On Yields, Inflation, Stimulus

Here are a few thoughts on the zeitgeist of the market. 

1.  Nasdaq is underperforming because of higher yields. 

A few years ago, not many people thought that low yields were great for tech stocks.  Everyone equated low yields with low growth, and thus bad for tech stocks.  The biggest ever tech bubble (not including this one!) happened as the 10 year yield went from 4.20% in October 1998 to 6.80% in February 2000.  

Don't buy the argument that the reason Nasdaq is lagging the small caps and SPX is because yields are going up.  Yields were screaming higher in 2018 and the Nasdaq easily outperformed the SPX that year.  The main reason the Nasdaq is underperforming now is because it is over owned and way overvalued compared to the rest of the stock market.  That rubber band got stretched way too far in 2020 and you are getting a mean reversion to more reasonable relative valuations between growth and value stocks.  

2. High unemployment will keep inflation under control.  

Inflation is a monetary phenomena.  Let's say you suddenly give everyone in the US a million dollars when unemployment is high.  The money is printed by the Fed and sent as stimmy checks.  300 million x $1 million = $300 trillion.  The current USD M2 money supply is ~$20 trillion.  So if you multiply the money supply 15x, then everything should be 15 times more expensive, and retailers selling at the same prices after those $1M stimmy checks are idiots and will immediately sell out whatever they are selling.  In reality, instead of giving everyone $1 million, they effectively gave everyone $10,000 (per capita stimulus over the past 3 months ($3 trillion in stimulus). There will be inflation, its just the government and the Fed that will lie about it through their manipulated CPI and PCE numbers.  

3.  Fiscal stimulus will keep coming.  

There will just be one more stimulus left for Biden (infrastructure), one that will be spread out over 5 to 10 years, and then expect the government to take its foot off the pedal in 2022 (economy will be hot).  And after the 2022 midterm elections (odds are very high that Republicans take over the Senate, as midterm elections always heavily favor the party not in the White House + built in Senate advantage for Republicans), there will be gridlock.  And there is NO way a Senate led by Mitch McConnell will give additional stimulus for Biden ahead of 2024.  That means barring some unforeseen economic catastrophe, 2022, 2023, and 2024 will be without additional fiscal stimulus.  That's at least 3 years where the stock market is on its own, and with Fed Funds at zero with a possibility of it rising, but very low possibility of it falling.  That is a disaster waiting to happen.  The market is a forward looking mechanism, it may be too dumb to realize that Republicans will take back the Senate in 2022 but it will definitely consider that possibility, especially if the stock market falters and the economy begins slowing in the 2nd half of 2022 as I suspect.   

 

On the current market, I am waiting for a bigger dip to buy SPX and RUT. SPX 3820 is my target entry point. Not interested in NDX at the moment.  Expecting the next rally to be led by small caps, energy, and financials.