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Market Commentary 12-30-21

Kris Venezia, Market Analyst

I was asked a few times during year end meetings if I was worried about being in a bubble. While I don't think the overall market is in a bubble, there are constantly bubbles forming and popping in areas of the global market.

I would make a case that there were some bubbles with the stay-at-home and high flying stocks that did well during 2020.

Peloton went up 434% in 2020. There was a narrative that working out was changing in a revolutionary way. We were all going to workout in our living rooms forever.

It turns out that wasn't true. Zoom, Teladoc, Docusign, Chewy, Chegg and so many others in this table were part of that stay-at-home fad. They have come back down to earth.

Sports gambling stocks went through a bubble phase of their own. DraftKings and Penn National Gaming (which has a stake in Barstool Sportsbook) popped and then dropped.

Marijuana stocks went through a bubble. It's not seen in the chart because it was a shorter cycle, but we saw many pot stocks and ETF's skyrocket after Democrats won the Georgia run-off elections. The high was short lived. There are marijuana stocks and funds down over 50% from the peak in February.

Bubbles are a natural part of investing. They happen because humans invest and humans get emotional. Bubbles become an issue when they become a problem for the broader markets. The most popular example of this was the dot-com bubble from the early 2000's. The dot-com stocks became part of the broader market indexes and when they crashed, it caused a lot of pain.

The stay-at-home, marijuana and sports betting stocks have fallen, but the losses have been confined to those specific areas of the market.

Clint Carpenter, Director of Operations

In a rare feat, the S&P 500 has outperformed the NASDAQ this year, with a 27% YTD return, compared to the NASDAQ’s 22%. The DOW isn’t far off either, returning 19% YTD. With two more trading days left in this slightly volatile fourth quarter of the year, we’ll see how those returns hold up.

Moving on, treasury yields have bounced all over the graph this year. The 10-year, which started the year paying you .9% is now yielding slightly over 1.5%. The 30-year has been on a slightly different journey, starting the year paying 1.6%, bouncing a few times to nearly 2.5%, and settling today at a yield of around 1.9%. As you can imagine, mortgage rates have moved all over the map as well, but ultimately cost you more at about 3%. I’ll touch a bit more later on how the Federal Reserve influences these numbers.

Many of our clients have heard this from us already, but basically, here’s what the Fed has been up to.

When there is trouble in the economy, one of the most powerful tools, and arguably one of the only tools the Fed has to bolster it is to set interest rate policy. The Fed tinkers with some internal interest rates that banks use to borrow and lend money to each other, which then has an overall effect of changing all interest rates.

Essentially, the Fed is making it cheaper to borrow money. That’s nice for people like you and me because it makes it cheaper for us to go out and get a mortgage or a car loan or some other form of financing. Where it’s also very useful is in corporate borrowing. You can imagine how a company that borrows a lot of money to grow their operation is suddenly more profitable when they can borrow that money and pay less interest.

This is all great for the borrower, not so great for the lender, which is what you are when you buy bonds. You are loaning your money and receiving interest. When the Fed sets rates lower, you’re not receiving as much interest as you used to, making the bond market less attractive. This can have the effect of bolstering the stock market, because there’s really just nowhere else to put your money if you want it to grow. If the market starts to go up artificially in that regard, we can get into trouble, so the Fed has a great responsibility to not keep rates too low for too long, but also not raise them if the economy isn’t doing great.

So, after bringing rates down significantly at the beginning of the pandemic, what the Fed has been waiting on to start raising rates is for the labor market to get stronger. It has been trending better all year, and in the last few months we’ve seen very low unemployment, stronger job creation and rising wages. As such, the Fed has begun to indicate that they will begin to raise interest rates over the next few years. They can certainly change their minds if the economy gets into trouble again, but for now, we’re told to expect at least 3 rate hikes in 2022. This is something we obviously pay a lot of attention to, so we’ll be making changes as this unfolds and we’ll certainly be keeping you informed.


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