A global pandemic and 30 million people unemployed didn’t kill the domestic stock market. So, it’s hard to imagine that a robust economic recovery will do the trick. Yet, that is exactly the case many bearish investors are making.
Don’t worry: They’re as wrong about the current stock market as they were about stock prices during the worst of the pandemic.
The reason is simple: shifting goal posts.
I’m not going to make the case that changing the rules in the middle of the game is fair. It is not. Yet that’s what happens time and again in investing … and it is usually for the betterment of investors.
During the pandemic, companies simply stopped releasing economic forecasts. Managers complained that it was too tough to gauge demand as much of the economy remained shuttered. That’s fair.
However, curtailing guidance is normally a bad thing. In the past, the practice was met with swift haircuts for share prices.
Interestingly, that didn’t happen this time around.
The Walt Disney Co. (NYSE: DIS) managers built a big business on the backs of summer blockbuster movies from Marvel and Pixar, overcharging tourists at its theme parks around the world and broadcasting college and professional sports on ESPN.
When COVID-19 hit, all those businesses closed almost overnight.
Managers were understandably glum when they met with analysts last May to discuss business during the first quarter. Killing future guidance was a given and widely accepted. And the stock price didn’t fall.
Shares rallied despite empty movie theaters, shuttered theme parks and canceled sports schedules. Analysts glommed onto the idea that Disney’s new business — a subscription video on demand (SVOD) service called Disney+ — was the next big thing.
Goal posts were being shifted elsewhere, too.
The shares of hospitality firms got a lift on the strange thesis that the economy couldn’t possibly get worse. Each time a new government stimulus program was announced, stock prices zoomed higher.
The good news about vaccine development had the same effect: Bad corporate news found deaf ears. The concept of the reopening trade had investors buying airlines, cruise lines and hotels beginning in April, only a month after the worst of the stock market decline.
Meanwhile, stay-at-home businesses like Peloton Interactive Inc. (Nasdaq: PTON), Zoom Video Communications Inc. (Nasdaq: ZOOM) and Teledoc Health, Inc. (NYSE: TDOC) shot higher as business doubled … then doubled again. Everywhere investors turned, stock prices were headed higher.
Today the stay-at-home trade is winding down, and many are arguing all stocks are too expensive despite the prospect of a reopened economy and corporate pricing power.
The big bearish bet is that there is too much inflation everywhere.
What these investors are missing is that the goal posts are likely to shift again.
If you’re unsure which to believe, just take a trip to your local The Home Depot, Inc. (NYSE: HD) store. Prices for lumber, screws and nails are out of control as rising raw material costs and increased demand lead to shortages.
In the new digital economy, managers at the home improvement superstore have figured out a way to raise prices to reflect macroeconomics.
In a normal economy, the Federal Reserve would raise short-term interest rates as a shot across the bow of the corporatists.
However, this is not a normal economy … not even close.
When the Fed met in March, expectations for economic growth sharply increased. Fed Chair Jerome Powell went out of his way to assure investors that no interest rate increases were on the table until at least 2023. And that was only the half of it. Powell plans on continuing asset purchases of bonds until progress is made toward the Fed’s internal goal of full employment for lower-income Americans.
And there you have it. The goal posts for fighting real inflation have been moved. If bearish investors were hoping Powell would do them a solid and rein in inflation, they are going to be disappointed.
It is not happening. In the absence of a vigilant Fed, stocks keep rising.
As the adage goes, trade based on the market you have, not the one you want. Investors should take these shifting goal posts and run with them.
Best wishes,
Jon D. Markman
