Shesa's MARCH 2021 Investment Blog
MARCH 2021 - INVESTMENT BLOG
By Shesa Nayak
U.S. Stock Market Update
This month we saw a split market in the U.S stock indexes. Both DOW and S&P 500 hit new all-time high but NASDAQ fell to a correction territory attributed to the 10-year Treasury yield that went past 1.75%. The technology led Nasdaq was hit the hardest losing 12% in just a couple of weeks and went into correction mode. This was attributed to rising yields that triggered rotation away from growth-oriented stocks and tech-related stocks into business reopening stocks, value-oriented and cyclical sectors. However, Nasdaq has recovered some of its loss in last couple of weeks. Meanwhile, Biden administration has passed $1.9 trillion Coronavirus package. Despite the bond-yield and inflation fear, I am very optimistic that this would be a major booster for the economy as money goes to 85% of the Americans. In next few weeks we will see Q1 earnings which is expected to rise 22.1%. During FOMC meeting, Fed stated that they will not be raising interest rate till 2023 despite uptick in inflation.
There are few questions that comes to mind, even if Fed is buying $120 billion worth of assets each month as part of quantitative easing, why NASDAQ was beaten so hard, so fast? Well, there could be many reasons which I will try to analyze and share my view. Another question is, after seeing this Nasdaq pullback, does it make sense to stay away from technology stocks? I will share all my thoughts but before that let’s take a look at stock market indexes.
| 2021 | | | |||
Indexes | 1/2/2021 | Close FRI 3/21/21 | Change in 2021 | % Change in 2021 | All Time High | % from All Time High |
DOW | 30,606.48 | 32,627.97 | 2,021.49 | 6.60 | 33,227.78 | -1.81% |
S&P 500 | 3,756.07 | 3,913.10 | 157.03 | 4.18 | 3,960.27 | -1.19% |
NASDAQ | 12,888.28 | 13,215.24 | 326.96 | 2.54 | 14,109.12 | -6.34% |
BTK | 5,739.02 | 5,579.59 | -159.43 | -2.78 | 6376.77 | -12.50% |
NBI | 4,759.14 | 4,892.78 | 133.64 | 2.81 | 5466.79 | -10.50% |
S&P 500 Earnings
Earnings: For Q1 2021, the estimated earnings growth rate for the S&P 500 is 22.1%. If this holds true then it will mark the highest year-over-year earnings growth reported by the index since Q3 2018 when companies reported 26.1% earnings growth.
Valuation: The forward 12-month P/E ratio for the S&P 500 is 21.9. This P/E ratio is above the 5-year average (17.7) and above the 10-year average (15.9).
Economy News
- GDP: Q4 GDP growth was 4.1% quarter over quarter and annual growth of -2.4%. The economy is reflecting both the continued economic recovery from the sharp declines after the impact of the COVID-19 pandemic
- FED forecasts GDP is expected to increase 6.5% in 2021 before cooling off in later years. Economic growth in the first quarter could hit as high as 10%, according to a Federal Reserve.
- Goldman Sachs raised GDP forecast GDP growth of 8% in 2021
- Manufacturing is at its highest level since 2018, with prices rising and inventories choked
- Employment remains the main weak spot, though some encouraging signs are emerging.
- U.S Coronavirus Cases: The number of cases has gone up to 29.8 million vs. 20.2 million, Death:541K vs. 348K since my last blog. Although more than 33 million people have been vaccinated (one/two doses) still there is uptick of COVID cases in 20 states recently.
- Retail Sales: February retail sales decreased -3% vs. 7.6% growth in January 2021
- The unemployment rate declined to 6.2% FEB 2021 down from 6.3% In January
- US Total GDP/Economy: $21.43 trillion
- Interest Rate: 0.25%
- Inflation rate: 1.7% in Feb vs. 1.4% in Jan
- Consumer Confidence: 83 in March vs. 76.8 in the previous month
A quick glance at the Economy - Federal Reserve, GDP and Unemployment
Last week during the FOMC meeting FED kept interest rate unchanged as expected. The members do not foresee interest rate hike before 2023. However, Fed Chair Jerome Paul said that they will be focusing on data and not concerned about inflation at this time. Fed will continue its Quantitative Easing (QE) program. In other words, it will continue its asset purchase program in which the central bank buys at least $120 billion of bonds a month. FED also forecasted that GDP is expected to increase 6.5% in 2021 before cooling off in later years, according to quarterly economic projections from members of the FOMC. Reminding the blog readers that the GDP projection was 4.2% in December. Furthermore, they also project GDP growth of 3.3% for 2022 and 2.2% for 2023. In addition to the robust GDP growth, the members also anticipate that unemployment to fall to 4.5% from its current level of 6.2%.
The Yield Curve – Root behind Nasdaq Correction
On Thursday, 3/18, the yield on the 10-year U.S. Treasury spiked this morning above 1.75% and finally settling at 1.72%, and the 30-year Treasury bond rose above 2.5% even though the Fed said it will keep rates near zero and continue its bond purchasing program.
The NASDAQ and S&P 500 dipped on the news as the rising yield on the 10-year Treasury bond is still spooking investors. And of course, the media likes to tell people that as bond yields go up, it is going to increase inflationary pressure and that technology and growth stocks are very expensive. According to Bespoke, the last time both 10-year and 30-year Treasury yields traded at new highs was in October 2018. Such type of situation has occurred 15 times since 1980, and only once out of those 15 times S&P 500 not traded higher in the following 6-12 months. So, I believe this is a short-term bump and market may focus on earnings after couple of weeks. Actually, money is not moving out of the market
Why NASDAQ went to Correction - is it time to Get out?
As I stated in my opening remarks, the benchmark yield which was 0.90% on January 1, 2021 went to as high as 1.75% triggering a correction in Nasdaq. As we know, when the indexes went down more than 10% it’s termed as correction. As the readers may be aware, Nasdaq went down more than 12% a couple of weeks ago. Why did it happen? When the yield rises there is a fear inflation and increase in interest rates. These higher yields make it more expensive to borrow money, and that tends to slow down economic growth, which could be bad for stocks. As Nasdaq stocks had gone up significantly, most of those stocks were trading with high multiples. Many of the stocks like cloud, renewable energy and cannabis were hit the hardest. Many such stocks were smacked down 20,30, 40% or more from their 52-weeks high. Due to The HFT (High Frequency Trading) and Algorithm based trading determines the direction of these stocks based on various parameters. We are seeing the stimulus coming, businesses are reopening, economy is reopening and moreover Fed is still buying bonds of $120 billion. So, why did Nasdaq got smacked? I could think of a few reasons:
- Treasury Yield went up as high as 1.75% from 0.90% in January 2021
- Stocks had gone up significantly. Please note that, Nasdaq has gone up more than 99% since it hit low last year on March 16
- As stock went up, so also the valuations, particularly Nasdaq stocks became more expensive
- Some stocks had gone up too high too fast
- Some IPOs went into bubble
Visualizing the above factors some correction was imminent. However, two questions that comes to my mind. First, even though Fed is still buying $120 billion worth of bonds, in other words quantitative easing is still in place but why did not stock go down so much so fast? I have already stated the facts above. However, the other thing that comes to my mind is, lot of investors and politicians were telling that there were disparities and only certain sectors of the market was going up and traders/investors were chasing them. As such, treasury yield could have been used as an opportunity to dump many of the high-flying tech stocks. In fact, Fed Chair Jerome Powell keeps repeating his same old talking points while ignoring the fact that long-term Treasury bond yields are soaring. Why? “Fed may be thinking of bringing some equality to the market as investors could sell some high-flying stocks and jump into other sectors as aforesaid. That way, the other sectors get benefited. This is absolutely my thoughts and I may be totally wrong!!
However, in the whole process, money did not leave the stock market but moved to other sectors like energy, leisure and many other businesses re-opening stock. Many of the stocks in those sectors are no cheaper as most of them have gone up significantly in last few months. Having said that, the good thing for those stocks is that they will have easy over year comparison, whereas many Nasdaq technology stocks will have a very tough year-over-year comparison.
Are the run-on technology stocks over?
Now another question comes to my mind. So, is the run-on technology stocks over? In my view, it can’t be generalized. For some it could be but for many other stocks I don’t think run is over. Now that those stocks are down, as I said some stocks have been beaten down 30-40-50% and that creates an opportunity for investors, particularly those who are willing to invest for long term. Looking to the future trend some of the renewable energy stocks and Cannabis stocks are looking exciting to me, though one has to decide diligently. The technology stocks would still do well in the long-run as innovations will never go away! As long as, they can generate revenue and profit always they will always be in demand. In long run, good technology stocks have always generated nice returns for the shareholders. Let’s not forget that Technology (IT sector) has amassed 466% return in last 10 years!!
Is the market correction a bad thing?
Corrections could be painful because nobody likes to see the portfolio comes down. Obviously, it’s a terrible feeling. However, corrections are not bad thing as it brings new money/investors to the stock market, which is good for long term health of the stock market. That’s the reason, one should trim some positions when time is good and have some cash on the sidelines to take such opportunities. One lesson that I have learned is that buying good stock at the worst time pays handsomely in the long term. Hence, if an investor has some cash available then that’s the perfect time to jump-in accumulate in a phased manner. However, many retail investors jump-out of the ship because of fear rather than accumulating the stock or initiating a new position. But when to jump-in or jump-out depends on our research and experience. And that differentiates between good/bad investors. Corrections happen from time to time but good stocks continue to move higher over time. As I have said many times before, bull market prevails 90% of the time and bear market prevails about 10% of the time. So, we must diligently decide which side of the boat we should be in.
Strength in economy still exists
There are several strength positives in economy which support for a strong stock market. Let me put those facts on very high level.
- Stimulus: A few days ago, Biden administration has passed $1.9T COVID stimulus bill which is certainly going to help the economy. U.S government and Fed has pumped up $6.5 trillion stimulus last year. If we add this $1.9T then total $8.4T has been pumped up as stimulus thus far. The next is expected to be infrastructure spending in the tune of $2-4T.
- Robust GDP and Earnings Growth: GDP forecast for this year is 6.8%. Earnings Growth in Q1 is expected to rise 22.1% highest since 2018
- Economy expected to bounce back: Business Re-opening: Employment, customer demand/ consumer Spending; all these are positives
- Easy year over year comparison revenue/profit but some stock may face stiff comparison
- Trillions of dollars still sitting on the sideline
- FED said during last FOMC that there is no plan to raise interest rate before 2023 and the quantitative easing to continue
- Strong Home Market: Home prices are on tear, more buyers than seller which stimulates the economy in the form of consumer spending
- U.S Manufacturing is at its highest level since 2018
Weak Spots in Economy
- Unemployment is still high at 6.2%
- Inflation is picking up
- There are still some bubbles, particularly in SPAC and some IPOs
- Better economy does not necessarily mean the best return from stock
My final thoughts: I do not see a major risk till Q1 earnings. What we are seeing in the market is mainly rotation from high valued stock to some of the reopening stocks, conservative stocks like energy, industrial etc. But those stocks are also reaching to their pick. We are already seeing some pullback happening in energy sector. March will be the quarter end, so quarter-end window dressing will begin where the institutional investors and ETF managers would start rebalancing their portfolio and buy fundamentally superior stocks. So, we may see stock market bounce back in next week or two. If earnings are good the momentum will continue to May, June. Let’s not forget that April happens to be one of the best months for the stock market. Though, Q2 earnings could be the better, let’s not forget that all good news may be behind us by then. Hence, I am expecting to see some turbulence during July-Oct timeframe. The other good news I can foresee is “Infrastructure bill”. That should provide some impetus to the renewable energy sector. My anticipation is that renewable energy and cannabis sector should have tail wind for them due to democratic push in these areas. However, one thing I would like to emphasize, we may not see the stable stock market that we experienced from March 2020 till Jan 2021. Things could be changing and I may have to revisit my strategy going forward. The stock market may go further high in next couple of months but better to keep a close eye. I believe that each investor should revisit their own investment strategy and align to the changing market situation. More in my future blog.
Nothing goes up in a straight line forever: Let's not forget the fact that Stock market have a huge run since low last year major dip on March 16. Let’s think back to one year ago and it seemed like the financial world was coming to an end due to COVID-19. All experts, media were telling that this is a huge problem because it’s not only a financial problem but also medical problem and can linger for years. But see how the stock market has performed!!
NASDAQ up: 99%, DOW up: 79%, S&P 500 up: 78%. Many investors might have made so much of money, so we should be mentally prepared to take some beating when things do not go our way. We've already seen a correction in the Nasdaq which went down 12% from its all-time high and entered into the correction territory. Many investors have also been saying we're overdue for a 10% drop in the S&P 500 but we will see how it goes.
There is a lot of fear about inflation as the treasury yield went up. So, let’s take a look at some historical stock market performance during rising interest rate environments.
Year 1954 - 1960: The 10-year Treasury yield went from 2.3% to 4.7%. In that time, the S&P 500 was up 207%, on an average 17.4% per year.
Year 1993 – 1994: Rates went up from 6.6% to 8.0%. The S&P 500 was still up nearly 12%.
Year 1998 – 1999: Rates went up from 5.5% to 6.5%. Stocks were up more than 55%.
Year 2003 - 2007: Rates went up from 3.3% to 5.1%. The S&P went up almost 83% (12.8% annually).
Year 2012 – 2018: The 10-year rate went up from 1.5% to 3% and stock went up about 131%. Let’s not forget the market turmoil in December 2018.
So, to summarize during the rising rate env stock markets have mostly performed well. So, the current yield news is a noise. But as I said earlier, we may see some turbulences at later part of the year.
Sectorial Performances
Click on the link below to see Sectorial Performances
US Stock Market Sectorial Performances
Source: Fidelity.com
Now let me discuss this month’s inclusion to my blog portfolio.
Bitcoin Investment Trust (GBTC)
Grayscale Bitcoin Trust (BTC) is an exchange traded fund launched and managed by Grayscale Investments which invests in Bitcoins. It enables investors to gain access and exposure to the price movement of bitcoin in the form of a traditional security without buying, storing and safekeeping bitcoin directly. BTC’s purpose is to hold bitcoins, which are digital assets that are created and transmitted through the operations of the peer-to-peer bitcoin network. The investment objective of BTC is for the shares (based on bitcoin per share) to reflect the value of the bitcoins held by BTC. It invests through derivatives such as futures, swaps, and other CFTC-regulated derivatives that reference digital currencies.
A quick glance to the Bitcoin History
Bitcoin is a digital asset which falls under the category of cryptocurrencies. There are only 21 million bitcoins that can be mined in the World in total because that’s the total number which has been put on the source code. Once bitcoin miners have unlocked all the bitcoins it will be exhausted and that may further increase the value of Bitcoins. As of February 24, 2021, 18.638 million bitcoins were mined valued at around $1.6T, which leaves 2.362 million yet to be introduced into circulation. These bitcoins are introduced to the bitcoin supply at a fixed rate of one block every ten minutes.
Not a long ago, in 2009 the Bitcoin came into existence. There was not much interest in the beginning and people were hardly aware of it. I had included GBTC in my investment blog on October 2017. At that time Bitcoin was around $6000 but pulled back to about $4200. After keeping it for several months I pulled it out of my blog after pocketing about 62% gain. If I recall correctly then the fund was less than $1 Billion at that time. Now the value has gone up to $37B Billion in Market Cap. There has been lot of changes and wider acceptance today than when I wrote in my last blog a few years ago. Today the Bitcoin is trading at $57,700 as I write my blog. After I sold GBTC in 2018, I never was interested to get into Bitcoin. But things are changing and the World is changing, so also the investment landscape is changing. Hence, it’s better to focus acclimatize to the growth area to get better ROI over long run.
As day passes, we see wider acceptance of Bitcoin. As we could see the acceptance of Bitcoin has been increasing day-by day. Though there are no formal government acceptance but Bitcoin has its own advantage of faster and cheaper transactions. As a matter of fact, a large number of financial institutions, banks have started accepting it. Last week, Morgan Stanley said that it will permit wealthy clients to use three funds that allow ownership of Bitcoin, potentially starting in April. Earlier, Goldman Sachs (GS) said that it has restarted its cryptocurrency trading desk. JPMorgan Chase has launched its own digital currency. Bank of New York Mellon, the oldest bank in the U.S., also said it plans to launch a segment to help with the safekeeping of cryptocurrencies. In addition, PayPal said it will allow its customer to Buy and Sell Cryptocurrencies. There are many cryptocurrencies like Litecoin, Ripple, Ethereum etc. However, Bitcoin is most popular and I like Bitcoin rather than other Crypto. It would not be surprising to see more and more businesses, banks, financial institutions start accepting it. That may further increase the value of Bitcoin keep rising over years. It would not be far if companies like MasterCard, VISA and many other financial institutions start accepting soon.
Why do I like GBTC?
GBTC (Grayscale Investments) is the world’s largest digital currency asset manager. Last Wednesday, 3/17, fund announced launching of five new digital currency investment trusts, bringing its total to 14. Frankly speaking, I am apprehensive buying other cryptocurrencies. I like BitCoin and the most convenient way is to invest in GBTC. When I wrote in my blog in 2017 the market capitalization of GBTC was just $972 million. But today it’s $36.66 Billion. Please note that Yahoo finance do not show the right market capitalization. One can check Fidelity, Ameritrade etc. GBTC reasonably large and stable fund in this area. In future, every country may have their own Bitcoin, the same way they have currencies for their own country. For example, we have USD, so also dollars from many other countries but why do people prefer USD over others? Because, it’s most widely accepted/used, stable and renowned. I do believe bitcoin works in similar fashion. Despite the fact that, there are several hundreds of crypto currencies Bitcoin is first to the market, well known and more widely used cryptocurrency comparing to other. I prefer stability rather than speculation. GBTC has a 52-weeks low of $6.41 and high of $58.22. Currently it’s trading at $52.96, just about 9% discount from its 52 weeks high.
My Strategy
I have already taken a small position at around $30-40 level. But as a strategy, I do not buy everything at once, rather I prefer to buy in a phased manner and do dollar cost average. The primary reason is nobody knows the TOP or Bottom of an equity. It’s better to have some long-term investment (core position) and some shares to trade as Bitcoin is extremely volatile. That way, one can keep making some money having to wait for a longer-term reward. Many of my blog readers should be knowing that I keep doing this for most of my investment. I may keep adding some more position in future. We can only research from the existing information available to us at the time of buying it, so there could be many unknowns which is always a risk and have to be mitigated or re-evaluated based on the market situation. As long as I have done my research and comfortable of buying an equity, I take my position in a gradual manner. If it comes down then I visualize it as a buying opportunity rather than getting too emotional. That’s part of my long-term strategy.
Risks: Bitcoin is still not regulated and it’s not an official currency like other currencies. It’s extremely volatile and speculative. Any restriction or regulations by the government or FED or central banks could have major impact. The risks and rewards are pretty high. It’s not a bad idea to take a calculated risk, let’s say 1% - 2% of the portfolio which has the potential to give excellent Return on investment (ROI) in the long run. Investing a very small part of portfolio may not ruin even if the investment fails. As there is a saying, “invest only that much of money which you can afford to lose”. Nobody can always be right and all investment carry risks. Every investor must do their own analysis and due diligence before taking a decision. So, I am taking a calculated risk and putting a small amount of my portfolio in GBTC for the future. I will see how it goes and then I may re-visit my strategy depending market situation.
Other Stocks of my interest: DQ, FSLR, ACAD, ICPT, PLUG, APHA, BMRN, CVM, NCLH.
Shesa’s Blog Portfolio (As of March 21, 2021)
Equity | Suggested Price | Current Price | Suggested Date | % Change | My View |
STOCK (All prices are in USD) | |||||
12.9 | 119.99 | 1/25/2013 | 830% | HOLD | |
47 | 290.11 | 11/13/2013 | 517% | BUY on Dip | |
77.18 | 356.51 | 12/12/2013 | 362% | HOLD | |
311.73 | 3074.96 | 4/12/2014 | 886% | HOLD | |
67.28 | 267.85 | 2/21/2016 | 298% | Accumulate | |
36.53 | 45 | 5/28/2018 | 23% | HOLD | |
134.81 | 1120.95 | 11/25/2018 | 732% | HOLD | |
297.57 | 512.18 | 1/6/2019 | 72% | HOLD | |
17.66 | 6.44 | 2/17/2019 | -64% | HOLD | |
20.16 | 34.45 | 12/10/2019 | 71% | HOLD | |
87.53 | 145.55 | 9/1/2019 | 66% | HOLD | |
8.74 | 11.15 | 1/1/2020 | 28% | Accumulate | |
4.27 | 43.35 | 1/29/2020 | 915% | HOLD (Trimmed) | |
12 | 28.96 | 3/22/2020 | 141% | HOLD | |
76.91 | 139.39 | 4/19/2020 | 81% | BUY | |
54.59 | 116.69 | 5/25/2020 | 114% | HOLD | |
45.3 | 154.95 | 6/28/2020 | 242% | HOLD | |
19.58 | 49.1 | 8/2/2020 | 151% | Accumulate | |
12.03 | 31.58 | 9/13/2020 | 163% | HOLD | |
51.61 | 90.51 | 10/18/2020 | 75% | HOLD | |
62.71 | 43.62 | 11/21/2020 | -30% | HOLD | |
14.39 | 9.56 | 2/14/2021 | -34% | BUY | |
52.96 | 52.96 | 3/21/2021 | 0% | NEW ADDITION | |
ETF | |||||
139.1 | 250.39 | 8/16/2015 | 80% | HOLD | |
70.23 | 67.85 | 1/3/2021 | -3% | Accumulate | |
MUTUAL FUND | |||||
11.46 | 24.99 | 3/1/2013 | 118% | HOLD | |
59.45 | 180.65 | 12/20/2014 | 204% | HOLD | |
9.05 | 24.53 | 1/15/2016 | 171% | HOLD | |
37.32 | 92.44 | 3/20/2016 | 148% | HOLD | |
43.66 | 73.85 | 9/24/2017 | 69% | HOLD | |
Note: Dividends are not adjusted on the price. | |||||
Positions CLOSED since last Blog
None.
That’s all for today. Wish you great investing! Stay tuned for my next blog. Thanks for your time.
Disclaimer: This blog is meant to provide my opinion only. The information provided is to the best of my knowledge but may not be accurate. I do NOT provide any professional recommendation to buy/sell any stock, ETF, mutual fund, or any other security(s). As an investor, it’s your hard-earned money and you decide what is best for you. The above are merely my own opinions. Please contact a professional money manager to buy/sell any security. I do not charge any fees or commission by writing the blog except anything from Google AdSense. I have position(s) on whatever security I write on my blog and avoid recommending any security that I do not own or follow. Anybody buying or selling the equities mentioned here would do it on their own risk.
Note: Click on Blog archives to read all my Blogs and updates.
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