When the facts change, I change my mind. What do you do, sir?
-British economist John Maynard Keynes.
The environment that so profoundly favored the "pandemic stocks", if not over, is certainly less of a tailwind.
Pandemic stocks are the ones that did so well from March 2020 until early this year; Zoom, Teladoc, ARKK ETF, and Peleton as examples. No one can say for sure if these companies could reclaim the miraculous growth rates they exhibited during this timeframe. But if we assign the pandemic induced economic shutdown to creating the favorable environment that sent these stocks to the stratosphere, then what follows is that we should assign their recent plunge to the economy shifting to reopening. And it is a rapid reopening at that, even with this Friday's significantly lower than expected nonfarm payroll report.
The two key reasons why stocks could have sky-high valuations are:
- because of their growth rate and the belief that their growth rate will remain high into the future.
- The cost of capital is very low, which gives companies a lower hurdle to clear.
Now that consumers are finally heading out to restaurants, live events, and vacations, money being spent is expected to move away from the companies that enabled us to stay at home, to those that enable us to go out. This questions pandemic stocks' ability to keep rising due to rapid growth.
The cost of capital is still exceedingly low. But based on the expectation that interest rates, both short term and long term, must rise because inflation has risen, many investors believe that growth dampening higher rates are right around the corner.
Beneath the surface of the major benchmarks, lots of stocks have been crumbling since February. You just haven't noticed because the benchmarks are at or near record highs. Where is the money from these falling stocks going? Into Facebook, Amazon, Apple, Microsoft, and Alphabet (Google). As long as these stocks hold up, so too should the benchmarks.
This is so reminiscent of the year 2000 tech wreck. Smaller, hyper aggressive tech stocks were crumbling since January of 2000, but the tech wreck didn't catch up to the heavyweights until March of 2000. The NASDAQ dropped buy almost 80%. And investors were buying the dips the whole way down.
Yes, past performance is not a guarantee of future performance. But when the environment that for hot stocks changes, I change my mind. What do you do?
These two brief videos do a better job of explaining my position. They're highlights from two of my livestream episodes this week. While you're watching, please subscribe to my YouTube channel.
My livestream show is called Be the Boss of Your Money. I broadcast every Monday through Thursday at 4:30 PM EST on LinkedIn, YouTube, and Facebook.
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Thanks for reading and see you next week,
Mitch
