Stocks rose in the US overnight, apparently on hopes of an imminent US$900 billion stimulus package. I say apparently because this has been the bullish narrative for months now. Like Christmas, stimulus is coming…
And like Christmas, the stimulus will provide short-term joy before things return to ‘normal’. I’ll get to that in a moment.
But first, a follow up from yesterday…
I mentioned that Sydney Airport Holdings Pty Ltd [ASX:SYD] was a good ‘COVID recovery’ stock to keep an eye on. Soon after I wrote that, it published November traffic data. Have a look for yourself…
Source: Sydney Airport
Compared to the same period last year, total passenger numbers are down by more than 90%. Not surprisingly, SYD decided not to pay a final distribution this year.
Now SYD has another problem. It always had this problem. It was just a case of when it would surface.
The problem is a potential virus outbreak on Sydney’s northern beaches. A whopping 17 people have contracted the virus. In most countries, that would be laughable. But Australia has gone for eradication, so it’s panic stations all ‘round.
Queensland and WA have already imposed travel restrictions on Sydney’s northern beaches. If it spreads, expect more.
No one knows the source. The theory is that it came from overseas. Of course it came from overseas.
It just highlights how risky Australia’s position is. We’re an island. We can eradicate the virus if we close ourselves off to the world. But when the average age of COVID deaths is ABOVE the average age of death in general, why would you do that?
You would only do so if you’ve created such an aura of fear that the community demands it.
And seemingly, Australia is happy with the way governments have handled it so far. It’s just that such an approach is not conducive to opening borders, especially international borders.
So it will be interesting to see the response of stocks like SYD today.
But who knows? We are in the midst of an ‘all news is good news’ kind of market.
Investing in this Market
Which brings me back to the rally based on ‘stimulus hopes’.
It makes sense. In the short term, an extra billion or so in government spending will wash through the economy and help the likes of Amazon and Apple…
But after that?
We know that once debt-to-GDP levels get to a certain point, the productivity of an additional dollar of debt diminishes. This means fiscal policy only has a limited and short-term effect.
One of the best monetary economists in the world, Lacy Hunt, wrote about this in his last quarterly economic outlook:
‘Debt financed fiscal policy can provide a short-term lift to the economy that lasts one to two quarters. This was the case with the debt financed stimulus packages of 2009, 2018 and 2019. However, the benefit of these actions in 2009, 2018 and 2019, even when the amount of the funds borrowed and spent were substantial, proved to be very fleeting and the deleterious effects of the higher debt remain. Substantial econometric evidence indicates that government debt as a percent of GDP in all of the major economies are well above the levels where these detrimental effects occur. The multi-trillion dollars borrowed for pandemic relief in the second quarter encouraged the beginnings of a “V” shaped recovery, but this additional debt will serve as a persistent restraint on growth going forward. When government debt as a percent of GDP rises above 65% economic growth is severely impacted and becomes very acute at 90%.’
The world’s largest economies (US, China, Japan and Europe) all carry government debt-to-GDP burdens well above 90%.
But just because the long-term outlook for the economy is screwed, doesn’t mean the stock market will collapse. That would be like saying the purchasing power of cash vis-a-vis assets is going to soar.
That’s not a bet I want to make.
The real trick for investors is having the nerve to be in the market when it feels like it is crazy to do so. And then being able to handle or take advantage of the panic plunges when they inevitably come.
The solution, as far as I’m concerned, is to think like a contrarian. Try to avoid the crowded trades. And if every trade is crowded, build up some cash ready to deploy during the next correction.
It certainly feels like every trade is crowded right now: Tech, resources, banks, microcaps, small-caps, blue chips…
It’s in these environments where it pays to sell to the panic-buying latecomers. Don’t get me wrong, I’m not suggesting you should get out completely. But just recognise that when everyone thinks the same, taking the opposite view usually works out well.
So think about taking some profits here. Increasing your cash levels. And wait…
Editor, The Rum Rebellion
PS: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.