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T2 Asset Management

Feb 2021 Market Commentary

Well, that’s it! We are going to stop analyzing the markets and just join some internet chat rooms for information on how to invest. For those of you that missed the fun this month, there were some chat rooms on Reddit that ganged up on some larger hedge funds causing billions of dollars of losses. Now, no one is saddened by the woes of these much larger and supposedly smarter traders, and we certainly love to see the little guys making a few bucks. However, this certainly does feel like 1999 when everyone was an expert in the markets and fundamentals no longer mattered. To give you an example of that valuation problem, below is the earnings yield on the S&P 500 (courtesy of multpl.com). As you can see, investors in the stock market are currently receiving less earnings for their investments than pretty much ever.

In addition, the economic data were pretty miserable for the month. Gross Domestic Product (GDP) came in at 4% matching expectations. Non-farm payrolls lost 140,000 jobs missing expectations by nearly 200,000. And finally, retail sales were -0.7%, also missing expectations. The bottom line is that during COVID-19, we lost 20 million jobs and only about 12 million of those came back. Now, the Federal Reserve has been pouring money into the market, and the U.S. Government has added to the pile with stimulus efforts as well, but that can only go so far. If the economy is sagging, and the Fed just pours more money, eventually the end result is stagflation, and that will not be a good thing for bonds or stocks.

Price action on the S&P 500 Index is beginning to look a little bit dicey as we pulled back about 3% last week. It is still well above the pre-election lows, however. The unprecedented pouring in of money has propped up this market like no other, and it is unclear how this will end. This is all a new experiment for the financial markets and for the policy makers that are guiding them. We are not sure that the endless bailouts and printing of money will end well. Much like the homemaker that thinks another new credit card will help solve their spending problem.

We have continued to recommend caution to investors. We still advise leaving a good portion invested, as we don’t know when this situation will resolve itself. The market can disconnect itself from reality for quite some time, but don’t be fooled, this is not likely the start of the next new bull market.