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Something Doesn't Feel Right
Markets ripped in January.
The S&P 500 was up 6.1%. The Nasdaq was up 11%.
Underneath the hood, high beta stocks did much better.
Tesla was up 41%.
Coinbase was up 65%.
Carvana (CVNA) — a company we’ve written about before — was up 115%.
Are these businesses really worth tens of billions more 30 days later?
Even Bed, Bath & Beyond was up 12% in January… and that’s after they told investors bankruptcy is imminent. (It’s up 108% month to date, too.)
You can see most of these stocks went up into the right without much pullback last month.
Yes, everyone was incredibly bearish heading into the end of the year. Yes, most people were tax-loss harvesting in December. And yes, January is the time for people to reallocate to stocks.
But this level rally seems different. It seems like speculation is back on. The narrative has changed from deep recession to soft-landing.
The CNN Fear & Greed Index is showing greed is back.
Despite the fact Federal Reserve Chair Jerome Powell continues to tell the markets that interest rates will be higher for longer. Here’s Powell from last week’s press conference (emphasis added):
‘’We need substantial more evidence to be confident about inflation returning to 2%, in particular as we see core non-housing services inflation still running at 4% annualized with no progress there.
…We need to be honest with ourselves: inflation might be more persistent in this sticky category, and that means we have to do more.’’
The S&P 500 is only 12% off its January 2022 high… when speculation was still running rampant. Yet interest rates have gone from zero to 4.5-4.75%.
The markets still believe the Fed is bluffing. That it’ll pause and/or cut in the near future.
But the markets have gotten it wrong time and again last year. Looks like they were wrong again.
Last week the chance that the Fed hiked rates to 5.50% by June was priced at 4% probability.
Now it's at 30% probability.
— Jack Farley (@JackFarley96)
4:41 PM • Feb 6, 2023
Here’s hedge fund manager John Hussman on his market outlook echoing our sentiment:
“Over the past year, the S&P 500 has retreated only modestly from its January 2022 speculative peak, yet interest rates have normalized to a much greater extent. That, in my view, is probably the most dangerous aspect of the current market environment. We continue to observe valuations that were created only as the result of a decade of reckless zero-interest rate policy, yet zero-interest rate policy is no longer present."
Something just doesn’t feel right. The fear of missing out (FOMO) is back.
We’re getting vibes of November 2021 again. Here’s what we said November 16th, 2021 in Don’t Fall For The Trap:
“Everyone’s getting rich right now…
This is what happens towards the end of a bull market. The mania phase.
Everyone’s feeling good. Everyone’s making money. Everyone’s ready to gamble with just a little bit more of their money to go for that moonshot.
The FOMO (Fear Of Missing Out) is real.
It’s probably making you want to dabble in certain asset classes you wouldn’t have ever gotten into.
Speculations like day-trading. Cryptos. NFTs. Call options. Biotechs. You name it.
It’s all exciting and attractive. This idea of making many multiples on your money very quickly. The thrill feels like you’re in a casino. If just one of these moonshots hit, it’ll change your life.
Mania phases like these suck you in like a blackhole. Making you want to invest more and more of your money into speculative ideas.
Don’t succumb to the temptation.
Times like these are not normal. Getting caught up in this market will slaughter the average investor.”
We’re not predicting markets will crash. Far from it. In fact, we predicted the pain trade of 2023 was actually higher. Here’s what we said December 27th, 2022 in 2023 Predictions…:
“Sentiment is so bearish… no one believes this is possible.
There are so many headwinds in front of us.
Inflation. Recession. Major global supply-demand imbalances. A hawkish Fed. And hawkish central banks around the world. War.
Almost no one believes the markets can rally next year.
Is that the ‘pain trade?’ Could be…”
But if markets return, on average, 7-10% per year… then the gains are likely to have already been made.
Markets shouldn’t run this far this fast.
Bear market rallies are always the fiercest. They lull you into thinking we’re back to normal. But we’re far from normal. Expect more volatility.
Don’t let FOMO catch you off-guard.
Charlie Munger once said:
“Someone will always be getting richer faster than you. This is not a tragedy… The idea of caring that someone is making money faster than you are is one of the deadly sins.”
J.P. Morgan said:
"There's nothing in this world, which will so violently distort a man's judgement more than the sight of his neighbor getting rich."
You need to let compounding do its thing. To make sure you have some cash as an allocation… All in order to let you sleep well at night.
Of course, we want our company’s stocks to go up like everyone else.
But not like this.
Be careful.
Good investing,
Lance