Contrarian investing is difficult from both an emotional and implementation standpoint. Often the consensus is right, and industry groups are out-of-favor for a reason. As the saying goes, “Don’t be contrarian just for the sake of being a contrarian.”

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March 23rd marked the one-year anniversary of the COVID-19 bear-market bottom. We are all eager to turn the page on the pandemic ordeal and move forward to brighter days ahead. Looks like some big help is coming our way.

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In our mid-month Of Special Interest, “Valuation Extremes: Here Be Dragons,” we examined valuation outliers as a measure of market sentiment. The hypothesis was that exuberance is reflected in investors’ willingness to hold stocks priced on an aggressive “vision” of the future; companies that are either habitually unprofitable or trade at a Price/Sales ratio above 15x.

Top decile valuations are often the result of unduly positive investor sentiment that leads to inflated multiples. Bullishness comes in varying strengths: optimism, enthusiasm, exuberance, and, at the extreme, the mania of crowds. Because bullishness manifests itself in aggressive valuations for speculative companies, we believe the prices being applied to such companies - for which intrinsic value is dependent on a future that looks significantly different than today - are an excellent measure of investor sentiment. In that spirit, we examined past cycles of extreme valuations with the goal of understanding how they relate to investor sentiment and what they might tell us about market conditions and relative returns.

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The S&P 500 and 10-Year Treasury bond yield could accomplish something fairly rare today by closing at “joint” 52-week highs. The relevant levels to meet or exceed are 3934.83 on the S&P 500 and 1.49% on the bond yield.

The Core CPI numbers were slightly below estimates easing inflation fears. Inflation in the Energy complex has driven headline inflation to a one year high. Readings over the next few months will be distorted as we reach the anniversary of last spring’s collapse.

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Equity investors have had a multi-year love affair with TINA—the belief that “There Is No Alternative” to stocks in a world of ridiculously-low interest rates. This TINA romance has carried on so long that the S&P 500 is nearing valuations last seen in the Tech bubble’s final inning. If the fling with TINA has become prohibitively expensive, we’d like to introduce “SAMARA.”

Young readers sometimes give us a not-so-subtle roll of the eyes when we discuss any sort of stock market history that occurred before their date of birth, but it takes experience to appreciate that “there’s nothing new under the sun—least of all in the stock market.”

The Reddit-driven January performance of heavily-shorted stocks reversed in February, but not nearly enough to reverse all the previous gains.

The market focus has started to shift from a reflation trade to a real-yield tantrum. We compare the latest real-yield tantrum with four prior episodes where rate increases were driven by higher real yields, while breakeven rates were flat to lower: 2005, 2013, 2015, and 2018.

We revisit the great divide that has emerged between companies and entire industries over the course of the past year. The fragmentation is, of course, the result of companies/industries that benefited from the pandemic environment, and those that were adversely affected.

We’ve noticed a small segment of equity ETFs, designated as “thematic,” that is increasingly gaining popularity. Thematic ETFs invest in baskets of stocks that share narrowly-defined business enterprises outside of the standardized GICS methodology.

High growth rates, innovation, and disruption are defining traits of the companies that have powered the market to recent highs, and the ARK Innovators Fund (ARKK) is an example of today’s enthusiasm for visionary growth stocks. Recent returns and growth in AUM have been nothing short of spectacular, and ARKK has become symbolic of today’s style of new-era growth investing.

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The last few weeks offer plenty of evidence that the mania has moved into a more feverish phase, yet the Fed insists that it is still “not-even-thinking-about ‘thinking about’” raising interest rates. That dismissive attitude could well whip up an even higher fever in the months ahead.