Negatives and Positives
Equity markets dropped last week with the S&P 500 down 1.7%. The market has held up with normal deadzone choppy waters in play. The S&P 500 is up 33.5% from a year ago, and momentum has held firm over the past three- and six-months, up 21% and 29% annualized, respectively. Two factors are helping to keep the market moving steadily higher in our view:
Longer interest rate view: While Fed tapering is the next major policy move on the radar, it appears the market is still comfortable assuming a low-for-long interest rate environment post-COVID. For now, 10- and 30-year Treasury yields have settled in slightly below pre-COVID levels. For equities, this has helped ease valuation concerns that were emerging early in the year. 10-year yields backed off more than 40 bps from the spring high.
Earnings support: The Q2 earnings season was a blowout. According to Refinitiv’s tally, 87% of the S&P 500 topped analyst expectations. Earnings growth topped 95% y/y and the level of earnings on the S&P 500 has surged more than 20% above pre-COVID levels.
And over on the negative side of things, there are several concerns which have gotten lots of coverage:
Seasonal factors: The market is currently in the toughest part of the calendar from a historical perspective. Between 1950 and 2020, August (flat) and September (-0.5%) have recorded the weakest average monthly returns. We’ve discussed this topic multiple times, presenting data reflecting this cycle, 2009-2021, first year Presidential terms (2009, 2013, 2017) and the lack of a seasonality in the second half in those years.
Delta variant: Rising COVID cases across much of the developed world have slowed down some regional reopening and the travel that was expected to return in the second half of the year. As a result, growth has been coming in under expectations, and revisions have been tilted to the downside. Sectors of the equity market that thrived on a relative basis during 2020 lockdowns (e.g., technology and large caps) have been outperforming again versus areas like small caps and banks. Peak earnings revisions have not historically led to peak stocks.
Fed tapering: There has been no taper tantrum yet. The start of the road toward less-accommodative Fed policy has not spooked the market, but inflation concerns only seem to be mounting at this point. U.S. job openings, for example, are now at the highest level on record dating back to the early-2000s.
While we are now in the deadzone of the 3rd quarter, and believe that the market may dip during September, based on two or three weeks of upward trending volatility, our overall view for the remainder of the year remains the same: bullish. We see multiple potential catalysts for a continued rally in the stock market in the short term:
If the Delta variant surge peaks in the short term – positive
Interest rates modestly rising and yield curve steepening – positive
Pent-up consumer demand is still strong – positive
Dovish Fed – positive
Potential fiscal stimulus – positive
VIX spiking and posting an inversion – positive
Retail investor outflows through August (contrarian indicator) – positive
Historically, if the 1st half of the year is greater than 13%, Sept. usually strong – positive
Continued pundit doom and gloom (contrarian indicator) – positive
This doesn’t mean the road isn’t bumpy; it very well could be, and media voices will most likely continue to paint a negative and fearful picture. Long-term investors should continue to ignore the noise. Though we continue to monitor and make real-time decisions for our clients, our overall market outlook pushes the timing for the more negative factors in play to potentially impact the market out into early 2022.
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Interesting Reads:
https://finance.yahoo.com/news/democrats-slim-biden-tax-plan-120303716.html
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