by Bryan Perry

December 15, 2020

Last week, we saw new all-time highs above 3700 in the S&P 500; COVID-19 vaccines are being delivered this week to front-line workers, the Electoral College is delivering a clear path to the Inauguration for Joe Biden, the Fed is rock solid in holding to low rates; and industry analysts are predicting the S&P 500 will have a closing price of 4000 in 12 months, according to FactSet Earnings Insight (December 11, 2020).

More importantly, the market is broadening out in a manner that looks like it is gaining some real traction for many areas that are now providing several new themes heading into 2021.

“We’re already seeing the earliest move out of U.S. mega caps into essentially everything else,” said Simplify Asset Management’s CEO Paul Kim. He named a few: “Emerging markets, international developed markets, small-caps, to some extent value. The question is, how much of a trend is it, or is it just a short-term reversion to the mean? If it’s really a trend we could see the market drive much higher.”

Previously unloved segments are finally getting some attention from investors – like the emerging markets:

Emerging Markets Exchange Traded Fund Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Rising optimism about a recovery in the labor markets and corporate earnings are driving bullish sentiment even as the Main Street economy struggles across many lines of business with still no help from Congress.

Congress apparently had no problem acting quickly to pass a short-term stopgap spending bill to keep parts of the government from shutting down as of midnight last Friday. While Congress takes care of their own paychecks, tens of thousands of businesses are closing up permanently because the cavalry never showed up in time. Forcing people not to work and then not helping those affected is a crime by elected officials.

It gets worse: The emergency CDC order, which temporarily prohibits new and previously filed evictions from occurring, in an effort to prevent further transmission of the coronavirus, expires on January 1, 2021.

An estimated 11-13 million renter households are at risk of eviction, according to Stout, an investment bank and global advisory firm. Stout predicts there could be as many as 6.4 million potential eviction filings on January 1 if the CDC moratorium is lifted. Playing politics and delaying funding while businesses shutter, weekly jobless claims increase, and people lose their dwellings is unconscionable. But it’s happening.

Maybe this week Congress will get it right, pass the $908 billion relief package and extend the eviction moratorium for another 60 to 90 days – but it’s a two-edged sword, because landlords not receiving rent must also pay bank mortgages on rental properties. A lot can and should happen in the next three weeks.

A Survey of What are the Biggest Financial Risks for 2021

Beyond these Main Street issues, it is customary for Wall Street to solicit professional market participants about what potential risks lie ahead that could undo the primary uptrend that seems to resist any bad news.

I find it interesting that their top three financial concerns were all COVID-19 or vaccine-related.

Biggest Risks to Global Financial Markets Bar Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Considering the powerful rally within the travel and leisure stocks (like airlines, hotels, casinos, restaurants, theme parks, sporting venues, music venues, etc.), and that a massive distribution of the vaccine begins this week, there seems to be a bit of a disconnect seeing all this financial focus on the virus and the vaccine.

The risk that catches my attention is now in the #6 spot – “Runaway money supply growth causes inflation earlier than anyone expects.” The current thinking is that as long as sovereign bonds of investment-grade in developed nations remain at 0% to 1%, central banks can print money in an unlimited fashion. The Fed, ECB, BOJ, and PBC have all expressed extreme confidence in policy statements about their abilities to maintain QE at current levels until their mandates are achieved. It’s this kind of glowing assurance in such aggressive monetary policy with literally no historical precedent that should be viewed with some caution.

This chart of the 10-year Treasury shows the yield testing resistance at 1%. If breached, it will likely trigger automated selling, given that AI-driven trading platforms are wired to act when technical levels are broken.

Ten-Year Treasury Note Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

We see buy programs kick in for the stock market time and time again when technical levels are cleared. The same holds true for bond, commodity, and currency markets as well. Machines react when certain levels are breached and the 10-year bond takes out the 1.0% level and opens the way for a move to 1.5%, which historically is still dirt cheap, but will likely be disruptive to equity markets on a short-term basis.

Equity markets have historically advanced in a rising rate market because of implied economic prosperity. But in no time in history has this volume of debt been created. At $280 trillion, global debt is about $130 trillion greater than in the global financial crisis of 2008-09, according to calculations based on IMF figures.

Maturities average about five years, meaning $50-$60 trillion needs to get rolled over every year, which pushes central bank balance sheets to their capacity – at least in theory.

The conventional thinking is that the Fed and other central banks can’t let rates rise, causing interest costs to mushroom and asset prices to decline, risking a dangerous drop in coverage between the total pool of global liquidity available and world debt loads.

It seems that this is the elephant in the room that no one wants to talk about.

All content above represents the opinion of Bryan Perry of Navellier & Associates, Inc.

Please see important disclosures below.

Also In This Issue

A Look Ahead by Louis Navellier
Tesla’s Stock is Up, But for How Long?

Income Mail by Bryan Perry
The “Unmasking” Of Market Risks In 2021

Growth Mail by Gary Alexander
My Top 10 New Books for A Crazy Year Soon Ending

Global Mail by Ivan Martchev
Whatever Happened to Bitcoin?

Sector Spotlight by Jason Bodner
2020 in Review & My 2021 Preview (Part 1 of 2)

View Full Archive
Read Past Issues Here

About The Author

Bryan Perry

Bryan Perry
SENIOR DIRECTOR

Bryan Perry is a Senior Director with Navellier Private Client Group, advising and facilitating high net worth investors in the pursuit of their financial goals.

Bryan’s financial services career spanning the past three decades includes over 20 years of wealth management experience with Wall Street firms that include Bear Stearns, Lehman Brothers and Paine Webber, working with both retail and institutional clients. Bryan earned a B.A. in Political Science from Virginia Polytechnic Institute & State University and currently holds a Series 65 license. All content of “Income Mail” represents the opinion of Bryan Perry

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