With fall and football on the very near horizon, I’m writing to share some financial thoughts as the markets transition through their traditional summer doldrums.
You know me to believe that markets move in the short-term on ”Headline News”, which may or may not really reflect the underlying health of the economy and markets. With the latest news on the Delta variant spread, the unsettling Afghan news of both human suffering and the ensuing US political turmoil, and my suspicion that the Federal Reserve may choose to be tighter in policy than most expect, it would be of no surprise to me to have a tolerable, brief correction in the markets from its recent highs. This is not a call for the end to the bull market, but rather of a natural pullback after the long and strong run that we have seen since the Covid-bottom in March of 2020. The aggressive “innovator companies” and the Russell 2000 Index have essentially already rotationally corrected from their highs and I expect this rotation between growth and value, & tech and cyclical to continue. I still think there is a lot of value and promise in these classes, so as fall progresses these and markets in general likely could see a rally into the end of the year. Meanwhile, patience may be required during any headline-driven volatility, and diversification in portfolios will be of value.
As mentioned in my recent commentaries, we still have inflation to manage around both economically and investment wise. Yes, oil is down from its highs, but supply-side constraints remain for both workers and industrial goods. The fact that McDonalds is paying $18 per hour here in Boulder, and as an incentive to get my stepson to work the late shift even paid for an Uber to get him home at 2am, tells us that costs are going up. We have the Fed Jackson Hole conference this week, which now is set to go virtual due to concerns of the Delta variant. Consensus amongst economists and financial pros is for Fed Chair Powell to now tease the Fed’s taper discussions and for the tapering news to be officially announced probably at the September FOMC meetings. I do not see the Delta variant derailing this, but certainly Delta’s spread gives Powell justification for giving it an extra bit of time to announce changes in timing and sizes of Fed asset purchases. Many believe the Fed would not begin to hike rates until it ‘completes the taper’ and is no longer buying bonds, but I suspect this could be accelerated. This will in a large part be dependent on the inflation prints, which I suspect we will continue to see coming in hot for some time.
Beyond any short-term market pullback, for the foreseeable longer term we have two meaningful positives going to support the markets. (1) Corporate earnings are very strong, but given relatively full valuations, earnings must really beat expectations by a large magnitude to get stock prices to react favorably. And (2), there are still very few investment alternatives to stocks, with low-yielding bonds and cash providing very little competition to equities. The current consensus estimates for the S&P 500 earnings this year are $208, and with the S&P 500 selling over 4300, that is a 22x this year’s earnings. Many analysts project earnings can get as high as $220 and then we are selling at 20x earnings which is quite reasonable. Even at 22x the estimates of $208, valuations are high but not not crazy given the low interest rates we have today. Continuing global recovery is strong and economic expansion is solid, which should create increasing future earnings (and will be necessary) to support equity performance at these current valuation multiples.
In summary, as summer wanes and fall waxes, we remain both prepared for increasing volatility and optimistic for future returns. My plan for now is to sit tight in our allocations, get in a few more rounds of golf and hold on to my eternal hopes for Buff and Bronco victories. 😊 I hope you enjoy the change of seasons in whatever ways that bring you excitement and happiness.
Be Well, Bob Webster
Disclaimer: Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading strategy. Certain Statements contained within are forward-looking statements including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Undue reliance should not be placed on such statements because, by their nature, they are subject to known and unknown risks and uncertainties. The Standard & Poor's 500 (S&P 500) and Russell 2000 are unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.