With the U.S. stock market going out on new all-time highs, I cannot help but wonder, is this the new Disney World?
Just ask Buzz Lightyear who has become one of the most iconic, beloved and most marketable Disney characters. Buzz’s catchphrase, To Infinity and Beyond, is the more apt title for today’s article.
The Economic Modern Family
Looking at what I have coined the Economic Modern Family, To infinity and Beyond describes the price movement of all family members with one exception. But we will get back to that. A little history of the Family first.
The Family is comprised of one major market index and five sectors as the nucleus to help us see the real economy as portrayed through a combination of economic cyclicals and non-cyclicals. To visualize the most salient sectors of the economy, I created cartoon characters.
For a link to read the science and back story plus see the cartoon characters, please click here.
Three of the Family members are what Stanley Druckenmiller calls the “inside of the market.”
Over the last three months, those three instruments (Russell 2000 IWM, Retail XRT and Transportation IYT) have seen the lion share of money rotation mirroring the optimism for the economy in 2021.
Meanwhile, not to be upstaged, two other members, Biotechnology IBB and Semiconductors SMH, are also roaring. Both have made new all-time highs.
The lone lagging member, Regional Banks KRE has a long way to go to see its all-time high made in 2018. Regional Banks have fallen behind because the banks have seen their share of loan defaults. Furthermore, with interest rates and particularly mortgage rates at 2.7%, the bottom-line margins and profits for banks have been cut. However, this sector is playing serious catch up and worth keeping an eye on.
‘Infinity and Beyond’?
So why is the market heading To Infinity and Beyond and how will we know when or if reality hits. There are several components we can look at.
First, the Central Banks keeping rates near zero ad infinitum, helps.
Secondly, the market is counting on a lot more stimulus from the Biden administration.
Third, with fierce competition for a vaccine, it appears relief from the pandemic is just around the corner. Like a coiled spring, once folks let loose, the economy will snap faster than usual into action.
Fourth, with the advent of the young Robinhood traders, there has been a tremendous boost of liquidity to the market.
Finally, pandemic fatigue will most likely lead to a huge burst of consumer spending, which could drive GDP higher. Before the pandemic hit, the real GDP at an annual rate for 2019 was a mere 2.1%.
Although that level of growth is considered decent for the U.S., the market is behaving as if once all the dust settles and life is back to normal, whatever that means, economic expansion will take GDP past the 2019 average to a much higher figure.
Here is where the Economic Modern Family helps. With the Russell 2000, along with Retail Transportation, Semiconductors, and Biotechnology all at new all-time highs, outperforming the Big Tech or FAANG stocks, one could surmise that these are forward-thinking leading indicators intimating that the economy will improve substantially in 2021.
With Disney officially closed, indeed the stock market is the new amusement park of the year.
What we investors hope, is that once Disney reopens and consumers start once again spending their money, taking their families to the very high-priced resort, the market does not wind up like Buzz Lightyear’s nemesis, the galactic invader Zurg.
Michele 'Mish' Schneider currently serves as Director of Trading Research and Education at MarketGauge.com. She writes and produces daily market analysis in "Mish's Daily", and serves as a developer and trading mentor in several of our trading services, drawing on her 30+ Years of Trading and Teaching Experience.
Mish is a former floor trader on several New York Commodity Exchanges, including Coffee, Sugar and Cocoa NYMEX and FINEX in NYC. While on the trading floor Mish also served as a market analyst for two of the largest commodity trading firms at the time - Continental Grain, and Conti-Commodities.
Mish also wrote the best-selling finance book, Plant Your Money Tree; A Guide To Growing Your Wealth.