2021 has certainly been a wild year so far for the stock market, even though everyone thought it couldn’t get any worse than 2020. We witnessed the whole Gamestop drama, Bitcoin hits $50000, and Elon Musk is pumping Dogecoin like anything.
A lot of assets have become way overvalued, like TSLA with its sky-high PE of above 900. While other assets like Gold have been in a downtrend since the beginning of this year.
All these, combined with the fear of high inflation, have created a lot of volatility and uncertainty in the stock market. Which essentially makes making money an even harder job for investors like you and me.
So, with the fed’s outlook on interest rates and the economy opening back up, what are some of the best areas to look for when it comes to investing?
Should you completely forget about meme stocks like Gamestop and AMC? Is it the right time to jump in on cryptocurrencies like Bitcoin and Dogecoin?
To answer all these questions, we’ve invited Kyle Woodley, Senior Investing Editor at Kiplinger.com. Today, he’s going to give us a quick overview on navigating the stock market in 2021 and how to make money in such a volatile market. So let’s begin with the stock market overview 2021.
Stock Market Overview in 2021 So Far
So what’s happening in the stock market in 2021? What is up with all these meme stocks, Buzz ETFs, and all the craziness that is going on. And more importantly, how can one really navigate through the madness and actually make money in the stock market right now?
Well, when Biden came into office, everyone thought that things are going to become a lot easier from here. There’s not gonna be as much commotion, and everyone can relax a bit. However, we’ve all been proven dead wrong by the market.
Talking about the latest that’s going on, everyone is all of a sudden enamored with inflation and bond yields, which is what controlling the market currently. It’s no longer the stimulus or the pandemic but inflation worries.
In fact, if you look at Bank of America’s most recent global mutual fund manager survey, for the first time since Feb ‘20, Covid-19 is not the biggest tail risk. Inflation and taper tantrum have taken over as the biggest tail risk for the markets.
So suddenly, we all care so much about what Jerome has to say over at the fed. But unfortunately for us, he has said very little.
The Fed isn’t looking very worried about inflation. Though their expectations for inflation is “higher than expected,” they haven’t moved anything in terms of interest rates. Although interestingly, a few members see the next rate hike coming a bit sooner than the planned 2023.
Also Read: Index Funds vs Stocks: Which is Better For You?
What Does Inflation Mean for Investors?
If inflation is such a big worry now and the Fed is still playing it cool, what does it mean for the investors and what they should be doing right now?
The effect of inflation is already visible in the market. You can see that tech is really getting hammered on inflationary worries as it cuts into their margins.
Whereas because the expectations for inflation are so high and part of the reason why the inflation worries are so high is because people are expecting this great economic recovery.
And for that reason, investors are pilling into cyclical stocks, value stocks, and the areas of the economy they believe Americans will be spending the most heavily in over the next year.
That is the reason why you’re seeing travel companies such as airlines, booking companies, restaurants going through the roof. Industrials and financial stocks are some other good areas you’ll see investors pilling up.
Now what’s most significant is that finally, after more than a decade of outperformance of growth, you’re starting to see some love for value stocks. And many experts expect this newfound love to continue until at least halfway through the year or more before tech starts growing again.
That is why according to Kyle, it is more important than ever now to focus on value because value assets are finally gaining the attention they deserve.
What’s With the Meme Stocks
So, if people are more interested in value right now, what’s with the meme stocks? Why are they gaining attention when we should be actually focusing on value?
Well, meme stocks are a different concept altogether. They are not a growth or a value thing. Some of the meme stocks that people are dividing into, they are doing so because of a perceived value.
A lot of these stocks were actually good, like Gamestop, Nokia, and AMC. People believe them to be undervalued, and so they’re pumping them.
Now obviously, they’re not doing it by traditional value metrics that you and I would care about. But there’s a perception that these stocks are not so great, however, they can be.
With the economy reopening, AMC is in a position for growth. Obviously, they might not be profitable for the next two to three years, but at least you can see what people are seeing in these stocks.
Also, investing in AMC not only has value but is also helping the company to actually open up its theaters. So it is not just a meme, but there is a reason why people are jumping into it.
Gamestop might not look great, but they have a lot of space to improve. Chances are low that they will limit themselves to the brick and mortar business but do something transformative and get their foot into the fast-growing e-sports industry.
It will be foolish if they do not utilize the insane amount of branding they’ve got in this whole episode to do something great with the business.
This is interesting because it started out as something that was just hype. People got into it as a movement to eat the wall street and all. But now, it might really turn into something good.
Should You Invest in Meme Stocks?
Ok, so we have talked a lot about the meme stocks and how they might actually hold some value. But the real question is, is getting invested in the meme stocks at this point in time a good idea?
Well, whatever hopes there might be for these companies, as far as investing in Gamestop or any other meme stocks is concerned, one shouldn’t make an investment decision solely based on hope.
Now, everyone has their own risk tolerance, financial goals, and their own views on value. So choosing to invest in meme stocks is really a subjective thing and up to the person.
Personally, Kyle says he would refrain from investing in meme stocks at these levels. Companies like Gamestop need a more concrete plan and actual execution of that plan to really display the potential we were talking about.
Right now, all of these stocks are grossly overpriced, and they just don’t justify the valuations for Kyle to invest in them.
Even the companies that Kyle has a positive outlook for like AMC. He is worried about the competition from other theater chains like Alamo Drafthouse, which is operationally better than AMC.
The thing about investing in meme stocks or any other similar stocks is having an eye for value. There shouldn’t necessarily be an obsession with value like if a stock is undervalued, it must be good.
But you should always care about whether you’re getting good growth for the value. In popular language, it is referred to as GARP (Growth at a reasonable price). All the while making sure that your investments go along with your financial goals, risk tolerance, and investing strategy.
So that was the first part of our stock market overview 2021. We discussed everything from current trends in the market to investing in meme stocks. In the next part, we’ll talk about ETFs and why they’re the new investor-favorite now.