The Truth About Today’s Markets

I make a mistake very often when I travel. I tell strangers what I do for a living. Imagine for a second that you’re a doctor. You step into a restaurant. You sit down. You order a hamburger and fries. You get an iced tea and a glass of water. You’re also the only customer. The waiter – just making small talk asks you what you do for a living. You answer, “I’m a doctor.”   The Truth About Today’s Markets Dear Reader, I make a mistake very often when I travel. I tell strangers what I do for a living. Imagine for a second that you’re a doctor. You step into a restaurant. You sit down. You order a hamburger and fries. You get an iced tea and a glass of water. You’re also the only customer. The waiter – just making small talk asks you what you do for a living. You answer, “I’m a doctor.” Within five seconds, the waiter takes off his shirt and asks you to check a mole on his back. Uncomfortable? Yes. Especially if your area of medicine isn’t dermatology. Maybe you’re an eye doctor or a person who focuses on rare disorders. The point is, you can’t tell him anything about the mole because that’s not your area of expertise. Nonetheless, he keeps asking you questions… over and over again… because – you studied medicine, and he decided to follow a jam band for seven years... The life of an economist and market analyst can be very similar. Dinner for One I ordered a Bratwurst. I ordered a Coke. And then I said I was in town to work on an investigation into the stock market. I’m an economist and write about the markets... For the next 20 minutes, I received questions about cryptocurrencies, Non-Fungible Tokens... “Should I buy Coinbase?” the bartender asked. “Do you recommend people buy gold?” “My brother is really into Dogecoin,” he said. “Have you heard of Mara? Polkadot? Enjin?” First off, I’m not a registered advisor. That’s not my job. I don’t provide individual financial advice. Second, I don’t spend any time in the latest craze, and I’ve primarily ignored active cryptocurrency trading because of the pitfalls associated with the practice. I think it’s great that people are engaged in the market. They’re actively trading. They’re excited about something different. But I care as much about day-trading cryptocurrency as I do about the weather on Mars. Third, my inner voice was screaming, “PLEASE!” Please. I just got off a plane full of screaming kids and have been breathing into the same mask since lunchtime. Please just let me enjoy the Bratwurst. It was my first stadium-style Bratwurst in two years. I had to scarf it down and get out of there before the bartender started asking me next about Beanie Babie’s. So, Here’s What I Do In finance, I operate at the edge of a bell curve. Most people spend their days analyzing Blue Chip stocks. They talk about annuities, and ETFs, and major market indicators. If people are talking about Apple or Microsoft or Facebook, I’m usually not. They’re all great companies. But they don’t excite me. I get excited about companies that you’ve probably never heard of. And if they’re boring and pump out a lot of cash flow, all the better, in my opinion. Yes, I have a background in macroeconomics. I spent years studying and covering derivatives policy, fiscal policy, and momentary policy. But now, I like to focus on market anomalies—the behavioral components of the markets that go misunderstood regularly. Momentum is one of these elements. Strong stocks typically go higher (in price and relative momentum), while weaker stocks tend to go lower. The Truth About Momentum So, here’s a question that the bartender should have asked me. It is in my wheelhouse. “If stock market momentum is negative right now (and it is), why does the stock market continue to rise?” As I’ve shown, the market is fragile at this moment. But everyone is cheering the all-time highs of the Dow Jones, S&P 500, and the Nasdaq 100. Well, take a look at the S&P 500 and Nasdaq 100. Both of these indices are weighted by the market cap of their members. Apple represents 11% of the Nasdaq 100. Combined with Microsoft, they are more than 20% of the weight on that index. They’re 11% of the S&P 500. Two stocks worth nearly $4 trillion combined are moving higher and higher. But there are more than 7,000 stocks that trade on U.S. equity markets. And they have been going down, down, down. Mega cap stocks have seen massive inflows because the markets deem them safe investment plays for the long term. I argue that investors treat these giant tech firms as a store of value as some of the cryptocurrencies we hear a lot about. Meanwhile, small-cap stocks are off more than 5% over the last month. Micro-cap stocks are off more than 10% over the previous month. And nano-cap stocks are off more than 15%. So, yes. The markets are going higher. In the U.S., Apple, Microsoft, Amazon, Alphabet, Facebook, and Tesla have a combined market capitalization of $8.6 Trillion. This value is nearly double the size of the world’s fourth-largest economy in Germany. And that figure represents about 10% of the universe of 4,778 stocks that I’m tracking each day. To call the markets top-heavy would be an understatement. The lack of focus on how vulnerable these other parts of the market are right now by the media is downright negligent. Tiny companies in America are taking a beating at the expense of the big boys. If we continue to remain overly reliant on just a few names for our market returns, we’re heading for trouble. We’ll continue to remain vigilant, especially given the fact that market momentum has largely been negative for nearly two months now (except for the S&P 500). I’ll be back with more commentary tomorrow, Garrett {NAME} © 2021 Godesburg Financial Publishing, Inc. 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