There have been a few interesting market developments the last few days. 10-year Treasury yields have increased to levels around where they were last year at this time, before the pandemic and lockdowns had really been felt. The $1.9 Trillion stimulus package seems to be getting closer to getting done. Inflation expectations are ticking up based on stimulus optimism and the eventual reopening of the global economy. The momentum growth stocks we’ve been flagging as overvalued have begun to falter with the Nasdaq now down on the year, after being down another 3% this morning. Tesla, as an example, has lost over 25% from its high, although of course it is still up huge over the last year. The stock is down nearly 10% as I write this. Value stocks and financials have had their best month relative to growth in the last 20 years according to Bloomberg.
One month is not a big deal, but really so is one year in the big scheme of long-term investing. The reality on the ground hasn’t changed. Much of the market is overvalued. We’ve had a 40 year run in which interest rates have generally trended downward and inflation has not been a problem. We’ve never printed money like we are doing now. Value stocks are the cheapest relative to growth in history. Importantly, they are cheap on both an absolute basis and a relative basis. There is the opportunity for a 5-10 year run for value, which can be massive, especially in lieu of what I believe could be a terrible time for most other investments, including bonds and overvalued growth stocks/indices.
Speculation is at extreme levels, about as bad as anytime I’ve seen since the late 1990s. The stock market is not a video game. Following trends can be like a hot run in Vegas, but holding on to those gains and having a consistent and replicable strategy can be far more challenging, which is a lesson markets have repeatedly beaten into market participants throughout history.
On individual stock news, Puerto Rico seems to be inching closer to a long overdue restructuring. This would be excellent news for Puerto Rico bonds and the bond insurance stocks such as Assured Guaranty, Ambac, and MBIA. I’ll caution you that it is only a partial deal and they still need to work out the details on some of the other credits, but I don’t expect it to add significantly to reserves, which is great news. Clearing up the Puerto Rico situation would remove the biggest uncertainty for these stocks and a stock like AGO increasing by 50-100% is not outside of the realm of possibility, if a full and favorable deal can be reached. Even at those levels, the stock would still trade at a discount to its adjusted book value per share.
Lastly, I feel like I’ve written about this quite a few times, but the JNJ vaccine hopefully will get approved this week or next week. The more traditional vaccine is easier to store and ship, which should be enormously beneficial given that JNJ can manufacture and ship at scale. The Covid-19 numbers have dipped dramatically. New York announced a reopening of movie theaters in March for an example of progress on more reopening’s. Hopefully that trend continues and life can get back to normal as soon as possible.