When it comes to beverages, frothy can be delicious.
In what may be the least inspiring description of fizzy drinks ever written, a group of food engineers explained, “Aeration in beverages, which is manifested as foam or bubbles, increases the sensory preference among consumers.”
Stock markets can fizz up too. Share prices bubble, enthusiastic investors invest and prices go even higher. In a frothy market, stock prices often rise above estimates of the companies’ underlying values. The terms that describe this financial market phenomenon include “irrational exuberance,” “animal spirits” and “overconfidence.”
Last week, there was speculation about whether some parts of the U.S. stock market have become too frothy. Eric Platt, David Carnevali and Michael Mackenzie of Financial Times reported on an initial public offering (IPO) by hospitality company, Airbnb. They noted:
“The share price more than doubled in value on Thursday in a return to the kind of mammoth pops that came to define the dotcom boom of the late 1990s…It’s a sign of frothiness, a sign of incredible demand and a sign of a retail investor that…just wants to get in.”
That observation about investor enthusiasm for stocks was supported by the AAII Sentiment Survey. Last week, 48.1 percent of participants were bullish, far above the long-term average of 38 percent. Some believe the survey is a contrarian indicator. During times when bullishness is stronger than usual, contrarian investors would adopt a bearish stance and vice versa.
Despite IPO fervor, major U.S. stock indices finished lower last week. The decline has been attributed to a lack of new stimulus from Congress rather than concerns about over-valued share prices. Inflation worries may have played a role too. Last week, headlines of both The Economist and The Wall Street Journal suggested the post-pandemic world may include increasing inflation.
Wall Street’s fear gauge, the CBOE Volatility Index, edged higher last week, reported Ben Levisohn of Barron’s. It is at about 24.6, which is above its long-term average of 19. That is a sign markets may be volatile over the next few weeks.
Data as of 12/11/20
Standard & Poor's 500 (Domestic Stocks)
Dow Jones Global ex-U.S.
10-year Treasury Note (Yield Only)
Gold (per ounce)
Bloomberg Commodity Index
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance, MarketWatch, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
A HOLIDAY SEASON LIKE NO OTHER. The coronavirus, which The Economist estimates has infected one-in-five Americans, is reshaping holiday traditions this year. “COVID-19 is playing on shoppers’ psyches as they weigh the impact on their health and finances. As we have seen with previous periods of both recession and growth, consumers are resilient and will adjust their habits to adapt,” reported Deloitte’s 2020 holiday retail sales consumer survey report. They found:
- 33 percent of survey participants were in a worse financial position than last year, especially those in lower-income groups.
- 40 percent planned to spend less on the holidays than they did last year because they are concerned about the economy.
- 51 percent were anxious about shopping in stores because of COVID-19.
- Deloitte estimated shoppers would spend about $390 of their holiday budgets in stores and $892 online.
The Deloitte survey also identified four types of holiday shoppers:
- The Festive Shoppers “…are all about buying gifts for others and keeping up with their conventional shopping routines. They also outspend other types of shoppers.”
- The Conscious Shopper “…cares about society and are willing to ‘put their money where their mouth is’ by paying more for socially responsible products.”
- The Deal-Seekers “…enjoy the search for the right gift at the right price and will spend weeks shopping. They’re up for browsing and sifting through digital platforms, including social media, for attractive options."
- The Efficient Shopper “…is not in the mood to browse or get caught up in time-sucking events like Black Friday. Shopping is a task and they’ll seek out the easiest way to get it done.”
Do you recognize yourself in any of these shoppers? Do you like frothy markets? Or, just frothy drinks?
Weekly Focus – Think About It
“Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
--Warren Buffett, Investor
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Treiberg Wealth Management, a registered investment advisor and separate entity from LPL Financial. The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market. Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association. The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998. The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones. Yahoo! Finance is the source for any reference to the performance of an index between two specific periods. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. This newsletter was prepared by PEAK. Past performance.