Making sense of the markets this week: January 25, 2021

Photo by AronPW on Unsplash

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and offers context for Canadian investors.

The best post-election surge in modern presidential history

Stocks gained about 13% between U.S. election day and Jan,19, the day before Joe Biden’s inauguration—marking the best post-election market performance for a new president in more than half a century. Then on inauguration day (Jan. 20), U.S. stocks gained another 1.38%, moving to yet another all-time high.

For the time being, President Biden can legitimately claim the U.S. stock markets have been at an all-time high for the entire duration of his term. (Insert winky-face emoji.) The trend continued on Jan. 21 with slight gains; and while Friday’s close was down slightly, markets were still up 1.9% for the week.

According to that CNN Business post, here’s the story on the second place holder for post-election performance: My personal favourite, JFK…

“The second-biggest surge was from late 1960 to early 1961, when John F. Kennedy defeated Richard Nixon, and the S&P 500 rose 8.8%. The market continued to rally during JFK’s first 100 days in office, rising another 8.9%.”

Four years ago, U.S. stocks also cheered the Trump election victory, increasing 6% from victory to inauguration. Indeed, stocks performed well during the Trump presidency, gaining more than 16% per year.

Here’s an interesting tweet from James Piscerno, comparing the stock performance during various presidents’ first terms…

President Biden is in a tough place. COVID-19 is raging out of control, and now there is much talk of the economic scarring caused by the pandemic. So many businesses have closed. So many are out of work and not likely to return to the workforce in 2021.

That said, most investment firms and banks are calling for very solid stock market gains in 2021. RBC Capital Markets predicts a 9% gain for U.S. stocks in 2021. Coincidentally, stocks under the Kennedy/Johnson administration went on to earn 9% annually from 1960 through 1963.

Keep in mind that U.S. stocks increased by 16% in 2020. That’s an incredible feat achieved during the first modern-day pandemic. The high price of U.S. stocks is a continued theme, though we see the rotation out of those frothy large-cap tech stocks, and into the small-cap and mid-cap stocks that might offer more current earnings and value.

As I wrote in MoneySense when I took a look back at 2020 and a peek forward to 2021…

“Personally, I hold a contrarian hunch or guess as to what might happen when we start to get to the other side of the pandemic. The markets have been riding a wave based on optimism. Once we have that pandemic under control, market makers might turn their attention to actual earnings and earnings prospects. And they might not like what they see.”

In the name of rebalancing and booking those frothy gains, I have placed limit sell trades (slight trims) for many of the high-flying U.S. stocks in my portfolio. I am in the semi-retirement stage, so I cannot afford to wait out a lengthy U.S. stock market correction, such as the 1990s—also called the lost decade for U.S. stocks.

How will President Biden’s first moves affect the markets?

One of the new President’s first moves was to kill the Keystone XL pipeline. That is ironic, as last week I mentioned the bullish outlook that many share for oil and natural gas. And in that post, I mentioned TC Energy (TRP), which is building that pipeline (or was). I hold TC, as well as Canada’s biggest pipeline operator, Enbridge (ENB). The shares of TC Energy were hit hard on Mon., Jan. 18—I ate my own cooking. I picked up some shares at $54.50, it bounced back on Tuesday, trading at $57 on Thursday. But no worries on the stock price, I am happy to pick up that extra dividend income: The yield offered at the time of purchase was near 6%.

It was no surprise that the pipeline project was killed—that has been a long-held position of the U.S. Democrats. So that news was already “priced in” during previous weeks and months. It appears that investors simply overreacted upon last week’s announcement.

The Biden administration also signed the Paris climate accord. Once again, there is more support for clean technologies and green subsidies, and that continues to pose or create a risk for traditional energy.

Many are also saying that the incoming administration will be positive for the cannabis sector. That has already been on a good run (those forward thinking “smoke ’em if you got ’em” stock markets), as Horizons Marijuana Life Sciences Index ETF is up 13.5% year to date.

Maybe it’s time to plant that first position?

What’s in store for ETFs in 2021

On my site, I recently looked at the ETF sales in Canada for 2020. ETFs outsold mutual funds for the third year in a row, and set many records in 2020, attracting $40 billion in new monies. (This might be a good time to look back at the MoneySense Best ETFs for 2020 ranking.)

On Morningstar, Mark Noble from Horizons ETF looked at trends for 2021, including thematic ETFs such as that HMMJ fund mentioned above. Thematic funds will invest based on a niche theme or sub sector, such as cannabis or electric vehicles, as examples.

“Thematic ETFs had a massive 2020.… [T]hematic ETF assets grew 78% in the fourth quarter from about $60 billion to $105 billion. In Canada we’ve seen not quite the same level of growth, because Canadian ETF investors can but those U.S. ETFs.… But even in Canada we have about $5 billion now in thematic ETFs across 40 products.”

Two of the big themes discussed were those marijuana stocks, up 60% in 2020—and blockchain stocks, up an eye-popping 1000%.

Ruth Saldhana of Morningstar asked Noble about investors taking on those risky themes such as blockchain and bitcoin. He offered…

“Are thematic ETFs a higher risk/reward proposition than a broad equity ETF? So, let’s take that blockchain example. If I buy blockchain equities, is that a higher risk/return proposition than buying the S&P 500? Absolutely, no question. But I don’t think there’s anything wrong with investors taking what we call a core and explore approach, which is that you build a portfolio with core asset classes that are designed to meet your long-term risk/return objectives.”

While it’s not for everyone, I am a fan of the core and explore approach. A core portfolio might be represented by an investment mix such as the one-ticket asset allocation ETFs. The explore component may be built by way of a sector or thematic ETF. An investor might also use those explore monies to buy a collection of individual stocks.

The “explore” in my RRSP account consists of two U.S. stock picks: Apple and BlackRock. Those two companies have greatly outpaced the market returns.

On the thematic ETF side, I’d also be willing to pick up some of that HMMJ. But I would consider it a speculative exploration. The sector is not flush with profits and there’s the risk of great losses.

Noble suggests you keep your explore funds to 5% to 15% of portfolio assets.

Couche-Tard’s takeover attempt stopped in its tracks

Out of Quebec, Couche-Tard is perhaps the only truly global Canadian success story. They recently attempted a takeover of Carrefour in France, but quickly ran into a big “non, merci.”

Carrefour is France’s largest private sector employer and many feel that this takeover was a little outside of Couche-Tard’s wheelhouse; for that, the stock has been punished.

From that Bloomberg post…

“A merger would have created a retail powerhouse, combining Couche-Tard’s North America-focused network of 14,200 convenience stores with Carrefour’s sizable European operations, which include hypermarkets and smaller outlets. Carrefour has more than 7,000 convenience stores and gets almost all of its revenue from Europe and Latin America.”

Couche-Tard is down nearly 14% in 2020, and the stock price is down over the last one-year period as well. But this is still an incredible company as I wrote in September after Couche-Tard had reported very strong quarterly numbers.

And perhaps it offers incredible value with a PE ratio below 13. A lower PE ratio means you are buying a higher level of current earnings. For context, the PE ratio for the Canadian composite is 15, according to iShares. The U.S. market is drastically more expensive compared to Canada.

Dividend Stocks Rock calls Couche-Tard “crazy cheap” by historical standards. And now that the hype is over, they’ll go back to making money in the manner they did before this acquisition attempt. And they might be well-positioned for a robust summer driving season, if we can get the pandemic more under control.

Is Tesla the next Big Short?

Michael Burry is one of the investors who predicted the collapse of the banking and financial sector known as the financial crisis of 2008–2010. Eventually, Burry was able to profit handsomely from that collapse and it was such an amazing story that it was turned into a movie, released in 2015: The Big Short.

I like to “joke” I was in that movie, as I was one of those who worked in the industry who was laid off—I was working for a U.S. bank. (Tip: don’t work for a U.S. bank heading into a U.S. financial crisis.)

And now Burry has picked Tesla as his next big short idea. He predicts Tesla stock will collapse like the housing bubble: “Enjoy it while it lasts,” he says. The investor whose billion-dollar bet against the U.S. housing market was immortalized predicts Tesla stock will suffer a similar downfall. A Business Insider article shared Burry’s tweet on his increasing short position:

“Well, my last Big Short got bigger and bigger and BIGGER too.”

And on another recent Tesla stock price surge…

“Tesla’s stock price jumped 8% that day alone, adding $60 billion to its market capitalization— equivalent to “1 GM, 2 Hersheys, 3 Etsys, 4 Dominos, 10 Vornados,” he continued.

This will be interesting to watch. Tesla’s valuation does not appear to make sense. It is a wonderful company (and story), but perhaps not a wonderful stock in 2021.

We’ll see if this short tests Burry’s patience—and wallet. There is the famous expression from economist John Maynard Keynes that the markets can remain illogical longer than you can remain solvent.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com. Find him on Twitter @67Dodge.

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About Dale Roberts

Dale Roberts is a former investment advisor and proponent of low-fee investing. He created the Cut The Crap Investing blog in 2018. Find him on Twitter for market updates and commentary, every day.

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