“Tired of waiting, tired of waiting, tired of waiting for you…”
We’re heading way back to 1965 for this great old chestnut from Ray Davies and his vastly underrated band, The Kinks. The British invasion of rock and roll was in full swing, and this song was a smash both here and across the pond. Its relevancy for today’s missive is that many economic pundits have been predicting a stock market correction for several months. As I’ve stated, I’ve remained cautiously optimistic for stocks and we’ve been rewarded thus far. Here’s an interesting fact, courtesy of Birinyi Associates: 2021 has seen the best equities performance for the first 100 days of a Presidency since the Kennedy administration 60 years ago. I’m not necessarily attributing this to President Biden; however, the upward trajectory has been solidly consistent.
The reasons for the positive vibes on Wall Street continue. A move toward normalcy in our daily lives, an accommodative Federal Reserve, low interest rates, tame inflation, consumer re-engagement, and a slowing US trend in COVID cases have all contributed to a less anxious environment. Perhaps even more importantly, this cycle of corporate earnings has been highly productive. Large technology names hit the proverbial cover off the ball, and under-loved financial, energy, material, and manufacturing names showed marked improvement. Gross Domestic Product expanded at a 6.4% rate in first three months of 2021, and that figure is slated to go higher in the next couple quarters to come.
Even the prospect of higher taxes and ballooning deficits hasn’t derailed the train yet. President Biden has proposed a major infrastructure bill as well as a social welfare program not seen since the days of Lyndon Johnson’s Great Society. While the concepts are ambitious and potentially laudatory, they’re certainly costly. It will be interesting to see if anything can pass through Congress given the divisiveness seen every day in Washington. It doesn’t appear as though any Republicans will vote for either measure as they currently stand, and Joe Manchin of West Virginia may quash things for the Democrats in the Senate. We’ll have to stay tuned.
In retrospect, Wall Street has acted the way it should have acted during the entirety of the pandemic. There was panic in the first quarter of 2020 due to newness of COVID and uncertainty about the prognosis. When vaccines began to appear on the horizon, the tone shifted from day-to-day terror to future thinking optimism. Stock prices rose as spirits buoyed. It’s been a playbook that we don’t want to relive, but an explainable one nonetheless.
As far as a correction is concerned, we’re overdue, and they don’t generally need an instigator. Sometimes markets just get tired, and the present dynamic is beginning to show signs of fatigue. We’ve enjoyed a nice run in 2021, and a pullback would shake out some of the more speculative players. That being said, I’m simply not seeing any structural red flags indicating a trough. I like the fact that value names are finally getting some love, often at the expense of their sexier tech brethren. Many companies are increasing dividends with their free cash flow, and that’s never a bad concept. Market breadth has been increasing, and that’s a positive omen as well. When the next correction occurs (not if), I’d think in a counter-intuitive manner and seek to become a buyer of beaten-down shares. As long as the macroeconomic landscape doesn’t change appreciably, the bull market should still have legs.
RC and I are continuing to monitor things daily. We’d love to hear from you if you have any comments or questions. We look forward to in-person meetings becoming a reality when herd immunity is achieved. Zoom and GoToMeeting are fine in a pinch, but they can’t take the place of the real thing. Take care… stay safe…
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.
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