“I think this will be one of those historic revivals, there when the great wars are over,” he told MarketWatch earlier this year. “There is a huge demand from consumers. Can you imagine when we got completely clear and started getting back to normal? “
But three more months into the year, Andersen went awry. In an interview last week, he talked about how large segments of the market appear to be in favor one day, the next. “We are transitioning between value and growth, staying at home and reopening, almost every day,” he said. “I don’t know who is driving this, but it has to follow some sort of algorithm.”
Andersen is trying to be patient, realizing that the economy is at the inflection point of a generation and that everyone is operating under unprecedented conditions. However, he says, financial markets sometimes feel like a house of cards.
“It’s confusing,” he said. “The market is very fragile, and surprisingly so. This whole year has been really hard for me to try to figure out if there is any motivation, which direction it is going in and what its responsibility is. “
As if the horrors of the global coronavirus epidemic were out of reach, the past 12 months have caused a series of other headwinds that have countered the smooth sailing of the market. There is an increase of Retail traders want to use the stock market as a gambling casino, and a national politics so bitter that the presidential elections were bloody.
And that doesn’t even take into account the more existing questions: what is the right level for a stock market that fell 33% in about two weeks just a year ago? How much of this is due to policy stimulus and how much is real? How much is the expected level of economic recovery priced? What if the vaccine promise fails? What if this is as good as it gets?
Altogether, it leaves money managers, their clients and the consulting firms as confused as Andersen, with almost as many red flags being perceived and hypotheses about the cause. cause it all.
Nicholas Colas, co-founder of DataTrek Research, wrote in a recent note: “The most common observation we get from our customers is that the market doesn’t“ feel right ”, and we fully understand. that. “For us a big part of this uncertainty comes from the newness of seeing capital markets go from tough to excited in such a short span of time.”
Market watchers point out all the odd ways of seeming to confirm something is wrong. Among other things, the volume of transactions has decreased starting in 2021.
To be sure, the number going up by 2020 is just that – one exception. But according to some estimates, inexperienced amateur traders do accounting for 20% of the total volume on the market. And even if they all don’t target short sellers, they still have very different priorities and incentives from most of the rest of the market.
Also of concern: the spike in US Treasury yields
in just a few weeks in the first quarter of this year, insulting investors on the stock market, then followed by a few weeks by Federal Reserve policy makers reassuring the market that any Any rate hike won’t start until 2023 and will be announced in advance. Curiously then, the economic data is pink seems to cause a drop in bond yields in mid-April.
“Other weird things are going on,” mused Evercore ISI’s Dennis DeBusschere, in a note trying to explain the government bond rally. “SPAC’s and Solar are being hit hard on a relative basis, which is odd given the lower 10-year yields. Some argue that retail investor-sponsored names in general are suffering as they move away from the market. And why are underperforming homebuilders with 10-year yields collapsing? “
Dave Nadig is a longtime student of market structure, incl one of the earliest developers of an exchange-traded fund to help the market avoid another blast like Black Monday 1987.
Nadig argues that the market is healthy – i.e. operating efficiently and maintaining resilience, even through glitches like the meme-stock craze over the past few months and the Archegos home office explosion. What becomes “very fragile”, in his words, is the ability to explore prices.
“There is some basic background to how the market works,” he said in an interview. “What we found was that there was more noise and randomness in the market than people were willing to admit. Mainly what is changing is that the flow of information and data moves faster and faster. Any model you build today by definition does not account for acceleration tomorrow. “
Bringing Gamestop Corp.
the madness broke out in January. After a group of disgruntled traders have spent a few weeks targeting short sellers by pushing the stock’s price higher, “It’s no longer a normal stock – it’s an outlier. in the market there is a ripple effect that some investors may not realize, “Nadig said.
Older investment models – and algorithms – are confronting new ones taking into account new conditions, a process that Nadig calls an “arms race” and a process that is pushed. Fast due to the modern speed of information flow and response functions.
“We are starting to see cracks in the traditional way that we always analyze markets,” he said. “We are no longer dealing with reality, we are processing information and it is priced immediately. We have abandoned analytics. “
Nadig said. That means that on that day, all trades that “reopen” – and by extension, some cyclical trades and some closing values - will be affected.
For Peter Andersen, who has been managing money for almost three decades and returning more than 40% to his customers every two years, market fragility has been disappointing. Andersen prides itself on the “drastic independence” in stock options that leads to an agnostic macro portfolio. Some of his recent investments are cybersecurity, data storage, and pet care.
This year, however, one of Andersen’s top picks, Trupanion Inc.
is a 33% drop, for no good reason, he noted. “It’s like someone thinks everyone is going to eat their pets!”
1.2% increase, S&P 500
up 1.4% and Nasdaq Composite
Next week will provide US economic data on the housing market, including current and new home sales, and a series of corporate income reports.
Continue reading: The new bull market is about to enter its second year. So what now?