Watch Out for the “December Bubble”

Stocks are trading barely higher this morning as Covid-19 continues to run the U.S. ragged. Sluggish payroll growth, surging case totals, and reimposed lockdown measures have investors concerned about the near future.

As a result, there seems to be a “lid” on the major indexes – all of which linger near their record highs. A pair of working vaccines and productive stimulus talks initially put them there.

Now, Congress needs to strike a relief deal if the market’s going to climb any further. Tech shares led the way for most of 2020. The once dormant Dow components, meanwhile, are quickly catching up.

Longer-term, the growth-to-value rotation looks like it’s on hold simply because everything is rising. And it’s likely to stay that way with a big stimulus disbursement waiting in the wings.

Significant froth is hanging over equities in response.

“Story stocks,” like Tesla (NASDAQ: TSLA), Palantir (NYSE: PLTR), and Virgin Galactic (NYSE: SPCE), are up big despite little fundamental evidence to support their moves.

SPCE, for example, has risen over 90% since early November on news that it would eventually launch a commercial spaceplane. No successful launch has occurred, nor has a launch timetable been given.

But that hasn’t stopped bulls from pricing-in a revolutionary space airliner.

TSLA speculators got in on the action, too, bumping the stock up 15% over the last week alone. The newest rumor is that a stock split is on its way. The amateur traders it would attract could spike share prices in a hurry, causing a more immediate lift due to speculative FOMO.

The biggest “rags-to-riches” story of all, though, has to be the PLTR surge that drove the stock 200% higher over the last two months. The big data firm is struggling to turn a profit after being in business for 17 years, yet bulls are buying it en masse.

Going public in October has certainly raised capital, but will it help make Palantir a truly innovative and disruptive force? Maybe, maybe not. Either way, it’s still way too early to justify buying PLTR shares following their rapid, triple-digit run-up.

This kind of mentality is leaking into other areas of the market as well. Blue-chips had a great November across the board. And, historically, good November performance has carried through to December.

Year after year, the “December Bubble” refuses to pop.

This time could be different, however. All it would take is a wider crunch among smaller stocks – like Palantir and Virgin Galactic – for that bubble to deflate. Similarly, a slumping big tech company like Tesla would do the trick, too.

Really, any stock that’s been recently pumped-up to a record high represents a danger to the ongoing vaccine rally. Even the airlines, which are admittedly well below their all-time highs, have erupted right alongside Covid case totals.

Optimism is soaring and nearly everyone has something to say about the market. It’s eerily similar to how things were back in 1929, right before the Great Crash wiped out scores of speculators. At the time, Americans were obsessed with trading. Everyone had skin in the game, ranging from investment bankers to shoeshines working outside the New York Stock Exchange.

Then, the unthinkable happened and the façade was lifted. Every bull on Wall Street was wounded in the selling. Some, who got in way over their heads, lost their life savings in a matter of days as buyers completely vanished.

Is that where the current market’s headed? With so much fiscal support, probably not. But that doesn’t mean a short-term correction is out of the question, either.

So, if stocks start to dip, don’t panic; another dollars-to-donuts, catastrophic crash isn’t likely. Instead, pivoting out of the market’s “frothier” offerings might make sense, before buying back-in to more resilient value plays once the dust settles.


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