Markets took a breath over the shortened week. Growth stocks fell from recent highs as further uncertainty grips the market regarding the tapering of bonds. Large caps continued to move forward following their consolidation period, keeping the indices up as a whole. Sentiments are shifting. The market seems unsure of where to move next, and I expect higher volatility until earnings season brings clarity. A prediction at this point would be baseless.
The billionaire space race is heating up with Sir Richard Branson flying aboard Virgin Galactic’s (SPCE) test flight on Sunday July 11th. The flight will take him over 50 miles above Earth and looks to be the company’s third successful flight. The altitude will only be considered sub-orbital, and he will not pass the Karman Line (~60 miles), which is the internationally recognized border for space. The decision to go up on the 11th is in obvious competition with Jeff Bezos, who plans to go to space on July 20th aboard his own Blue Origin’s flight.
Inflation fears are behind us and investors are now worried about an economic slowdown. Excitement over the reopening is waning, and as hype dies many stocks are coming back to reality. Liquidity is going to decrease with unemployment benefits ending and stimulus checks no longer on the horizon. Additionally, it’s taking longer than predicted to achieve full employment, with COVID acting as a catalyst for unhappy workers to find new jobs. These conditions, along with the looming threat of bond tapering, may cause a correction in the markets sooner than I expected. A positive earnings season would mitigate some of these risks. The long term outlook remains unchanged, but it’s something to keep an eye on.
The uncertainty is creating an unfavorable environment for growth stocks. Valuations are already stretched and an economic slowdown is going to hit high P/E stocks first. The unusual gains over the past year have been driven largely by excess liquidity, so I expect a negative reaction as that liquidity dries up. The market seems to be pricing in tapering for early 2022, which is later than I expect. If my prediction for late 2021 holds true then the markets will likely see a sharp correction towards the end of the year. I view this as a buying opportunity, as the next major negative catalyst will be interest rate hikes in 2023. I’d be cautious about buying until there’s more clarity—I’m sitting and waiting at the moment.
The Space Economy
The space economy is going to be a huge opportunity over the coming decade. The benefits of going to space are numerous, and competition by private companies is making launches cheaper than ever before. This has made space more accessible for companies and individuals alike. My top space play is Rocket Lab (VACQ), which is set to go public this quarter. Rocket Lab already has 17 successful launches and over 100 satellites deployed. Their solid resume has made the company a trusted partner of NASA, who has contracted them for a Moon mission, a Venus mission, and a Mars mission respectively. Their Neutron rocket is in development, and upon deployment in 2024 will be able to lift over 17,000 lb. to low Earth orbit. No other company can say they literally went to the moon. It’s risky, but I’m extremely bullish on Rocket Lab.
The billionaire space race is bringing needed attention to this area of the market. Virgin Galactic (SPCE) has surged over 200% off their recent lows amid test flights and investor hype. I’m still not a fan of their business model and see them having difficulty scaling to frequent flights. Even if successful, a market cap of $12B is insane for a company with 0 revenue. It’s going to take a long time for this company to grow into their valuation. Virgin Galactic is going to have to execute perfectly in order to live up to lofty expectations, and I just don’t see that happening. I wish them and Mr. Branson the best on their flight this weekend.
Let’s Talk Margin
Recent FINRA data found total margin debt to be at $860B. This concerns me. Higher levels of margin means investors are bullish, and it generally correlates with market tops and bottoms. When markets drop investors go into debt to buy stocks low; this is normal. A de-leveraging is also supposed to occur during a drop, when over leveraged investors are forced to sell which lowers overall market debt. This forced selling adds to the downward pressure, forcing even more investors out. The market eventually bottoms, and those who waited to buy low benefit the most. Leverage then increases until the next correction and the cycle continues. An example of this can be seen in late 2018, when markets dropped and margin debt followed.
What concerns me is the continued use of leverage following the COVID recovery. The market crash of 2020 is easy to make out on the graph, with a sharp drop in margin followed by a sharp increase. This is expected. As the market crashed investors were forced to sell, followed by an increase in margin as investors bought the dip. Leverage then continued to increase as the market remained bullish. The thing is: there was never a de-leveraging following the rally. Instead of taking profits investors seem to be going further into debt to buy stocks. As the economy slows down there may be panic as growth doesn’t match investors’ lofty expectations. When the market finally does turn these debts are going to be sold off. The more leverage investors use the worse the future crash is going to be. Stretched valuations plus high use of margin is setting up the perfect storm for a violent market crash. Investors are getting greedy.
Branson Goes to Space
Virgin Galactic aims to make Richard Branson the first of the billionaires to reach space, beating Jeff Bezos by nine days. The flight is planned for early Sunday morning with coverage starting at 6 AM Pacific time. The mothership, VMS Eve will take off from the company’s New Mexico spaceport, climbing to 50,000 feet before releasing the VSS Unity. The spaceplane will then takeoff to over 50 miles in altitude, peak, and glide down safely. Joining Richard Branson will be three other Virgin Galactic executives along with two pilots. The mission is expected to last 90 minutes, with 4 minutes of weightlessness in space. A successful flight would certainly bring attention to the space race. I wish Sir Branson the best.
I’m not going to make any predictions among the market volatility. We’re currently at an inflection point, and things could go either way based off data and investor sentiment. June CPI data is due for Tuesday, which should move the markets. We’re facing the opposite problem as before, and an undershoot would be worse than an overshoot. A slow jobless claims would also reinforce the fears of an economic slowdown. The inflation fears were short lived as I predicted. We should be in for an exciting week. We’ll see where this goes.
Until next time,