Will investors pay a price for strong first half?
Today we will review some of the amazing financial market occurrences of 2021 thus far to try to polish the crystal ball for the next six months.
First, what sectors won the performance contest? Energy rose by a hair less than 40 percent. How is that for an industry the government wants to kill? Second and third places belong to financials and basic materials, both over 20 percent gains. Real estate was not far behind at 19 percent, industrials in fifth at 17 percent.
The laggards were utilities at 3, consumer defensive at 5 and communication at 8 percentages. Technology, usually high on the lists, was sixth with a rise of 15 percent. This showed one of the anomalies year to date because the value style of investments generally outperformed the growth style. The S&P 500 Pure Value index rose 25 over the Pure Growth index’s 13 percent, although Growth took back the lead in June.
Irrational exuberance (a term coined by former Federal Reserve Chair Alan Greenspan in the 1990s) was in full display. While Tesla cooled down, the younger Reddit crowd flexed financial muscle, beat the giant hedge funds at their own game (shorting), and forced the big-money moguls into massive losses.
How? Take a look at AMC Entertainment (AMC) for example. It had dropped from the low $30's in early 2017 down to $7.24 in December 2019, before we could even spell COVID-19.
Along with Gamestop (GME), the movie theater company based in Leawood, Kansas was an easy target for betting the share price would fall even lower this year.
But young investors decided collectively via social media (Reddit) that the stock collapse would not be. When they jumped in to buy AMC between the 2021 low of $1.91 and the mid-teens, those oh-so-smart hedge fund billionaires lost billions as they were forced to buy back AMC shares. This propels the stock price even higher on increased demand.
After a spike to $20.36 by January’s end and another low of $5.26 in February, an equilibrium was reached in the mid-teens that lasted until the last week of May. In a new rally, AMC gained over 490 percent from May 24 through June 2. It reached a high of $72 on June 2 before settling back to $62 and change by day’s end.
At $56.68 on June 30, AMC holds the record for the first half, its price skyrocketing from $2.12 on Dec. 31. This was a potential gain of 2,573 percent in six months. I say potential because there is almost no possibility that someone who held it at year end of 2020 and sold it at the close on June 30. But that is an impressive move regardless. With action like this, who needs Vegas or the lottery?
This leads to the second-half prognosis. In the past whenever financial markets have experienced this sort of speculation, more drastic price drops have usually followed. But when is the primary question? Even if the fourth quarter is as positive as usual, I believe that the probability exists for greater correction between now and mid-October. Too many investment holders seem to think this bullish situation is almost guaranteed, typically a recipe for disaster.
Time will tell. Volatility, hated by most, carries the keys to an opportunity to make more gain than your money in the bank or anything with a guarantee.
(Statistics from Worden Brothers, TC2000 Software, 2021.)
(Past performance is no guarantee of future results. The advice is general in nature and not intended for specific situations.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at firstname.lastname@example.org.