(Please enjoy this updated version of my weekly commentary from the Reitmeister Total Return newsletter).
As expected the consolidation under 3,700 wasn’t going to last. That’s because the good vibes of the holiday season were going to tilt the scales towards the upside into the final sessions. Thus, not surprising that this week we marched up to new record highs at 3,756 with a shot up towards 3,800 still a possibility before we close the books on the year.
We will talk briefly about this today so we can spend most of our time on a more compelling topic. That being my annual tradition of discussing the lessons learned during the past year and how that will help us improve our results in the years ahead.
Last week we reviewed the ugly “sausage making process” that happens in DC as our seemingly polar opposite political parties try and reach common ground on a stimulus package. At first the delays on this program was what was behind stocks stalling under 3,700. Now as we come down the finish line it is becoming a catalyst to allow stocks to reach new highs once again.
That is why last week I shared the following insight that is playing out as expected:
“At this stage I expect stocks to succumb to the typical seasonal trends. That usually means lower trading volumes with a mildly bullish bias. If true, then I would expect stocks to take a shot at new highs around 3,750 into the closing bell on the year. 3,800 is not out of the question. We are well positioned to benefit from these trends.”
Indeed this outlook is coming to life and our portfolio continues to strive towards new highs as well. However, I have been in a bit of a trading mood lately as I keep fine tuning our portfolio to get us in the best possible shape to start the new year on the right foot.
To be honest, part of that call is for more quality in the portfolio. Stable…proven companies with attractive upsides, but greater resistance to downside.
Because I think this market is running a tad too hot. Let’s not forget that the market has raced about 70% from the March bottom to current heights. And more recently it has zoomed 15% from the pre-election low to where we stand now.
I believe all of these gains in hand leads to a potential round of profit taking to start the year. This is quite typical and to be expected with the size of the gains that have taken place this year.
However, this path is not such a certainty that we need to take money off the table. In fact, this may prove to be nothing more than a consolidation period where the overall market trends sideways for a while with profit be taken from some sectors and moved to others. That type of action increases volatility for, which again, a call for quality is helpful.
New portfolio entrants like (tickers reserved for Reitmeister Total Return subscribers) fit the quality bill. And really as I look across the span of our entire portfolio there is a lot of quality on board. Yes, there is some risk in their too like the “Back to Normal” trades. But they are calculated risks where the future upside is still much more attractive than any short term downside.
OK…that should suffice for an update on where the market stands now and the outlook for the near future. Now we can turn our attention to the more critical discussion today…
Lessons Learned in 2020
Normally there are 2-4 lessons that emerge each year. But truly this year there is only 1 lesson worth talking about. And it is such a big, vital, crucial, important lesson that to blend it in with other topics would be a grave injustice to all concerned.
That lesson is to realize just how powerful low interest rates are to creating a bullish environment. Even during the darkest of times like late March 2020 when the economy and stock market were in outright collapse like we had never seen before. And yet in the midst of all that that doom and chaos a 70% bull run emerged through year end.
Let’s play back the tape to appreciate this primary catalyst behind the end of the shortest bear market in history and the start of the next bull market that continues today.
The place to begin this tale is the end of trading on December 31, 2019. There we see the 10 year Treasury rate closing at 1.92%. Incredibly low on a historical basis when the long term average is closer to 4%. Add to that a healthy economy and stocks started 2020 with every intention to extend the bull run that started eleven years ago.
By mid February the whispers about the Coronavirus were in the air as it was spreading throughout China. We had seen similar health concerns before, but it seemed like one of those events that would not truly effect the rest of the world…and certainly not the good ol’ US of A.
How wrong we all were!
By the end of February the S&P was starting to break below the 3,000 level. Along with that “Flight to Safety” trade was triggered with the 10 year Treasury bond slashed all the way down to a new record low of 1.13%.
The next few weeks were downright brutal as the country went into complete shutdown mode. We all worked @ home and stayed @ home with a seeming lifetime supply of toilet paper at the ready (remember hoarding that stuff 😉
Just three short weeks later the S&P 500 finds a new low at 2,192. That darkest hour was matched with a ridiculously low interest rate of 0.82% on the Treasury. (the lowest point for rates was actually on March 8th when they tumbled all the way down to +0.4% before rallying 100% the following week).
Yes, at first the bounce from bottom just seemed like a technical driven rally from oversold conditions. That certainly makes sense when you tumble 34% in such a short span. But then the rally kept going…and going…and going…and…you get the point.
Now as I look back there is no doubt in my mind that the bull market started because of the low rates. That is because the legion of classically trained investors who manage trillions of dollars were focused on the economy to show the way for our investment decisions. At that moment and for the next several months there was no way to look at the nuclear explosion in the economy and want to buy stocks. (Remember that GDP declined a historic -31.7% in Q2 of this year).
However, the few investors that understood this low rate math saw that even with all this economic devastation their dollars were better placed inside stock investments than any other alternative. Note the dividend yield on the S&P 500 at that time was climbing over 2% as the market sank. So even the most conservative investors liked their odds better with stocks just for the income alone versus cash or bonds.
This is what we call a TINA market
Alternative…to owning stocks
That is because the ultra low rates makes holding cash a worthless proposition. Even bonds lose their appeal as rates will be below inflation levels. And thus as rates rise in the future, then the bond will lose value.
ALL ROADS POINT TO STOCKS as the superior investment choice.
That is true even now as we contemplate the Earnings Yield of the stock market versus the rates we can get from the 10 year Treasury. This has long been an evaluation tool done by the largest money managers to determine whether the environment is more conducive for stocks or bonds.
0.93% = current yield on 10 year Treasury
4.54% = current Earnings Yield for the stock market.
Note that the Earnings Yield is accomplished by flipping the time honored PE calculation on its head. Here we are measuring the earnings for the S&P 500 for next year versus the level of the index which gives us the rate of return on stock ownership.
$169.20 EPS estimates for S&P 500 in 2021 by FactSet
3,727 (tonight’s close)
= 4.54% Earnings yield which is almost five times more attractive than the return on the Treasury bonds.
Yes, Treasury bonds are considered the risk free investment and thus the stock market should pay a premium to make up for the additional risk…but certainly stocks don’t need to offer a 5X better return to get money moving in that direction.
Again, this is what is meant by TINA…and that truly investors were compelled in late March 2020 to start moving money to stocks…and that math still is favorably leaning in that direction today.
Note that I had a much more in depth discussion of TINA and the Earnings Yield math in my 2021 stock market outlook shared in the 12/7/20 Reitmeister Total Return members only webinar. So check that out if you have not already.
Reity, isn’t the lesson to simply not fight the fed?
Yes and No.
In the short run that is not always true. And certainly wasn’t true at the onset of the Great Recession in late 2008 and early 2009.
Remember that the Fed was VERY active right out of the gate in September and October basically throwing money from a helicopter which got rates on their downward trajectory. However, stocks did not bounce until early March 2009. So the idea of “don’t fight the Fed” in October or November 2008 would have you buying in about 30% before bottom was found in March.
In the long run it was the hard work of the Fed to get rates down to a level that indeed investors saw the merit in taking on more risk in the stock market. And several times over the coming years that equation came to support stocks even when it appeared that the economy may be heading for the next recession (the Fall of 2011 and again in Q1 of 2016).
Reity, are you embarrassed that you continued being a bear for so long after the bounce began in March of 2020?
Again, Yes and No.
All investors cling to the lessons from the past as the best way to understand what is happening now and likely to happen in the future. Given my previous 40 years of investing experience meant that I focused on the key economic indicators as my guide. There was no way to look at that evidence without concluding that a deep recession, and maybe depression, was unfolding. That research naturally led to the conclusion that stock prices SHOULD go lower.
No doubt I was not the only one with this viewpoint. In fact, there were many surveys done in May and June showing that the vast majority of professional investors believed this was still a bear market. And the bounce was nothing more than a classic bear market rally. (aka Suckers Rally).
Yet in hindsight it is now abundantly clear that there was a better, truer compass to help navigate through this turmoil. And that is how low rates creates an obscenely large tailwind for stocks. And thus this understanding of the stock markets value versus low rates trumps virtually all other investment indicators.
Gladly we got this memo in enough time to turn our year around. In fact, coming down the back stretch of the year we have outperformed the S&P by a handsome amount (more about that in the Portfolio Update section below).
Going forward I want every Reitmeister Total Return member to lock this lesson into memory to provide us wise counsel at all future critical junctures. In fact, I have even gone so far as to initiate a calendar item that pops up once a week to remind me of this fact.
Meaning it will never be forgotten again!
Another solid week for our portfolio, but the last couple days have been a bit rougher. The reason for which may not seem obvious on the surface given the solid performance of the S&P and tech laden Nasdaq. However, when you take a gander over at the small caps in the Russell 2000 you will see 2 brutal sessions in a row at -0.38% Monday and -1.85% Tuesday. Indeed the smaller, growthier, riskier shares in our portfolio also did sputter out the last couple sessions.
Pulling back to the big picture we have enjoyed a long period of outperformance. In fact, my manual accounting of performance started on 6/11/20. In that time the S&P is up +24.15% versus the RTR return of +28.79%.
This is fairly impressive when you realize that for most of June, July and even August we continued to be defensive or even hedged in our portfolio. So that means our sparse long bets were in the right places. And that when we did fully get on board the bull rally, that we greatly outpaced the market.
That last point comes to light as we contemplate the topic of “What have you done for me lately?”. So as we look at just the month for December we are up +8.14% versus a more subdued +2.91% return for the S&P.
So yes, there are lessons to be learned this year to apply to future occasions when the low rates may create a bullish environment sooner than would typically be the case. Gladly we applied enough lessons learned from my previous 40 years to get us on the right side of the action and ready to take on whatever 2021 throws our way.
Now let’s dig in with more insights on our picks (those insights are reserved for Reitmeister Total Return subscribers. Read on below how you can start a 30 day trial to discover these picks for yourself).
What To Do Next?
Right now my Reitmeister Total Return portfolio is correctly positioned for where the market appears to be headed in 2021. That’s because we are overweight the groups most likely to benefit from society slowly, but surely emerging from the dark hole of the Coronavirus period.
In all the portfolio has 12 picks ready to excel in the weeks and months ahead including:
8 growth stocks trading at attractive discounts to fair value. This is a diversified collection of stocks in booming industries like home building, tech, consumer discretionary, cloud computing and more. Most are still trading 20-40% below fair value.
4 ETFs. 3 of them are direct plays on the “Back to Normal” trade in travel, leisure, entertainment and economically sensitive groups like the banks. Then one more ETF to gain from the long term trend for interest rates to get back to previous levels. That position got a boost from the recent Fed announcement.
If you would like to see the current portfolio of 12 stocks and ETFs, and be alerted to our next timely trades, then consider starting a 30 day trial by clicking the link below.
Wishing you a world of investment success!
…but everyone calls me Reity (pronounced “Righty”)
CEO, Stock News Network and Editor, Reitmeister Total Return
SPY shares were trading at $372.55 per share on Wednesday afternoon, up $1.09 (+0.29%). Year-to-date, SPY has gained 17.91%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Steve Reitmeister
Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks. More...
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