Broker Check

A Holiday Miracle

| December 29, 2020

In Cornerstone’s last post of what has been a wild year, let's start off positively with what can only be described as a holiday miracle.

The Federal Open Market Committee (FOMC), which sets interest rates, released its third in a quarterly series of forecasts for the full gross domestic product (GDP) and jobless rates. The reports have shown massive improvements each quarter.

That's not the full story though.

Let's go back to March 23, 2020, the precise date of the stock market bottom. The Federal Reserve predicted unemployment of more than 30 percent, or more specifically, 32.1 percent. Such a rate would have meant 52.81 million people unemployed.

The Fed already dumped massive amounts of liquidity on the economy on the assumption that we were going to encounter the worst recession since the Great Depression. But in miraculous fashion, the projections driving the Fed’s liquidity effort have been way off the mark.

Is it the chicken or the egg? We abstain from answering in the spirit of staying positive.

In retrospect, the peak jobless rate was 14.7 percent in April. Miraculously, it was halved in six months, with the most people unemployed topping out at 20 million, not the 52.81 million originally projected.

Continuing this holiday miracle theme, let's turn our attention to the Fed’s astonishing series of economic projections over the last three quarters, which was recently discussed in a Wall Street Journal editorial. As you can see from the table below, the Fed’s economists have continually improved their predictions throughout the year.

To summarize, in the last six months the Fed has ratcheted down the unemployment rate from 9.3 percent in June to 6.7 percent earlier this month. It’s also reduced its full-year GDP decline from -6.5 percent in June to -2.4 percent in December, which is nearly a two-thirds cut.

We certainly acknowledge the difficulty of this year. Many have lost a lot, unfortunately. Some even lost everything. Everyone’s lives seem to have been affected in some way. Speaking strictly in terms of macroeconomic recovery, from a “glass half full” perspective, where we are today in comparison to where “experts” and “analysts” expected us to be has to be considered a true holiday miracle.

Again, we acknowledge the pain of small businesses and the service industry. That portion of the economy has been beaten up bad. But when looking through a broader macroeconomic lens, the “holiday miracle” is also reflected within the markets:

As you can see, two major indices have almost doubled in value from when the market bottomed out. We think this economic recovery will continue into 2021 and believe it’s nothing short of remarkable how the economy has powered through this year. In the height of the induced panic, we came nowhere close to the “end times” predictions that were widely batted around.

Data vs. Narrative

Switching gears to a more forward-looking market analysis for one last time in 2020, we think there's no better way to review the year than to look through the lens of the trusted Map Signals’ Big Money Index (BMI), which tracks institutional investor activity.

This time, we want to look at the full-year BMI and what was happening in the news at the time. Keep in mind, the BMI doesn’t respond to news headlines. But the chart below is instructive because it plots the disparity between data-driven analysis via the BMI and assessments driven by news narrative.

The first thing to notice is the news is a less reliable indicator of forward-looking market prices than the BMI. We would argue that as the news gets positive, market peaks approach. The inverse seems to be true as well. When doom and gloom fill the headlines, we are nearing market troughs.

This illustrates how “big money” doesn’t trade on the news, it actually trades before the news. It also shows why the BMI is one of our most important guideposts for investment decisions.

So, what does the BMI tell us about the start of 2021 (i.e., President-elect Biden’s first 100 days)?

First, an important caveat – Cornerstone isn’t a genie wielding a crystal ball full of truths about the future. Nobody knows what will happen with certainty. That said, we think there is predictive power in data, and we want to provide some forecasts for our readers to keep in mind:

  1. Markets will rise in 2021
  2. Retail investors will buy stocks heavily in January
  3. 2020 year-over-year comparisons will be epic
  4. Value stocks will continue to rotate, but growth will be back by Spring
  5. Expect more twists and turns
  6. 2021 will be better than 2020

To add some detail, markets will likely continue to rise off the back of an improved economy, new opportunities, and increased investor activity. Regarding retail investors buying in January, that may be a time to lighten risk (more on that later).

When looking back on this year, the year-over-year comparisons will stand out. We may see the largest earnings and revenue growth in a long time, possibly ever, and certainly in my lifetime (although my doctor says I’m young).

For markets, equity rotation will continue next year. We foresee one highly oversold period in 2021 (i.e., a great opportunity to buy), along with more volatility. Expect more investors to suffer from panic and overconfidence throughout the year, which is no different than what we saw this year…or any year.

Lastly, next year will be better than this year. Many people seem to think next year is destined to be better than this year, but that isn’t necessarily true. However, ever the optimists, we believe 2021 will be a better year than 2020. We’re hopeful the battle with COVID-19 will end in triumph and people’s prospects will improve as we move forward.

Overbought…Until When?

Recently, with so many mentions of the market being overbought, we’re frequently hearing questions about when the stock market will crash. So, we’ll do our best to provide some historical average indicators to keep in mind going into the new year.

Remember though, the BMI can remain overbought for a long time (e.g., last year from May 6 to September 2, though that’s a historical outlier). The true key is to note when the BMI sneaks into overbought territory because that's when we need to pay attention. The index often will continue to rise for some time thereafter.

We pulled the data together in a more readable fashion and organized it chronologically. Based on the below averages, here is a ballpark figure of what to expect in the market:

  • Average time from overbought status to BMI peak: 19 days
  • Average time from overbought status to stock index peak: 46 days
  • Average time from stock index peak to trough: 91 days

In the current overbought market, the 19-day overbought-to-BMI-peak range covers through December 21, 2020, the 46-day overbought-to-index-peak range covers through January 18, 2021, and the 91-day index-peak-to-trough range covers through April 19, 2021. That last range roughly spans President-elect Biden’s first 100 days in office.

While these are precise figures, they are all based on averages of more than 30 years of data. Whatever unfolds will not be as exact as described above. Still, hopefully this provides a guideline of what to expect to start the year and some education to help minimize overreactions and panic (that’s what differentiates us from the media).

Speaking of the new year, we’d like to wish everyone a fantastic 2021. No matter how your 2020 was, let’s strive to make 2021 better. If it’s helpful, maybe consider a Festivus-style airing of grievances!

Securities sold through CoreCap Investments, LLC.  Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial Services, CoreCap Investments, and CoreCap Advisors are separate and unaf´Čüliated entities.