Bears Gored Again by Breadth and Technology
Equity markets fell for the first two days of the week amid spreading virus variants and concerns about the future path of global growth. The brief decline brought the bear calls out for a -10-20% forthcoming decline. Never mind that these strategists have been wrongly calling for this kind of “dip” for 9-12 months. This 3.5%, 3-day decline churned the stomachs of many who have become accustomed to straight-line gains. The Oak Harvest team repeats again, this is what bull market “dips” look like. Equities then “V-bottomed” and rallied to trade in record territory on Friday. The S&P finishing up 2% on the week when all was said and done.
Despite last week’s short-lived decline, the S&P 500 is up 36% in the past year, 27% annualized in the past six months. While the index is about 12% above its 200-day moving average, we remain positive for the next 6 months. Fear mongering over politics, Covid wave 3, and “peak growth” are, we believe, just that: fear mongering.
Our investment team keeps hearing bearish calls on the market due to it being “overvalued”. We remind our readers, that “valuation” is a horrible timing tool over weeks, months, quarters and years in many cases.
High valuations themselves do not bring the market down. However, they can magnify any downward move triggered by other factors. The forward p/e ratio on the S&P 500 currently sits at about 22 (or 4.5% on an earnings yield basis), the highest since the tech bubble. However, interest rates are less than half the level they were in 1999-2000. While the earnings yield itself has dropped to new lows, the spread versus 10-year Treasury yields has held steady.
“Bad Breadth” has been another recent rallying call amongst continual wrongfooted bears. We covered this topic in detail in last week’s podcast. The link is shared below.
The OHFG investment team remains mindful of normal summer seasonally in both the economy and stock markets making for a 5-6.5% pullback possible, but increasingly unlikely, at any time.
Fridays 7/23/21 Podcast: Bad Breadth You Say? Problem solved and Bears Gored by the Bull.. Again:
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