Talking Points – December 2020

December 16, 2020 – The IPO Frenzy

Having started in the industry in the late 1990’s during the technology bubble, there were some things that we never thought we would see again during our careers. Yet here we are 20+ years later and the hysteria for IPOs (Initial Public Offerings) has us feeling a fair amount of deja vu.

Despite some headline popping first day returns from notable IPOs recently, on average the first day gain now is still trailing the tech bubble by a fairly wide margin. However, the current era seems to be just as intent on bringing IPOs to market with negative earnings.

During the original tech bubble it was fairly obvious, even at the time, that many of those companies had no real business plan to survive, let alone prosper. Many of the companies coming public today are very interesting concepts with terrific early growth. Of course, there is often a difference between a great company and a great stock. The astronomical valuations for many of these stocks could leave them vulnerable if their growth prospects took any kind of hit.

“History doesn’t repeat itself, but it often ryhmes.” – Mark Twain

December 9, 2020 – Are Stocks Being Overbought A Good Thing?

Stocks have had an incredible year since the March lows, with the past month being one of the best periods in many years. As a result, stocks as measured by the percentage they are trading above their 200-day moving average, are the most overbought since late 2009.

Source: Strategas Research

It turns out that looking back to 1950, the largest 12 month forward returns were when stocks were the most stretched either below, or above the 200-day moving average, as can be seen below. What is also noteworthy, is the highest hit right of positive stock returns 12 months forward comes when stocks are stretched well above their 200-day moving average.

Source: Strategas Research

There is little question that stocks are now overbought and sentiment is perhaps a little too positive. That leaves stocks in the short-term vulnerable to unexpected bad news. However, as we look out further the current stock price momentum has historically meant more good days lie ahead.

Source: Greg Towner, CFA, CMT