“People all over the world… join hands… start a love train, love train…”
We go back almost a half-century for this classic rhythm and blues chestnut. “Love Train” was only one of the smash hits on the 1972 “Backstabber” album by Canton Ohio’s very own O’Jays. I know that my old Philips turntable got worn out playing this one back in the day. If you want to feel better about the world as we emerge from the COVID-19 cave, hop on YouTube and turn it up.
“Love Train” also nicely sums up market sentiment thus far in 2021. The old adage “Sell in May and go away” didn’t ring true this year, although there was some temporary volatility. Hot news on the inflation front sent equities on a three-day selling bender, but the dip was almost immediately reversed and stocks ended the month on a relative up note. The wildest action was in the cryptocurrency arena. Elon Musk’s appearance on Saturday Night Live, combined with the announcement that Tesla would no longer be accepting Bitcoin for new vehicle purchases, roiled the space. Troughs of 40% and more rapidly occurred across all cryptos. By month-end, there was some recovery, but not enough to restore former lofty levels.
As part of the inflation story, the price of crude oil continued to rise. We’re seeing $3/gallon at the gas pumps just in time for the summer driving season. It’s amazing how the powers to be manage to make this happen almost every year. Unlike many others of its ilk floating around, this is a conspiracy theory that actually might be true. The fixed income space also reacted to the inflation scare. Interest rates rose on the news but scaled back a couple weeks later.
There’s been quite a bit of chatter about bubbles lately. JP Morgan Chase CEO Jamie Dimon opined that one exists in the US housing market. Given the fact that the supply/demand curve is the wackiest in recent memory (plenty of demand but no supply of single-family residences), I agree with him. The fact that gold has reached levels not seen since the early days of the Obama administration is also a cause for concern, as the precious metal is commonly seen as a fear trade. How do we interpret these crosscurrents?
I’ve stated many times that Wall Street is a future-looking mechanism. It’s far more concerned with what it sees 6-12 months from now than today’s news. The anecdotal flow of re-engaging with life is becoming impressive. Restaurants have gone from moribund to pack. Planes are full and carriers are increasing flight schedules. Many countries in the EU will be open to foreign visitors this month. Cruise lines are getting permission to sail, both here and in Europe. Retail stores are seeing tremendous activity. The pent-up consumer demand is nothing to be trifled with. Positive sentiment goes a long way.
That being said, summer is often a tricky time for markets. Traders take vacations with their families, and volume is generally lower than at other times of the year. It stands to reason that volatility increases during Wall Street’s slow season. When traders are away, the algorithm machines tend to play. Therefore, we could see some erratic moves over the next three months. However, the foundation bulwarks of solid corporate earnings and cheap money are still intact. Unless that firewall crumbles, I remain cautiously optimistic despite some apparent valuation issues.
What could derail the love train? President Biden slipped his budget proposal literally under the door on the Friday before the Memorial Day holiday. Talk about proverbially burying the lead story! In order to pay for infrastructure and added stimulus, tax rates would be increased at both the individual and corporate levels. Capital gains rates would be hiked on the most wealthy. Beneficial estate tax provisions would also be gutted if budget provisions are passed.
Wall Street has taken this news with surprising equanimity. Perhaps it believes that the proposed tax increases will either be muted or rejected entirely. Since no Republican will vote for a tax increase of any kind, it only takes one Democratic Senator to quash the deal. It will be interesting to see, for example, how Joe Manchin of West Virginia will vote. He appears to be the linchpin swing person at this point. There will doubtless be plenty of debate and divisive rancor in the months to come.
In the meantime, RC, Ruth, and I are monitoring portfolios and looking forward to FINALLY being able to have in-person meetings with our vaccinated friends. That wonderful change in and of itself puts a smile on my face. Please feel free to call or e-mail with your thoughts and comments.
The opinions expressed in this letter are those of William Schiffman and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification cannot assure a profit or guarantee against a loss. The S&P 500 Index is a broad based unmanaged index of 500 stocks, which is widely recognized as representative of the equity market in general. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through ValMark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through ValMark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201 – W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from ValMark Securities, Inc. and ValMark Advisers, Inc.