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Links 🔗
- My State of The Markets 2021: Speculative Excess and Opportunity Everywhere
- Yields And Valuations ⚡️ What Is Next?
Now I'm no expert or anything when it comes to investing but even I can see that the market is getting a bit overheated with some speculative manias continue to balloon (SPACs, NFTs, etc). Yes, I know that the economy is reopening but there's still a lot of rebuilding to be done. In this week's ONE THING, I'll share my views on the current market state.
Technology Shift
- The coronavirus has really given technology a big boost in the world as cashless payments, e-commerce, video conferences all becoming the norm
- With the Fed lowering interest rates (meaning nobody wanted to keep their cash in the bank), people started to find opportunities elsewhere
- Combined with the catalyst that Covid provided, we saw tech stocks' valuations reached new heights and many tech stocks are now priced for perfection
Rising rates
- Now as of April 2021, the 10-year Treasury yield has been rising because of the improved outlook on the growth of the reopening economy
- Plus, the Fed has also been printing money and working with the Treasury to release the money through fiscal stimuli
- This will only lead to inflation and the currency debasement of the US dollar which is bad news for high growth tech stocks
- An increase in interest rates can do more harm to growth stocks than it can to value stocks because for growth stocks, investors are betting on the future growth of revenues and profits.
- But as interest rates start to rise, that becomes the new discount rate. The higher the discount rate, the lower the present value of future expected cash flows which will pose a threat to unprofitable companies, making no sense of the astronomical share price
I've only started investing in 2017 so I never actually experienced any major crashes (Well, March 2020 was one but things quickly rebounded). But when everyone is making money then it's probably a sign that a bubble is emerging. Tech stocks' multiple were able to stretch in a low rate environment but when rates start to rise I think we will start to see a major capital rotation from growth to value.
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