The past week has been one of the strangest weeks that we have encountered in a long time. In our previous commentary we discussed ‘potential’ bubbles in Tesla, Bitcoin, and non-profitable Technology companies. There have been extreme moves in all of these areas and 2020 was especially noteworthy for non-profitable Tech companies as seen in the chart below.

It probably makes sense to add Game Stop to the list of ‘potential’ bubbles because we now have retail investors short squeezing hedge funds via Reddit. But who’s David and who is Goliath?

Despite an intra-day drop of 70% yesterday, GameStop is still up nearly 900% this year. In a span of a few weeks, GameStop went from a small cap stock to a mid cap then a large cap stock. At one point it was large enough to be around number 260 in the S&P 500. It seems like speculation to us, but please don’t take our word for it because we’re not experts in the gaming sector.

So while we do see some froth in certain parts of the market, that’s not where we are investing our clients’ money so it’s somebody else’s issue to deal with. What this week does show is the magnitude of the firepower that the US retail investor has. Consumer wallets have swelled due to the stimulus and there is more on the way according to what we have heard from President Joe Biden.

Over the last 10 months, there has been a very strong advance in global equity markets as measured by the MSCI World Index, which is up nearly 70% since bottoming in late March. Valuations are currently at the upper end of the range on certain metrics such as the price-to-earnings ratio. Furthermore, investor sentiment measures appear elevated and would imply that investors have become complacent. All of this suggests to us that the market is ripe for some consolidation and we did see a bit of that this week when the S&P 500 declined by 2.5% on Wednesday. Corrections are normal and they happen almost every year, even during bull markets. As seen in the chart below, the average annual drawdown over the last 30 years has been 14.2%.

Nobody knows when these drawdowns will occur nor do we know how severe they will be. The important takeaway from this chart is that even though there have been drawdowns of 7% or more in 24 of the last 31 years, the S&P 500 has only experienced a negative annual return in only 9 of those 31 years. And in 2 of those years (2011 and 2015), the market was down by less than 1% so essentially flat. The point is that market drawdowns have typically been good buying opportunities. Not always, but most of the time.

So, what about today’s situation? We believe that a drawdown in 2021 will likely represent a good buying opportunity because we continue to expect a global economic recovery. There are several tailwinds that will support the recovery including government stimulus measures, low interest rates, and a huge amount of pent-up demand from consumers. In addition, Q4 corporate earnings have been strong thus far and have led to earnings upgrades from analysts. And finally, financial conditions remain loose. According to the Federal Reserve Bank of St. Louis, (https://fred.stlouisfed.org/series/NFCI), the current reading of the Financial Conditions Index is near its lowest level of the last 20 years. This implies that there are few signs of stress within the financial markets. Putting it all together, we continue to have a cautiously optimistic outlook for 2021.

Have a good weekend,

Phil

The stock market has been volatile as 2021 gets underway. After a negative start on January 4th, the market strengthened but it has given back most of the gains in the last few days. This leaves the market up marginally since the beginning of the year. The key issues for investors remain the same and are centered around a global economic recovery. One of the key factors that will drive the recovery is the success of the vaccines that are now being rolled out around the world, which will allow businesses and economies around the world to re-open and resume normal activity.

As we all know, global stock markets have surged since late March primarily on the back of government stimulus. This has provided massive amounts of liquidity, a large portion of which has found its way into stock market. This begs the question, is the stock market in a bubble?

From our perspective, we do see some areas within the market that are concerning. Tesla is a good example with the stock up approximately 1,000% since the March lows! During my career I have seen a few 10-baggers but typically they unfold over several years and sometimes over a decade. I do not recall seeing too many large-cap 10-baggers happen in less than 1 year. As seen in the chart below, Tesla’s 12- month return is well above some of the largest returns that were generated during the Tech Boom in the late 1990’s. This includes Amazon, Microsoft and Cisco.

Another example of a potential bubble is Bitcoin. As seen in the chart below, Bitcoin’s return has been well in excess of other bubbles that occurred in the past. This includes the Tech bubble, the US housing bubble, and the gold bubble.

Finally, we also see a potential bubble within unprofitable Technology companies. Many of these companies are up by 200-300% over the last year despite a lack of profitability.

So Tesla, Bitcoin, and non-profitable Tech are good examples of potential bubbles but does that mean there are bubbles everywhere? We believe it is an exaggeration to say that the entire market is in a bubble. A number of stock market indices generated negative returns during 2020 including the FTSE 100 Index in the United Kingdom (-14.3%), the CAC 40 in France (-7.1%), and the Borsa Italiana in Italy (-5.4%). The S&P 500 was up 16.1% in 2020 but some industry sectors were down during the year including Energy (-37.3%) and Financial Services (-4.1%). These types of returns are not indicative of a widespread bubble formation. We are finding opportunities in various parts of the market, especially in the Financial Services and Healthcare industries. Within those sectors, we see several stocks trading at a 50% discount to the stock market multiple with many companies trading at price-to-earnings ratios of 10-12x on 2021 consensus estimates.

So back to Tesla, Bitcoin, and non-profitable Tech. Why do we say they are in a potential bubble? The interesting thing about bubbles is that you will only know it was a bubble with the benefit of hindsight. Bubbles can go on for years before they pop. Nobody knows how long they will go on for and sometimes what is perceived to be a bubble doesn’t always materialize. Amazon is a good example. And it’s possible that Tesla could keep going up. Having said that, just because a popular stock doesn’t implode and become worthless, it doesn’t necessarily mean that it will be a good investment. Cisco is a good example. If you had bought Cisco Systems during the peak of the Tech boom in 1999-2000, you would still be in a loss position today, 20 years after the fact! The reality in the world of investing is that the price you pay dictates the return you receive. Buying a great company does not always guarantee a great return.

Our clients can rest assured that we are staying away from the areas of the market where we see the risk of a potential bubble and we are spending our time looking for opportunities in areas of the market that have been neglected.

After generating very robust returns during the second quarter, global equity markets continued to climb higher in the third quarter. The key factors that drove stocks higher included improving economic conditions and massive amounts of stimulus provided by central banks around the world. As Q4 gets underway and as we look ahead to next year, the key forces that will impact the stock market include the economy, government stimulus, the US Presidential Election, and COVID-19.

The first half of 2020 is officially over, and it was certainly an eventful period. During the first quarter of 2020, investors witnessed the fastest 30% drawdown in the history of global equities only to be followed by one of the largest 50-day advances in market history during the second quarter. Improving economic data, massive amounts of stimulus, and encouraging news about a potential coronavirus vaccine have been the key drivers behind the stock market’s resurgence.

After a very strong year in 2019, and a very strong start to 2020, the global equity markets have sold off very significantly. Unfortunately, the reason for the decline requires no explanation – it is primarily due to the significantly negative economic impact that the coronavirus containment measures are having on the global economy.

Despite several periods of volatility experienced during the year, 2019 was a fantastic year for investors across most asset classes, sectors, and geographies. Our Cumberland Global and Cumberland International strategies performed very well in 2019, producing returns that significantly exceeded their benchmarks.

We were in Hong Kong recently where we had the opportunity to listen to many thought leaders speak on their specialized fields. For this quarter’s macro review, we would like to share with you a summary of some thought-provoking topics with a perspective from Asia.

We are midway through 2018 and based on McKinsey’s most recent survey of executives’ sentiment on economic conditions, there is an increase in those who are more cautious on economic conditions and prospects for growth. It should not come as a surprise that changes in trade policy is the most cited risk to domestic and global growth in addition to being a risk to their own companies. The Bank of England’s governor, Mark Carney, has warned global political leaders about the costs of putting up trade barriers. Based on the UK’s experience with Brexit as an example, Carney pointed to their recent underperformance as a lesson in the perils of deglobalization.

As we commemorate the fiftieth anniversary of Martin Luther King’s passing, we wonder about the progress we have made in America and the rest of the world in terms of equality and peace. The United Nations, an international organization founded in 1945 after the Second World War by fifty-one countries is committed to international peace and security. They also try to promote social progress, better living standards and human rights. Yet, the UN has certainly not been successful in protecting nearly 700,000 Rohingya citizens who have been displaced from Myanmar since August 2017. We are witnesses to another case of ethnic cleansing that seems to be taking place. When we presented on Myanmar post our visit to that country during their first free general election in a generation, we were genuinely hopeful that this country would emerge to become a better country for everyone under the leadership of Aung San Suu Kyi. Her silence on this subject is viewed as complicity in crimes against humanity. While discussing this with opinionated industry colleagues, we had an animated banter about this subject. They tried to convince me that Aung San Suu Kyi has no choice but to look the other way if she wanted to stay in politics and therefore, we need to accept the fact that principals are not a valid choice in the world of politics.

Our condensed version of the global macro review of 2017 can be done in four words: Trump, elections, terror and China.

It may be fitting to observe that the current number one bestseller is “Fire and Fury”, a title that refers to a quote by Trump about the conflict with North Korea which places an exclamation mark on what was an exacerbating year. Since Donald Trump became the 45th US president in January 2017, the world has not been the same. His war of words with North Korean leader Kim Jong Un calling him “Little Rocket Man” and comparing one another’s nuclear button sizes, reminds us of spoiled and ruthless children. But here’s the problem: these two bullies are dealing with the safety of millions, perhaps billions, of people’s lives, with little certainty of a solution in the near future.