Any investor who missed 2021’s spectacular rally in the S&P 500 and Nasdaq has really missed out on an incredible money making epoch.
The S&P 500 index is up 20%. Google, which I had recommended as a strategic buy at 1715 is up 65% in 2021 alone. The index is up 68% from the March 2020 pandemic lows even as the global economy has been devastated by COVID disruptions. I surfed the US markets, often with high octane leverage but I am now worried at various fiscal/monetary/political ill winds.
The stellar EPS growth of Big Tech vindicated my conviction. Yet the disappointment in August payrolls now tells me that the Panglosian best of all possible macro worlds may have ended with the summer and Labour Day will be a time for portfolio introspection.
The boy wonder is back from his Greek isles cruise, Shaz Razzmataz is back from New York, the Yogster is all set to predict Dubai home prices from his Address View pool side perch and the Pre-IPO sapno Ki Rani is smoking some hot deals in her philosophers pipe. The midsummer nights dreams are now over and it is time to face hard macro realities again.
Success in the capital markets is impossible without a real time grasp of life in the second derivative. US economic growth has peaked, corporate earnings could well decelerate this autumn, Biden will raise US personal and corporate tax rate, unemployment benefits for 6 million Americans expire this month and we have seen peak stimulus.
Climate change will wreak havoc on the world’s cities as hurricane Ida has now proved with the floods in New York, Pennsylvania and New Jersey. The delta variant virus is as vicious as ever in the emerging markets. The US equity valuations remind me of Lady Caroline Lamb’s first words to Lord Byron “you are mad, bad and dangerous to know”.
We closed at 4536 on the index and I have a nagging feeling that we just witnessed the bull market peak for 2021. When the big guy of Al Furjan goes 50% cash, I have to agree dear Brutus, that the fault lies not in our stars if we lose money in this autumn of destiny. The Volatility Index at 16 does not remotely capture the risk I see looming on the horizon.
The S&P 500 is not cheap at 21X forward earnings if all the macro tailwinds have been priced in and the stock market faces legislative headwinds. In a world of speculative garbage like Dogecoins, meme stocks and Robinhood, nemesis can be both fast and brutal. 2021 has seen vicious sector/style sell offs, as we saw with energy in June. The average Nasdaq stock is down 25% from its highs even as FANG valuations hit the moon.
The August payroll shock means that a Fed taper will not happen at the September FOMC but it is inevitable at the November conclave. This bull market was a gift from the Powell Fed’s $8.2 trillion post COVID balance sheet but this largess is now skating on thin Ice.
History tells me that the broad index 30 year average multiple is 16X, oops!
Matein Khalid is Chief Investment Officer with Asas Capital