Markets loved April. The S&P 500 rose 5%. Equities held as a percentage of total financial assets for U.S. households rose to 41% according to JPMorgan, the highest level since 1953. Bullish investor sentiment hit 56.9% on 4-7-21 according to AAII. The historical average is 38%.
In the Q1 -2021 earnings season so far, 87% of S&P 500 earnings topped estimates. Earnings grew 46%. GDP rose 6.4% in Q1! Why sell in May? The old Wall St. adage refers to the fact that stocks typically underperform during the May - October stretch.
Investors like Warren Buffet and Lee Cooperman are repulsed by bond yields and concerned about future inflation. Lee describes himself as a fully invested bear. Buffet likes stocks for the long run but holds hordes of cash.
Don’t worry about inflation, according to Fed Chairman Jerome Powell. He is echoed by Treasury Secretary Janet Yellen. Any inflation will be temporary they assure us. Upcoming inflation numbers however, may surprise investors.
Shortages now persist in lumber, semiconductors, and fast-food workers. Commodity prices are rising and have entered new bull markets. Copper is king. Gas prices are climbing. Trucking companies need drivers. McDonald's offers signing bonuses.
Along with stocks and commodities, prices in real estate, collectibles, alternative currencies are all rising. Cash is trash according to some, as the biggest digital currencies Bitcoin and Ethereum made new highs of late. U.S. stocks made 25 record highs this year, even as the pandemic continues to hurt much the world economy. Our stock market has seen the fastest recovery ever after a 30% bear market.
We are on the cusp of an economic boom fueled by government policies. S&P 500 earnings growth is expected to be 24% in 2021, according to FactSet.
The government was largely responsible for one-third of consumer income in Q1 2021. A $1.9 trillion aid package passed Congress in March. President Biden has proposed a $2.25 trillion infrastructure program. The Fed is buying $120 billion in treasury and mortgage bonds per month to help keep rates low.
When will this all come to an end? Why worry when we all know the Government has our backs, whether we are investors or employees? Secular bull markets can run on for decades, i.e. 1949-1966 or 1982-2000.
However, some of us are old enough to remember U.S. Treasury bonds with 14% yields in 1981. Stocks sold for 7 times earnings as a result. Ten-year U.S. Treasury notes have rallied in yield to 1.64% at the end of April, up from 0.91 % in January. The trend for interest rates is higher.
The possibility of tax increases on capital and corporate earnings spooked the market briefly in April but was soon shrugged off as pundits said the rates proposed were negotiating ploys.
Tax increases and climbing interest rates will continue to be formidable threats to the current powerful run we are experiencing.
Bulls started running last March as markets despaired over COVID 19's spread and possible effects. Worries turned into opportunities for many investors shortly thereafter. The higher prices go the more confident people become. Confidence leads to even higher prices and more confidence.
Bear markets die of despair. Bull markets end in euphoria.
We are vigilant for changes in the tide. Tax proposals can lead to legislation in time. Policies matter more than words.
All the best,
Doug Coppola - Investment Committee Chairman Steve Lindgren - Chief Investment Officer