other words, the stock market can sell off during “recession scares” which turn out to be more mid-cycle growth pauses, than actual recessions with…

Unlock with Email

Unlock with Google

Already have an account?
Login here

donald pond

20th Nov '21

I know we shouldn’t cross-advertise, but at the moment you can get a 6 month subscription to the Hedgeye Macro show for $6. Their whole raison d’etre is to track the economy in real time with a view to predicting where it is going using those 4 “quads”. They have a great record in getting it right. My aim as an investor is not to buy the bottoms and sell the tops, but to capture the easy 70% between the lows and the highs and then be in something else during the really bad times. There is an investment for all seasons, but you need to have something to track the cycle and it was great to see Ed using quantitative measures. Too many people are saying it ‘feels’ like the bull market is over. That says something about the person but nothing about the market.

The one big surprise is that commodity ETFs have seen outflows: anyone buying cotton, wheat, oil, tin etc this year has made a killing.

Rusty2

Hello Donald, In order to buy and sell in the 70% middle, don't you need to know where the top is?

I have not heard of Hedgeye Macro show before I will have look into that.

Yes some commodities have done very well this year, you can add Gas and Uranium.

Tin won't that be affected by the slowdown in China, China consumes 40% of the world's tin.

Not sure we are at the top but I have been taking profits both in UK and US markets, when share price goes up almost vertically, such $TTD, it often falls down again, resulting is a spike, have seen that quite a bit recently. So I look at charts to judge when to sell.

Most US stocks I hold are still beating forecasts, but $PYPL has fallen back considerably, $V also struggling, I thought these would pick up as economies get back to more normal. I'm considering topping up $PYPL.

Inflation is a concern, it is still going up. Germany reported factory gate inflation at 18%.

US inflation is 6.2%?

In the UK seems a lot of money is going out of smaller caps and into larger caps. £ falling is probably not helping either. But is good if you hold US stocks. Maybe we will see more acquisitions?

Any opinion on gold, price has picked up recently.

tic_tac_toe

21st Nov '21

this is very interesting, so thank you very much. I have a question if I may. Your piece states:

"

Overheating/Peak (growth ↓, inflation ↑): Growth slows and inflation increases further with full employment. Central banks continue to raise rates.
Recession (growth ↓, inflation ↓): Growth is negative and inflation falls, given reduced consumer spending and rate cuts by central banks.

During 2020-21, we have clearly passed from Stage 4 (Recession) to Stage 1 (Recovery), and then to Stage 2 (Expansion), with above-trend growth now accompanied by rising inflation.

If in 2020-21 we passed Stage 4, then presumably at some stage prior to 2020-21 we also went through Stage 3.. Have you been able to discern when that may have been/ what period the most recent Stage 3 chimes with..?

+ please do inform us all when the indicators start to boil a bit more, we would all be very grateful :)

Edmund Shing

22nd Nov '21

Hi tic_tac_toe,

Well this recession is unusual in that it was triggered by a pandemic and near shut-down of the global economy in short order. Not the usual process of the economy overheating, central banks to raise rates to cool the economy down, then triggering recession.

2006-07 would have been a more recent stage 3 period, as would have been late 1999-2000...

Best

Edmund

Market Musings 20/11/21: When will the markets call time?

Market Musings 20/11/21:
When will the markets call time?

No-one rings a bell at the top...

A fantastic stock market run since March 2020, but…

More has been lost by turning defensive too early than in market crashes, over time

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

4 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...