April 20, 2021: Reflation part 2?

Foreword

This is a quick note, which tends to be just off the cuff thoughts/ideas that look at current market situations, and to try to encourage some discussions.

As usual, a reminder that I am not a financial professional by training — I am a software engineer by training, and by trade. The following is based on my personal understanding, which is gained through self-study and working in finance for a few years.

If you find anything that you feel is incorrect, please feel free to leave a comment, and discuss your thoughts.

Reflation part 2?

Quick recap of what has happened (dates may be slightly off, entirely from memory):

• In September 2020, there was general sense that the markets could blow up, and we saw a fairly significant dip.
• In November 2020, the vaccines were approved and rollout started soon after.
  • Stocks saw a huge boost, and reflation stocks(1) in general saw the best gains.
• Around mid/late December to early/mid January, this shifted into overdrive, with a slight shift in the composition — instead of reflation stocks, meme stocks(2) started seeing ridiculous price growth.
• Of course, from mid February to around late March, meme stocks cratered, taking down the rest of stocks a little, though rest of stocks recovered fairly quickly and was on the up shoot again.
• Sometime around that time, the “reflation == higher interest rates == Fed hike = no free money = stocks dump” news cycle started, which saw a second dip in late March for all stocks, but that also quickly faded.
• And from then till last week, stocks have been on a tear upwards.

Then came this week.

Interest rates are going down, and at a fairly decent trot (since around mid last week). However, unlike the previous news cycle, reflation stocks seem to be mostly going up, with the exception of travel/hospitality stocks. Tech stocks are generally taking a beating. Meme stocks remain circling the toilet.

What does this all mean?

I’m guessing it’s less of a reflation trade, and more of a normalization trade.

• Stocks that were hit hard in 2020 are recovering,
• while stocks that folks were overly exuberant about (meme stocks, stay-at-home [aka tech] stocks) are mostly getting timeout.
• And through this all, travel stocks are dumping.

Which I think suggests that the market is pricing in things going back to normal, but ring-fencing out travel/hospitality stocks, because, well, travel of any form is still a hot mess, except maybe domestic US travel.

Footnotes

1. To me, reflation stocks are those that benefit from a more normal inflation/interest rate climate (i.e: ~2% inflation, ~2-3% 10y yields, etc.), where all economic activities are sort of normal (i.e: not depressed by Covid-19).
2. To me, meme stocks are those that benefit from internet hype, especially from retail traders, with very little fundamentals to back up the valuation nor hype.