Peter Andersen, a Boston-based money manager, started 2021 feeling upbeat.
âI think this is going to be one of the historic recoveries, up there with the end of major wars,â he told MarketWatch around the turn of the year. âThereâs enormous demand from consumers. Can you imagine when we get the all-clear and start moving back toward normalcy?â
But three months into the year, Andersen is glum. In an interview last week, he talked about the way big segments of the market seem to be in favor one day, out the next. âWe toggle between value and growth, stay-at-home and re-opening, almost daily,â he said. âI donât know who is driving this, but it must be following some kind of algorithm.â
Andersen is trying to be patient, recognizing that the economy is at a once-in-a-generation inflection point and that everyone is operating in unprecedented conditions. Still, he said, the financial markets sometimes feel like a house of cards.
âItâs confounding,â he said. âThe market is fragile, and surprisingly so. This whole year for me has been really challenging to try to figure out is there any momentum, what direction is it going in and whatâs responsible for it.â
As if the horrors of the global coronavirus pandemic werenât enough of a curveball, the past 12 months have thrown up a slew of other headwinds against smooth market sailing. Thereâs the surge of retail traders bent on using the stock market as a gambling casino, and a national politics so bitter that the presidential election turned bloody.
And thatâs not even counting the more existential questions: whatâs the right level for a stock market that plunged 33% in about two weeks just a year ago? How much of that gain comes down to policy stimulus and how much is real? How much of the expected economic rebound is already priced in? What happens if the vaccine promise falls short? What if this is as good as it gets?
Taken together, it leaves people who manage money, their clients, and the companies that advise them, just as befuddled as Andersen, with almost as many perceived red flags as there are theories as to whatâs causing it all.
âThe most common observation we get from clients is that markets donât âfeel rightâ, and we absolutely get that,â wrote Nicholas Colas, co-founder of DataTrek Research, in a recent note. âFor us, a big piece of this unease comes from the novelty of seeing capital markets go from distress to euphoria in such a short period of time.â
Market observers point to all manner of weird quirks that seem to confirm something is askew. Among other things, trading volumes have plunged to start 2021.
To be sure, the elevated volumes in 2020 were just that â an outlier. But by some estimates, inexperienced amateur traders now make up as much as 20% of all volume in the markets. And even if all of them arenât out gunning for short-sellers, they still have very different priorities and incentives than much of the rest of the market.
Also unsettling was the spike U.S. Treasury yields in only a few weeks in the first quarter this year, spooking stock-market investors, followed by several weeks of Federal Reserve policymakers reassuring markets that any interest rate rises wouldnât start until 2023 and would be telegraphed well in advance. Strangely then, rosy economic dataÂ seemingly caused bond yields to plungeÂ in mid-April.
âOther weird stuff is going on,â mused Evercore ISIâs Dennis DeBusschere, in a note attempting to explain the government-bond rally. âSPACâs and Solar are getting hit hard on a relative basis, which is odd given the move lower in 10 year yields. Some are citing that the retail investor-sponsored names are getting hit in general as they move away from the market. And why are homebuilders underperforming with 10 year yields collapsing?â
Dave Nadig is a long-time student of market structure, including as one of the first developers of exchange-traded funds to help markets avoid another blow-up like 1987âs Black Monday.
Nadig thinks markets are healthy â that is, working efficiently and staying resilient, even through hiccups like the meme-stock rampage in the past couple of months and the Archegos family office blow-up. Whatâs become âvery fragile,â in his words, is price discovery.
âThere are some fundamental underpinnings of how markets work that are dissolving,â he said in an interview. âWhat weâre realizing is that thereâs a lot more noise and randomness in the market than people are willing to admit. Mostly whatâs changed is information flow and data moving faster and faster. Any model you build today by definition fails to take into account an acceleration tomorrow.â
Take the Gamestop Corp. GME, -1.12% frenzy that erupted in January. After a group of disgruntled traders spent several weeks targeting short sellers by driving the price of that stock higher, âItâs no longer a normal stock â itâs an externality in the market that has ripple effects some investors may not even be aware of,â Nadig said.
Older investing models â and algorithms â are bumping up against new ones that take into account new conditions, a process Nadig calls âan arms race,â and one thatâs accelerated because of the modern speed of information flow and reaction functions.
âWeâre starting to see cracks in the traditional ways weâve always analyzed markets,â he said. âWeâre no longer processing reality, weâre processing information, and it gets priced in instantaneously. Weâve given up on analyzing.â
That means that a headline, say, about a pause in the use of Johnson & Johnsonâs COVID-19 vaccine doesnât just mean that Johnson & Johnson JNJ, +1.15% shares trade lower, Nadig said. It means that for that day, the entire âre-openingâ trade â and by extension, some cyclical trades and some value plays â suffers.
For Peter Andersen, whoâs managed money for nearly three decades and returned more than 40% for his clients in each of the the past two years, the marketâs fragility is frustrating. Andersen prides himself on âfierce independenceâ in stock selection that results in a macro-agnostic portfolio. Some of his recent investments have been in cybersecurity, data storage, and pet care.
In the year to date, however, one of Andersenâs top picks, Trupanion Inc. TRUP, +2.77%, is down 33%, for no logical reason, he noted. âItâs as if someone thinks everyone is going to euthanize their pets!â
Stocks looked past the Johnson & Johnson news to close higher for the week with both the Dow and S&P500 index at new records. The Dow Jones Industrial Average DJIA, +0.48% gained 1.2%, the S&P 500 SPX, +0.36% was up 1.4%, and the Nasdaq Composite COMP, +0.10% added 1.1%.
The coming week will bring U.S. economic data on the housing market, including existing- and new- home sales, and a raft of corporate earnings reports.
Article originally published by MarketWatch.
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