clouds

Are clouds gathering pace over the 2021 sky?

Wealth Monaco proposes you the last article of Pier Alberto Furno – CEO of Nemesis SAM Monaco – an independent company in asset management, investment advisory, order receipt and transmission, and fund management for its domestic and international clients.

The year 2020 will be remembered as the year of a global pandemic, Covid 19, which caused global economies to shut down, worldwide population to go in lockdown and with economic consequences that in theory could only be compared to the great recession of 1929.

The economy was destroyed by Covid-19 and unemployment went from historic lows to historic highs, but it didn’t dampen the market euphoric mood.

Despite this gloomy comparison to 1929 we have the S&P 500 up 18.3% for the year and the Nasdaq up 45% for the same period making it a ten year bull market.

The current environment increasingly reminds me of the long summer of 1999 when growth and technology strongly outperformed value investing, when looking at valuations didn’t matter anymore, when retail investors were behaving speculatively, when only irrational growth rate projections could justify valuations, when the number of IPOs are at new high and euphoric bullish sentiment is the consensus.

The ten years long bull market that started in 2009 has finally matured and entered the late stage of an epic bubble that will burst no matter how hard the Federal Reserve tries to support and manipulate the market by injecting cash and maintaining low rates.

During the late stage of a bubble the market behaviour is characterised by excessive advance and by retail investors behaving irrationally and extremely speculatively. The S&P 500 in the last 9 months is up 68% and the Nasdaq 89.5% for the same period and the second ingredient can easily be observed in the price movement of companies like Hertz and Tesla…

The interesting point is that today we are facing a very high level of uncertainty, global economies are still severely handicapped by the effect of Covid 19 and probably encountering a slowdown and double dip, social unrest could increase in the coming months, unemployment is at historical high levels, investors inflows into junk bonds is at an all time high fuelled by Fed’s incentives and the S&P 500 P/E ratio is at the highest level of the last ten years while the economy is at his worst.

Even the Fed will run out of carrots to dangle…

Despite all the elements pointing in one direction what I learned over the years and after several bubbles is that to call the day, the week or the month when the market’s top is reached and when the bubble will start bursting is simply an impossible task. On the other hand, all bubbles eventually end and just like in 2000 and 2008 this one will too and precisely at the moment when it will be least expected. 

Under many aspects 2021 is not 1999 but it reminds me of the never-ending period between June 1999 and August 2000 where the market could keep going up and making new highs for months to come as well as bursting any day. 

Most likely, in my humble opinion, it will happen in late spring/ summertime when the full deployment of the Covid vaccine will take place, stimulus packages will be reduced by the FED in parallel with the disappearance of the Covid threat, the focus will then switch to the poor health conditions of the economy and the absurd market valuations.

This event will be remembered as one of the greatest bubbles in market history and it’s an honour to be navigating once again through such a market that require the mental and emotional strength to stick to your convictions and avoid the “crowd behaviour”.     

Of course, 2020 is not 1999 but a few similar worrisome phenomenon are present once again and in my opinion US equities are in a bubble today just like in 1999 and my advice is step off the dance floor and leave the party.   

Article : Pier Alberto Furno –Nemesis SAM Monaco

Post Author: Wealth Monaco