Why have markets moved up so dramatically in an environment of chaos, uncertainty, and severe economic distress? Next question might be: why has the bond market remained as relatively calm as it has in the face of extraordinary relief/stimulus money being injected into the economy? Everyone has an opinion, and the variance here is astonishing. My take on these perplexing questions is the following:
- Markets are forward looking. So, while daily volatility increased, the overall trend moved up in expectation of the growth to come in the new and emerging Post-Pandemic economy.
- Tech stocks pushed the Indexes higher because just a few names make up an outsized percentage of the Index. These tech companies enabled much of the white collar workforce to keep on working, and in all probability, the forced “work from home” rapidly advanced the tech transition to greater productivity in the economy and greater earnings capability for these same companies.
- While Industrials have lagged the Indexes, their lower valuations are now compelling when we add on the vision of the “getting back to work” we expect in the latter part of this year. Recently we have observed substantial money flows into Industrial stocks, and the sentiment surveys suggest a renewed confidence in those sectors of the economy. Again – the markets are forward looking.
- Interest rates are low and expected to stay relatively low. Chairman Powell has told us to expect the Fed Funds rate, which the Federal Reserve committee controls, to remain low for quite a long time. Low interest rates enable two things: higher p/e ratios on stocks and lower borrowing costs for companies who need to borrow to stay alive until the “back to work” vision is realized. Profitable companies enjoy outsized valuations and zombie companies survive to possibly see a better day.
- Stimulus or fiscal relief payments support, particularly for those in the service industries who cannot work because their place of work is shuttered, keeps this segment of the population, along with the workers who never missed a day or a paycheck, buying “stuff.” While we may not be able to or are not yet comfortable buying services, we all have learned to buy what we need, and what we want, online. The consumer represents 70% of the economy, better known as GDP. If the consumer remains healthy in an otherwise distressed and depressed employment picture, markets did and will react positively. The bond markets seem to be accepting of what will likely be an unprecedented total stimulus outlay because this money is filling in the “potholes” created by an equally unprecedented economic shock.
We expect the economy to grow this year. Most thought leaders on this subject expect some form of Global growth – maybe not “synchronized growth” but perhaps a rolling growth as the COVID virus is contained. Wealthy countries will emerge first; poorer countries will likely lag into 2022 or beyond. We expect a “K” type of recovery in the US – wealthier, white collar recovery and expansion while service and blue collar recovery lags. The same might be said for the Global economy – wealthier countries emerge first and faster while poorer countries will lag. Despite the headwinds lingering over the year, and market volatility to disrupt, we expect both leaders and laggards to advance as we move through the year.
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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The return and principal value of stocks fluctuate with changes in market conditions. Shares when sold may be worth more or less than their original cost.
