U.S. markets this week have arrested their rapid slide from last week’s highs. Reports suggest that the NASDAQ’s ramp to new highs was accelerated by large-scale options trading which was then unwound as the suspected traders took profits. It remains to be seen if the correction has run its course or if further volatility awaits; we would not be surprised to see volatility continue.
As we have noted for months, it seems apparent to us that the driving force underlying the market’s recovery from the March lows has been the liquidity unleashed by central banks and the largesse of fiscal authorities. While there will be variability in the deployment of these forces, we do not believe that this theme has fundamentally changed. In the context of this record-breaking free liquidity, valuations are high compared to history, but as a whole, not irrational — even if there are pockets of irrationality that may be driven by euphoric trading.
In short, “buy the dips” is still the watchword.
Many companies taking advantage of buoyant markets are making for a crowded schedule of new issues. Some of these will be also-rans, and have no real distinguishing characteristics. Others have genuinely unique offerings; some will be transformative. In our view it is worth paying close attention to the deal calendar to find differentiated offerings that are thematically relevant, especially to business digitization, software, the cloud, e-commerce, digital entertainment, digital payments, and cybersecurity. We still prefer growth over value. The digitization trend is in early innings, and is not anywhere near over. What’s happening in India is happening everywhere – including the U.S. and Europe.
Gold may be taking a breather, but investors should not neglect it. The end game of the current experiment in deficit spending and central bank balance sheet expansion is unknown, and history suggests that a gold allocation can be very important under such circumstances. If a gold allocation is part of your modus operandi, well and good — but do not neglect stocks, which may be in for an epic run before the next bear arrives.
Thanks for listening; we welcome your calls and questions.
