In my final essay of 2020, I wrote that 2021 was likely to be the year of the safe trade.
I couldn’t have been more wrong.
I believed that all of the craziness that happened in 2020 wasn’t going to repeat… and that the market was likely to get hit with a strong bout of common sense in 2021.
That theory was proven wrong just a few weeks into the New Year…
First, we got the “meme” stocks craziness.
Companies like GameStop, AMC, Bed Bath & Beyond, and others that were previously teetering on the brink of bankruptcy saw their stocks blast higher by hundreds of percent – fueled by the enthusiasm of retail traders anxious to “stick it to the man.”
Then we got the wild move in obscure (and arguably worthless) cryptocurrencies as investors plowed money into Dogecoin and other “joke coins” ahead of Elon Musk’s appearance on Saturday Night Live.
That was followed by a rush of money into the non-fungible token (NFT) market – where investors willingly paid millions of dollars to own blockchain-encrypted digital codes of pictures that are freely available to everyone.
Now we’re seeing money flood into Metaverse assets.
It all seems surreal… and, there are new forehead shaped dents on my desktop that match the dents I put there back in 1999.
Many folks who are trading the markets today weren’t around back in 1999. But those who were remember how crazy things got.
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Lots of “dot-com” companies traded for insane valuations as the experts explained that earnings didn’t matter anymore. Companies were instead valued on the basis of “page views” and “eyeballs.”
Traders got rid of their “old-economy” stocks with their high dividends and low price-to-earnings (P/E) multiples. Then, they used the proceeds to buy “new-economy” stocks with “.com” attached to the back of their names.
That worked for a while – until the Fed started to shift from an easy money policy to a tight money policy. Then everything unraveled in 2000…
The investments that had been the darlings of Wall Street in 1999 crashed and burned in 2000. And those old-economy stocks – with their big dividends and low P/E ratios – doubled and tripled in value.
I was wrong last year when I wrote 2021 would likely be the year of the safe trade.
I was expecting the Fed to start tightening sooner. And that shift in policy would lead to a move out of risky assets and into safer investments.
Clearly, that didn’t happen. The Fed kept its easy money policy in place for most of 2021. So, the risky behavior we saw in 2020 got even riskier in 2021.
But, the Fed changed course in November.
It started its tapering process – which is the first step towards a tighter monetary policy. And the market is beginning to price in a series of interest rate increases over the next two years.
To me, it looks like the pendulum is ready to swing from “risk on” to “risk off.”
I was wrong last year… 2021 was not the year of the safe trade. But, 2022 sure looks like it will be.
Best regards and good trading,
Jeff Clark
Reader Mailbag
Did you buy into the “craziness” of cryptocurrencies and NFTs this year? If so, do you think this trend will continue well into 2022?
Let us know your thoughts – and any questions you have – at [email protected].