2021 is likely to be the year of the “safe trade.”
Investors shunned safety in 2020 – with good reason. It was the perceived “risky” assets that did best.
Junk bonds performed much better than U.S. Treasury bonds. Foreign currencies were stronger than the dollar. And, companies that made no money saw their stocks perform better than companies with solid, predictable cash flow.
Heck, arguably the easiest trade of 2020 was to buy Tesla (TSLA) at the start of the year at a split-adjusted price of $85 per share – which was 12 times book value and a forward price/earnings (P/E) ratio of 95. The stock recently traded at $650 per share – which is now 36 times book value and a forward P/E of 152.
That’s a 665% gain.
Alternatively, you could’ve picked four tiles from a bag of scrabble pieces and then bought whatever stock symbol they spelled out. That strategy seemed to work well, too.
But, it’s probably not going to be so simple in 2021.
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The investing pendulum has swung to a point we’ve only seen a few times before – a point where long-term fundamentals don’t matter, where anyone preaching caution is ridiculed, where rigorous analysis is tossed aside, and where traders put their life savings into a stock based on an “influencer’s” tweet.
We saw this during the dot-com bubble in 2000. We saw this when stocks reached insane valuations in 2007. And, we saw it for most of 2020.
I’m willing to bet the pendulum starts swinging in the other direction in 2021. Here’s why…
This chart shows the spread between the yield on the 10-year and 3-year Treasury note. That spread has been increasing over the past several months. And, it looks to me like it’s ready to explode higher.
Long-time readers will remember when I shared this chart with you back in August.
The conditions were eerily similar to what we saw in 2001 and 2007 – just before the yield curve expanded, and the stock market declined.
Best regards and good trading,
Do you agree with Jeff’s 2021 prediction based on the patterns from previous years? Or, do you think the “scrabble strategy” will last longer?
Let us know your thoughts – and any questions you may have – at [email protected]