Behavioural finance analyst Ken Norquay says when the central bankers change direction, we should too.
2020, the so-called Year of Good Vision, turned out to be the Year of ‘We’ve Never Seen That Before’. Perhaps, the word ‘never’ is an exaggeration. The COVID-19 pandemic has a precedent. In 1919 there was a global Spanish Flu pandemic. Before that, history tells of Europe’s black plague, and North and South America’s Euro-disease pandemics among First Nations people.
And the February-March 2020 stock market crash is dwarfed by the 1929 and 1987 crashes. And America’s super-aggressive ‘print-as-much-as-it-takes’ monetary policy was preceded by Quantitative Easing I, II and III only a few years ago. Even the rarely mentioned lead-lag economic reversal has a precedent: normally the stock market peaks, then, some months later the economy peaks. In 2020, the economy peaked because of the pandemic—yet the stock market went to a new high late in the year. This occurred in 1929 and again in 1937. The old curse, ‘May you live in interesting times’, seemed to be the truest theme of 2020.
What theme should we expect for 2021? Let’s consider Yogi Berra’s quip: “It ain’t over ’til it’s over.” Apply this to the COVID-19 (COVID-20-21?) pandemic, the super-juicing of western economies by money-printing central banks, the virus-inspired economic collapse and the never-ending bull market. All these phenomena ‘ain’t over’ yet. In answering these questions, let’s think differently from the ‘fake news’ financial press. Let’s look at what we really know and not what we merely pretend to know.
What we don’t know
We know there’s a continuing battle raging between inflation and deflation. Overly easy monetary policy causes inflation. Too much debt causes deflation. The three huge and sudden declines of the stock market since 2018 warn of deflation; since then, the three even bigger surges back up to new highs herald inflation. Bullish analysts and salesmen all predict higher markets: bearish analysts and doomsters predict big economic and stock market disasters. We know where the financial battle lines are drawn, but we don’t know which side will win. This is important: we truly do not know which side will win.
We also know there’s a wicked virus scaring the daylights out of people and hurtling global economies into tailspins. In that context there is a battle between bare-faced conspiracy theorist naysayers and masked, politically correct conformists. But again, we do not know when or how this pandemic horror story will end.
Among long-term stock market investors, there are two main approaches: (1) buy-and-hold, and (2) buy-low-sell-high. When the stock market touches a new high, as in late December 2020, the buy-and-hold crowd celebrates and adds to their portfolio of stocks by buying more. The buy-low-sell-high crowd gets ready to ‘sell high’.
My investment theme
This column’s investment theme is: buy and hold investments in up trends and do not own investments in down trends. Let’s review the various market trends of 2020 and see what investments we should own in 2021without ‘pretending to know’.
US stock market
The S&P500 gained 16 per cent in 2020. This occurred in spite of the 35 per cent crash between February 20 and March 23. The long- term trend is UP and the yellow caution light is flashing brightly. Bullish analysts argue that the 35 per cent decline in 23 trading days was a complete bear market and the green light is on again. Bears argue that, following America’s longest ever bull market (March 9, 2009 to February 20, 2020), it takes more than one month to correct the bullish excesses of 11 years. But, thanks to FED monetary intervention, the bull market continues. For the record, our view is that the up trend that began on March 9, 2009 is still ON. The main reason for its longevity is continuing quantitative easing. Easy money makes the market go up.
Canadian stock market
The TSX Composite gained 3 per cent in 2020. It had lost 38 per cent in the short sharp crash of 02/20/2020 and has not yet fully recovered that loss. Clearly, Canadian stocks are under-performing those in the US. This is mainly because of the weakness of Canadian resource stocks and the strength of US internet stocks. The-long term trend is NEUTRAL.
US and Canadian long-term bonds
The price of US long-term bonds has drifted lower since spring 2020, even though the FED has been actively buying. The pattern is very similar in Canada. For now, we’ll continue our NEUTRAL assessment for both US and Canadian long-term bonds/interest rates. Keep your confidence level low regarding the bond market and interest rates. Central banks are actively intervening because of the COVID-19-20-21 economic debacle, rendering normal supply-demand analysis less effective, less reliable.
US dollar vs. basket of non-US currencies
The long-term trend has been NEUTRAL since 2015, but the short-term trend has been DOWN since FED Chairman Powell’s easy-money announcement on the Ides of March, 2020. It appears investors no longer feel the need for a ‘safe haven investment’ in US dollars.
Canadian dollar vs. US dollar
The loonie’s long-term trend has been NEUTRAL since the end of the 2011 to 2016 oil price crash. But the Canadian dollar’s short-term trend has been UP since the end of the oil price crash on April 28, 2020.
Gold prices are in a short-term DOWN trend within a long-term UP trend. This is a good time to increase your exposure to precious metals investments. History shows us that gold does well in times of high inflation and high deflation. (Precious metals perform poorly in times of stability.) We don’t know which financial force, inflation or deflation, will win in 2021, but we do know that economic stability is a long-shot!
Oil prices are so very interesting right now. Printing money causes inflation and higher oil prices. Pandemic-related travel restrictions cause lower demand for fuel and lower prices. Economic weakness in oil-producing countries pressures those countries to sell more oil, increasing supply. Low prices have caused some oil sands and shale operations to close, creating lower supply. Through all these pushes and pulls, the price has slowly risen since oil’s climactic sell-off last spring. For now, we’ll maintain our NEUTRAL rating for oil’s long-term trend. Don’t expect much for 2021 unless some unexpected surprise arrives.
In spring of 2020, oil prices reached their ultimate low, when crude oil futures actually went negative in price: futures speculators had to pay to have someone take delivery of the oil they had contracted to buy. This may have ended a volatile long-term DOWN trend that began in 2008. Following this emotional, climactic April 28, 2020 low, we expected an initial price rise, followed by a ‘test’ of the low. A long term DOWN-to-UP trend reversal would then be confirmed if/when crude oil prices surpass the initial rise. So far, the initial rise has been extended by the FED’s very aggressive easy-money printing spree. For now, the long-term trend is NEUTRAL.
Oil stocks, on the other hand, have followed our technical script and are currently in a long-term UP trend.
What to expect
What should we expect for 2021? Mr. Powell, of the US Federal Reserve Board, is watching the same financial trends we are. His ‘dream-come-true’ scenario would be a stable inflation rate of 1 per cent to 3 per cent and a return to economic normalcy. But, as long as the population and their governments are running scared of the pandemic, that sweet dream is unlikely to come true.
Pandemic or no pandemic, Powell’s job is to maintain stability in an unstable financial world. When economic and pandemic normalcy returns, monetary normalcy has to return with it. No more printing money. When Powell released the power of his monetary printing press on the Ides of March, 2020, the stock market went straight up. When things return to normal, what will happen? How will the central banks stabilize it?
Don’t expect answers to these questions. Mr. Powell and his fellow central bankers are watching the same statistics we are. But they are the leaders and we are the followers. Don’t forget to follow. When the leaders change direction, we should change direction too. Remember, 2021 is The Year of Following.
Special Note: American internet stocks have ‘gone parabolic’. Please review our June 2020 article to remind yourself how a ‘spike top’ unfolds. Then check a five-year chart of Invesco QQQ Trust Series 1, the ETF representing the NASDAQ-100 Index, composed mostly of giant internet companies. The time to ‘sell high’ is coming soon.
Ken Norquay, CMT, is the author of the book Beyond the Bull, which discusses the impact of your personality on your long-term investments: behavioural finance. He can be reached at firstname.lastname@example.org.
This is an edited version of an article that was originally published for subscribers in the January 2021, First Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
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The MoneyLetter •2/7/21 •