If there was any question whether 2020 was going to be an eventful year, it got answered in its first week. Tensions with Iran reached a fever pitch, having both nations seemingly on the brink of war. Fortunately, the situation has been de-escalated. It certainly has not gone away. The President increased sanctions on Iran in response to the missile attack. Iranian leaders have called the sanctions economic terrorism. This issue is far from over. Not even 24 hours after the standoff subsided, the record rally of 2019 resumed in the new year. Fears of war with Iran seem to have been erased as quickly as they came. This Bull Market has been absolutely remarkable with its resilience. Nothing, and I mean nothing, has been able to keep it down for long. Volatility is our theme for 2020. We got it already.
The first five days in January have historically mattered for the Market. Since 1950, when the first five days of the year are up, the year has ended positive 82% of the time. Both the DOW and S&P finished the first five days in the green in 2020. But the leadership has been dominated by just a handful of large Tech stocks. The equal-weight S&P was flat and the small cap Russell 2000 declined the first five days. We’ll see where this leads. Small caps have still not come near their all-time high reached in September of 2018.
145K jobs were created in December and the unemployment rate is still at the 5-decade low of 3.5%. This was below estimates, but that seems to be no issue. The Fed continues to inject massive liquidity into the system. The DOW hit the 29K level this morning for the first time. It didn’t hold it. The Stock Market is so stretched and way overbought right now. It is eerily similar to the situation in 2018, when stocks rallied to start the year but led to a sharp and swift decline. It was January 2018, where the meaningful high was hit and wasn’t seen again until the Fall, before another massive fall took place. The S&P has the same elevated valuation now too. But the trend has been undeniably strong. It’s been no use to manage risk, even in the face of the threat of war. That will change, for sure. But who knows when. Overbought situations last far longer than oversold. Making money tends to mask underlying issues, until they don’t. For now, the pace of hiring remains more than enough to keep the longest economic expansion in U.S. history on track and the Fed has made its presence clear it plans to provide substantial support.
It was exactly 20 years ago that AOL bought Time Warner in the largest merger in American history. It was a $165 Billion deal that brought the powerhouse of traditional media and entertainment together with the overnight leader of the worldwide web. The enthusiasm and expectations were massive. It didn’t last. AOL tapped its inflated stock and debt to swallow Time Warner with plans to form the new generation media empire. However, the AOL-Time Warner merger marked the TOP of the Dotcom bubble. The deal was a miserable failure and has basically been unwound as Time Warner properties are now owned largely by AT&T and AOL was snatched by Verizon a few years ago.
There have been many comparisons to today’s Market environment and that of the Dotcom days. There are some definite similarities. Most have to do with excessive valuations and the dominance of Technology stocks. But the overall backdrop is quite different. Corporate profitability is not the overriding issue today like it was two decades ago. It’s just a question of how much the profit growth is worth. Investor sentiment is not nearly as irrationally exuberant as the Dotcom days. Politics and the division within our nation perhaps explains why the lack of broad-based excitement. The election is going to bring substantial volatility attitudes, emotions and the overall Market. Volatility is our theme for 2020. As I mentioned above, we got it already.
Have a nice weekend. We’ll be back, dark and early on Monday.