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More Summer Fun: Market Bingo

Yep, the dog days of summer are here. And now that people are getting together more frequently, there is the age-old matter of what to discuss. Politics is a bit touchy these days. Sports is an option, of course, but who really wants to talk about pitch spin rate and the Olympics seemed to lack the typical inspiring excitement—thanks a lot COVID-19! And there is what to binge-watch next. But with stocks continuing to climb, new asset classes seemingly bursting onto the scene and plenty of uncertainty ahead, one should expect a bit of market banter.

Below is a little game to go along with those investing conversations. A bingo card to keep in your back pocket, and some context for each item so you can keep up with the investment topics of the summer. See if you can cross out all of the boxes before Labor Day.

 

The Bs:

• SPACs—Who doesn’t have a Special Purpose Acquisition Company (SPAC) these days? These “blank check companies” raise capital via IPO. Then the SPAC sponsors buy a private company and bring it public. Bonus: SPACs avoid some pesky regulatory hurdles, although this may be starting to change.
   
• Value vs. Growth—Relatively low valuations and a strong economic reopening have given value stocks a lift. Growth stocks, however, have outperformed over the past decade attributed to a variety of reasons, including technological innovations and low interest rates. Which style should you invest in now? Both camps have reasonable arguments, but the current economic and financial market environment seems rather muddled.
   
• Taxes—The Biden administration is considering tax increases on corporations and households making over $400,000. Meanwhile, 130 countries, including the US, appear to back some kind of global minimum corporate tax rate. But the odds of these tax changes occurring seem remote at the moment, thanks to a deadlocked US Senate and the need for approval by every EU member country. 
   
• “Priced In”—With US equity markets charging ahead, are the economic reopening and strong earnings recovery already fully factored into stock prices? Inflation data, China-US tensions, Delta variant and Fed policy risks appear to be mere speed bumps at this time—perhaps rightly so. But besides the known knowns, what are the known unknowns (or even unknown unknowns) that markets may be missing?
   
• Supply Chain Bottlenecks—The supply chain has hit many snags throughout the pandemic and even as the global economy has begun to recover. Stress on supply chains, including COVID-induced lockdowns and port closings, the Suez Canal blockage, the domino effect of chip shortages, homebuilding material shortages and so on, will likely persist.

The Is:

• Commodities’ Super Cycle—Copper, lumber and tin reached record highs this year, while soybeans and corn hit multi-year highs. Greater demand, supply bottlenecks, low inventories, government infrastructure plans—particularly the massive proposal in the US—and a slew of green energy goals spurred talk of another broad, multi-year rise in commodity prices. Perhaps the concerns are a bit premature as some commodity prices have fallen (timber!—get it?) in recent weeks, but time and the strength of the global economy will ultimately decide if we are entering a secular upward trend.
   
• Reopening—Just as most people can’t agree on how fast the world should reopen as vaccination rates improve and COVID-19 cases decline, arguments persist over how reopening will impact the market and for how long. In June, US consumer confidence reached pre-pandemic highs. Will that result in additional spending? There’s hope, but consumers could also simply shift how they spend.
   
• CAPE—The Schiller P/E, or cyclically-adjusted price to earnings ratio (CAPE), stands at a lofty 37, well beyond the historical mean of nearly 17. For those who put some value in the metric—and not everyone does—some think it indicates that value stocks deserve a second look. Others see it as an indicator that expected returns will be lackluster. 
   
• Housing Market—The pandemic-induced rush to the burbs or smaller metro areas, along with a strong labor market, low interest rates, squirreled away savings and low housing inventory, has led to a housing silly season. According to the S&P® CoreLogic Case-Shiller Home Price Index, prices are up 16.6% YoY nationally. Round and round buyers and sellers go, how long it lasts nobody knows.
   
• Pent-Up Demand—When people were slammed by the COVID-19 recession, they clammed up spending, contributing to record savings rates. Now investors hope those same people will turn their savings into (revenge) spending. It has created enthusiasm in travel, restaurants and other consumer-focused sectors, where the idea of splurging sounds worthwhile—or even cathartic.

 

The Ns:

• Laser eyes (crypto)—If you want to know who supports bitcoin, simply look towards social media: those avatars with laser eyes photoshopped in support of the coin. Somehow this has become the go-to meme in the effort to drive bitcoin past $100,000. The cryptocurrency hasn’t neared that mark yet, but laser eyes have had senatorial (and Tom Brady) support.
   
• Momentum—Playing momentum can get you involved in plenty of recent debates, including meme stocks, the economic reopening and cryptos. There are tons of other momentum plays out there too (hello value vs. growth). In fact, there may be a game of bingo in this investing trend, all its own.
   
• Market Cycle—Just as everyone has an opinion on Brittany Spears’ conservatorship, they will have a thought on where the market stands in its current cycle. Whether it’s rising, peaking, dipping or bottoming out, you can find an advocate for your thesis—and a corresponding critic.
   
• Volatility—Markets have generally calmed down since the onslaught of the pandemic, although the volatility of volatility has remained a bit elevated this year, perhaps indicating some underlying unease. It seems quite possible volatility and market turbulence could quickly return if reality strays from current upbeat expectations.
   
• Yield Curve—The Fed’s policies, the impact of reopening and the potential for inflation all play into the yield curve’s daily movements. The two- to five-year curve steepened in June when the Fed indicated it might start raising rates earlier than expected—in 2023 rather than 2024. But it didn’t last long, as the curve flattened shortly thereafter.

 

The Gs:

• Meme stocks—With Reddit users coming together to prop up stocks that may –or may not– have much intrinsic value, it has created a headache for regulators and for anyone shorting companies. Game Stop, AMC and others, however, have benefited.
   
• Sector Rotation—When COVID-19 struck, money moved towards IT, which experienced strong returns last year. Now that the economy has opened, which sector will money move into next? Warning: Looking too closely in this direction can potentially result in a market cycle debate.
   
• Inflation Expectations—Most prognosticators expected prices to rise as consumers splurged and prices rebounded from a 2020 COVID-induced slide. “Transitory” became a trending term among those such as the Fed, who see the surge as temporary. Then strong consumer price index data for April, May and June—along with rising commodity prices and reports of wage increases to attract workers—caused some hand wringing about the transitory nature of prices. And what if people begin to accept higher prices that enable a feedback loop of further price increases?
   
• Antitrust—The one consensus between liberals and conservatives these days seems to be that Big Tech is far too big. This has resulted in myriad antitrust suits. A case against Facebook was found to be “legally insufficient” (but it can be refiled). Google faces multiple cases, both from federal and state claims. As does Amazon. Congress also is mulling over ways to get an upper hand on Big Tech, but legislators should keep in mind that eager and hasty efforts often come with unintended consequences.  
   
• Budget Deficits—The US budget deficit reached a record $2.1 trillion for the first eight months of the fiscal year, thanks in part to COVID-19 recovery efforts, and some Democrats are pushing hard for a $3.5 trillion reconciliation spending package. But in an age of low rates and seeming experimentation with Modern Monetary Theory, do ballooning deficits and yawning national debts matter? What’s more, it’s not like the US is the only country racking up major IOUs. But right now, it’s easy to forget the age-old lesson that deficits don’t matter, until they do. 

 

The Os:

• NFT (Non-Fungible Tokens)—Welcome to a new digital asset class. NFTs are a way to enable the buying, selling and ownership of digital assets; the item is often a representation of something in the real world, such as art, video or even an NBA highlight. NFTs use blockchain technology, and like their cryptocurrency siblings, digital collectors have seen some NFT values skyrocket into the millions of dollars. Why? Because, that’s why.
   
• Latin America—South America has a lot going on. The pandemic is still ravaging the region, economic conditions shaky (though improving) and social discontent has bubbled up in some countries. Meanwhile, a series of important elections and Chile’s constitutional rewrite will hold an interesting mirror to the region’s future. 
   
• The Fed—Amid all the talk of inflation, the market’s eyes have turned to the Federal Reserve. Its move to flexible average inflation targeting (FAIT) has investors uncertain about its reaction function to price pressures, along with the path of interest rates and bond purchases. So far, the bank has held steady to encourage more hiring. But some are getting fed up (more wordplay😊), claiming the central bank is waiting too long.
   
• Spreads—Credit spreads have tightened to historically low levels last seen in 2018 and just before the Global Financial Crisis in 2007. The Fed’s bond buying has reduced the amount of corporate bonds in the market, while investors seek yield in higher-risk securities in a market of low default rates. But one major risk on some minds is a quick turn in conditions if inflation forces the Fed to adjust its plans.
   
• Participation Rate—Millions of Americans remain out of the workforce, and it’s not clear how many are gone for good. The labor force participation rate is on a decades-long slide, punctuated by steep drops during economic downturns. This time, enhanced unemployment benefits, COVID-19 fears and rising wage levels are among the list of culprits for the struggle to rehire workers. Time may reveal the root causes (e.g., in September federal enhanced benefits expire and schools reopen) and those answers could have significant positive or negative long-term implications.