Gregory Bergman

Editor-in-chief, CapitalWatch

The stock market crashed last year on word of a novel coronavirus from China set to wreak unprecedented havoc on the nation and the world, extinguishing many lives and many more livelihoods. The economy shut down and the market sold off. But the Fed Chairman Jerome Powell stepped up fast and swore to flood the markets with liquidity and slash rates to oblivion. He kept his promise, and the equities markets boomed while the economy tanked, and Covid-19 cases rose—all amid nationwide social unrest.

Still, the market kept going higher. First, the stay-at-home stocks ascended to new heights. As Zoom (ZM) became a verb, stocks in companies making everything from video conferencing apps to canned food to disinfectants broke new highs. Big tech was the big winner--travel, industrial, and energy, the big loser.

Now, after a full year of showcasing the nation’s incomparably incompetent management of the Covid-19 crisis (vaccine development is something altogether different), America is bolstering a magnificent comeback. Production and manufacturing are steady and climbing, and a surprisingly competent vaccine rollout (grading on a global curve anyway) has lifted the economic prospects of the nation. It turns out, after all this, that the American economy might not only perform well in 2021 but perform spectacularly.

With the nation on the verge of reopening, the beloved stocks of 2020 fell out of favor early this year, and the re-opening trade became the go-to for investors. Big tech names even with stunning earnings like Amazon (AMZN), Alphabet (GOOGL), Neflix (NFLX), Facebook (FB) were suddenly defanged. Oil and travel and industrial stocks, along with boredom-fueled retail led short-squeezes, became the trade of 2021.

As Biden attempts to keep his promise to “build back better,” the Senate, through the tricky budget reconciliation process you can read about elsewhere, will push through the $1.9 trillion stimulus and recovery package in which hundreds of billions are allocated to do much more than stave off a crisis on account of the pandemic. Republican criticisms of the center on the assertion that it contains long-desired Democrat wishes that are not directly-related to the health crisis at hand. They are not wrong in that assertion. The bill includes such long desired items such as expanding the child tax credit and increasing spending on K-12 education to the tune of $130 billion, more than double the last Covid-19 rescue bill. The historic stimulus package is as expensive as it is sweeping. It is widely believed that the bill could cut the nation’s child poverty rate in half.

Biden is on record for saying he is more worried about going too small, as they did in response to the 2008 housing debacle, than going too big. While the skies look clear for air travel (and airline stocks) as vaccinations rise and infections drop, the thinking here is that the inflationary risk associated with such an expensive bill is worth taking for this kind of insurance policy against the worst case scenario.

For the economy and the health of the nation overall, I agree that the bill should be passed. So do Wall Street economists, who predict that this bill will usher in 5% GDP growth in 2021, the largest expansion of the economy since 1984. But when it comes to the equity markets, this bill might spark a further sell-off that could last into the summer and beyond, or so say many market experts.

But why?

“Part of the enthusiasm in the marketplace has been that the Fed is going to keep the cocaine going,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, to The New York Times. “The better and better things are, the less and less rationale the Fed has for keeping rates at zero.”

Even if the inflation worries are overblown (the inflation fear mongers have been wrong for the last three decades) any hint of inflation might spark a further sell-off. Bond yields are already rising, and while the Fed has tried to reassure the markets that it does not plan to reduce its support, rising bond yields, a typically bad thing for stocks, just keep on rising. As yields rise, borrowing becomes expensive, which hurts high-growth smaller companies that need capital the most. So analysts now say to buy cyclical stocks for the reopening trade. But hasn’t that trade already passed?

Yes and no. It is true that the S&P 500 energy stocks are up over 30% in 2021, and financials have gained more than 14%. I still like Exxon (XOM) and Valero (VLO) and Devon (DVN) on energy, and I like Wells Fargo (WFC) and Bank of America (BAC) in the banking sector. But real value is still in stocks like Boeing (BA), which trades at $218 a share after this week's downtown, and is down from $340 per share on February 14 of last year. The aerospace giant has problems, but no matter what the market or economy does (within reason) the stock will be worth what it was and more in the next few years. Still, a couple of the best trades are in tech: Microsoft (MSFT) and Apple (APPL), two companies whose earnings just get bigger and better and for whom the reopening does not spell a revenue decline, a fact not currently reflected in their falling share prices.

Boredom Will Help Save the Markets

Unless this stimulus package does indeed produce 1970s-level inflation which, it should be pointed out has not occurred since despite many, many warnings, the millions of new active traders (you know, the ones who pumped up GameStop (GME) and AMC) may have entered the market on Covid-19-lockdown-related boredom, but they are here to stay long after the last American is inoculated.

That’s why I believe that the feared short-term downturn in stocks will be just that—short-term. The sheer activity of new traders combined with savings income rates (now at their highest levels in years because of stimulus checks, enhanced unemployment benefits and lockdowns) will serve to shorten the period of any market correction. Stocks will fall, but activity will continue, and it is precisely such activity that will keep many stocks alive: It is going to be about picking the right stocks, the ones that you know are winners long-term.

For now, Bitcoin is a good bet as similarly hip investments like Tesla (TSLA) big tech fall. While the cryptocurrency fell 4% after Powell’s recent dovish repetitions to the dismay of Bitcoin buyers looking for the cryptocurrency to serve as inflation hedge in the face of trillions of newly printed money (on which Powell did not make promises), Bitcoin is attractive to many investors for many reasons other than such hedge. Bitcoin and boredom go hand in hand and, after even when the boredom subsides and bars are packed to full capacity, the buying crypto and stocks from your phone in-between jello shots is the kind of “new normal” we’ve talked about for the past year.

For me, I bought a rare call option on Microsoft ending expiring way out on September 17 (should have waited a bit to see if the stock falls a little more). Now, if you don’t mind holding. you can pick up any of the FAANG stocks at these prices, especially Apple. They may go lower; they may not. But they will go back up. And, when God forbid, the next pandemic hits or some killer Covid strain emerges—they will be the first to go up even more.

Gregory Bergman

Editor-in-chief, CapitalWatch

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