It was almost exactly one year ago that one of the most powerful market narratives in history emerged. As the pandemic raged, it didn’t take long for investors to figure out the biggest natural economic byproduct of COVID-19 was soaring demand for live-at-home technology for people and businesses.
On April 16, I wrote that, “It Turns Out the Whole Nasdaq is a Stay-At-Home Trade!” On April 30, Microsoft (NASDAQ: MSFT) crushed sales expectations by more than a billion dollars and the company said the virus had minimal impact on business. For the biggest companies in the world, our global suffering was a bottom-line booster. Their technology allowed the economy to get by indoors, and their products helped keep us sane when we had only our minds to keep us busy. The Quarantine Trade was a simple, verifiable story that rallied investors around stocks they already loved. The earnings power of big tech alone would’ve been enough to keep the market afloat, but in case there were any doubt, we got an even juicier story on top: stimmy checks. Direct deposit from the government started flowing in, and by this time, anyone who’d been too busy playing video games or Peloton-ing got the message loud and clear: Stocks Only Go Up.
That’s when the story started turning toxic. Crypto clowns and stock scammers pitched us everything in the book, and we bought. Everyone at some point or another the past year has acknowledged “we’re in a bubble,” but almost everyone follows up with “so don’t bet against it.” This confidence got a literal shot in the arm when vaccines were announced, and since then investors have been flip-flopping between two great stories: Stocks Only Go Up and the Recovery Trade. Somewhere along the way the two got mixed up, and now we’re stuck with the most expensive stock market in history. We’ve got the biggest economic restart in history too, but the stuff that stands to benefit the most is already expensive and looking tired.
The S&P 500 is just a smidge below its all-time highs, but the big stories of the past year are getting old. The Nasdaq-100 and Russell 2000 closed Tuesday at levels they first saw in early February. The market doesn’t have a clear story, and it needs one. Earnings determine direction in the long run, but volatility arises from narratives. Right now there’s a powerful, verifiable narrative lurking, waiting for its chance to seize – a variation on that early theme: “we are in a bubble.” Except this time “it’s popping.” You don’t go from Stocks Only Go Up to Stocks Sometimes Go Up; you go to Stocks Only Go Down, and then earn your way back to Sometimes.
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