Published July 9, 2021

The U.S. stock market closed out the first half of 2021 at a record. The market showed gains through July 1 for five consecutive quarters, the longest streak since 2017. Business confidence has rebounded. While it seems that stocks can only go up, the outlook is increasingly hazy.

Fears of inflation cloud the outlook. The Federal Reserve chairman says the inflation threat is transitory, the result of distribution bottlenecks from the resurgence of the economy. Investors are not so sure if the rate of inflation is transitory or more permanent.

Savvy investors are looking for sustainable earnings. Who will be the long-term winners?

The trajectories of value and growth stocks have disconnected. In a bull market, both categories would be moving up. Value stocks have been outperforming growth, indicating that investors are uncertain about market direction.

While corporate earnings have been stellar, many investors believe that the economy’s rebound has been priced in and that stocks, trading at high multiples, are priced to perfection. Stocks are now in the second year of a bull market and can be expected to be choppy and make more muted gains.

Interest rates have risen, as might be expected in inflationary times. The yield on the benchmark 10-year Treasury had been edging up, but then in July fell to its lowest level since February, and may go even lower. Still, rising interest rates could test the downward trend.
Rising rates would favor utilities and financials.

The U.S dollar is strengthening, which makes U.S. goods more expensive in international markets and results in difficulties for emerging market countries to repay their U.S. dollar-denominated debt.

The Federal Reserve now predicts 2021 U.S. economic growth of over […]

Published June 11, 2021

With the U.S. economy growing at 6.4 percent and current inflation estimated at 2.3 percent, investors are left to wonder what is happening.

Are we too late to invest? Are we too early? Is this an inflationary economy? Is it a Goldilocks economy (not too hot, not too cold)? Where should we invest? In precious metals? Bitcoin? What about bonds, stocks or commodities? Where does the COVID-19 virus fit into this scenario? These are all pertinent questions, for which there are no simple answers.

Similar to the mess that ensued from the financial crisis of 2008-09, the ramifications of the virus are omnipresent. First, inflation. Currently, the Federal Reserve estimates an inflation rate of 4.2 percent for calendar year 2021. This is no easy rate to peg. There is the rate at the store, or the gas pump, or the stated rate by the Fed, or the PCE inflator that the Fed prefers, but there is no one certain rate. Thus the published rate has many imperfections.

What is inflation and why does it matter? Inflation is the decline of purchasing power of a given currency over time. It matters because businesses and consumers make purchasing decisions based on the perceived rate of inflation: The higher the current rate of inflation, the more likely a business or consumer is to buy, thus fueling more inflation.

Also, the Federal Reserve makes interest rate decisions based on the rate of inflation. If inflation is higher, the more likely the Fed is to raise interest rates. The Fed does this because it does not want inflation to “run away.” Conversely, if inflation is too low, the Fed might lower […]

Published May 7, 2021

As of the end of April, the stock market is up 11.8 percent year to date and up 46 percent over the trailing 12 months, as measured by the S&P 500 on a total return basis. One wonders when the robust market climb will falter.

The strong gains seem to provide evidence that the economy is poised for rapid recovery following last year’s pandemic-caused recession. Economists now expect a rebound because of strong consumer spending, trillions of dollars of government support, a surge in pent-up demand and increased mobility due to vaccinations.

The government reported last week that the overall economy, as measured by gross domestic product, rose at a robust rate of 6.4 percent in the January-to-March quarter. Some economists believe that growth will be strong in the coming quarter, perhaps even topping 10 percent.

U.S. consumer spending grew at the fastest pace in nine months, reflecting billions of dollars of government support payments. Incomes surged a record-breaking 21.1 percent in March, after falling 7 percent in February when frigid winter weather disrupted sales. The surge came amid billions of dollars in relief payments from a nearly $2 trillion federal government support package.

Despite the spending increases, consumers squirreled away a lot of their incomes – the savings rate grew to 27.6 percent in March, from an already elevated 13.9 percent in February. Excess household savings now totals about $2.3 trillion over what economists estimate would have been the case without the pandemic. Analysts believe that consumers will spend this stockpile in coming months as vaccinations get them to return to stores and take long-awaited vacations.

Inflation appeared to be tame, rising 1.8 percent annualized, excluding […]

Published April 9, 2021

2021 began with a slow start. Seemingly it was not a good time for investing. Between January 1 and March 1, the market dropped 1.01 percent as the pandemic stretched on. In this column, I warned against short-term investing and encouraged investors to pay attention to the Federal Reserve and government fiscal spending policies. The Fed said it wanted low interest rates and the central government wanted a large stimulus package. A few months later, the Fed has had its way with interest rates and the government has its stimulus package. As a stream of economic data and corporate profits turned positive, the U.S. equity market experienced strong gains for the first quarter of 2021.

With 99 percent of companies in the S&P index reporting positive earnings and a decline in new COVID-19 cases, the market powered upward. The passage of a $1.9 trillion fiscal relief bill and the Fed’s assurance of a near-zero interest rate policy, coupled with continuance of the monthly bond purchase program, spurred the market on.

Concern about inflation expressed by the Federal Reserve chairman caused investors to rotate out of economically sensitive stocks and out of high-growth companies. Still, equities closed near their highs as the quarter came to a close.

Fear began to rise that inflation would take hold if the market recovered too much. Ten-year Treasury yields rose sharply, with stocks falling just as sharply. Things began to look grim for the equity market, but just as quickly, the market reversed course and began to recover. The result has been a solid start to the year with the S&P broad market index up 9.19 percent through April 5. […]

Published March 5, 2021

Readers of this column will note that sometimes I refer to the market climbing a wall of worry.

In the past week the market hit that wall head-on.

The market had been moving up nicely, so what happened that led to it hitting a solid obstacle?

It was a case of good news and bad news. As often happens, investors were lured by the market into a sense of security by benign interest rates, a supportive Federal Reserve and a likely stimulus package for the economy. However, as the economy began to improve, interest rates began to rise. The 10-year Treasury yield, a benchmark for investors, traded as high as 1.6 percent – a move that was unnerving to investors. The 10-year yield moved more than half of a percentage point in two months, which is a rapid increase for the bond market.

Never mind that the unemployment rate in the country is still high or that Fed Chairman Jerome Powell promised to be supportive with low interest rates. Rates began to rise. A rise in interest rates would not be too bad, if it signaled an improving economy, but this rise was too fast. A rise in interest rates could also signal a rise in inflation. Indeed the 5-year TIPS/Treasury Breakeven Rate, an indicator of the markets’ expectations for inflation, rose to 2.38 percent in the last week of February – its highest level since before the 2008 financial crisis. The rapid rise in interest rates was too much too soon. The market was spooked.

The interest rate on 10-year Treasurys, a popular benchmark for the bond markets, began to reach the dividend yield on S&P […]

Published February 5, 2021

A variation on the old investment strategy of short selling took on new dimensions as new traders took control. What brought about the market turmoil? Several factors were influential.

One factor was growth in the number of investors. In the past year, more new investors opened accounts – at least 10 million – faster than ever before.

Additionally, a shift to no-commission trading unlocked a wave of activity. With coronavirus-related lockdowns in place, people had little else to do. There were no major sports to bet on, so the stock market took its place. Trading activity started to surge. Recently, equity volume was triple the amount as on an average day in 2019.

Individual investors have always been small fish compared to the sharks of Wall Street: hedge funds. Before the pandemic, activity from individuals (“retail investors”) made up about 15 percent of daily trading volume. Now, it consistently makes up more than 20 percent. A single trader, from his basement office, led the change in this increase. Why?

Social media has given investors message boards and group consciousness, and that has evolved into market action. A single investor working on a social media platform called Reddit targeted a single stock with enthusiasm: GameStop. Convinced that GameStop offered opportunity and noting that some very big players had large short positions, he attacked with a relatively small commitment. One day he bought $53,000. By using options, he amplified his bet and made as much as $46,000 in a single day. Over the next year and a half, by using Reddit as his message board, “Roaring Kitty,” as he called himself, promoted the company and enthusiasm grew.

Encouraged by […]

Published January 8, 2021

Will Rogers often said, “It is hard to make predictions, especially about the future.” But that is what investors must do. Obviously the past is easier to read. For instance, we know that last year the market went from peak to trough in 33 days. This was three times faster than the 1987 bear market. In 2020, the market then recovered to break even, for a V-shaped recovery, by Aug. 18. That made it the fastest recovery on record.

We have since made 19 new highs. The S&P was up 18.4 percent for the 2020 calendar year, and up nearly 50 percent for the trailing two years. An unprecedented amount of government stimulus was the main driver. Some say 10 years of digitization of the U.S. economy squeezed into a matter of months has also been a catalyst for increasing multiples and stock prices. The market began 2021 with a bang, rising strongly for the first 10 minutes of the new year. That was followed by a thud and then another rebound.

So, what’s on deck for this year? We can expect that the Federal Reserve will continue to provide support to the market. Also, both political parties will want to keep the economy humming, so we can expect continued fiscal and monetary stimulus from the government. Specifically, we can expect a stimulus package and infrastructure spending.

Inflation should run about 2 percent – the Federal Reserve’s sweet spot – to keep dreaded deflation at bay. Upward pressure on inflation is being provided by the unprecedented scale of money printing. The supply of U.S. dollars has increased by almost 15 percent from March 2020 through […]

Published December 11, 2020

The stock market climbing a wall of worry is a cliché in these columns, and indeed, the market is doing it again. The elections, the coronavirus and the economy have provided plenty for all of the markets to worry about. In the course of this year, they have had generational gyrations.

The elections

As the markets processed the presidential election, they had even more on their plate than usual. Markets do not like uncertainty, and a change in government at the top can be a serious threat to stability. But so far, the markets have aced the threat. Contrary to fears and some remaining challenges, the democratic process has held, and a peaceful transition seems to be possible.

Nevertheless, we still have hurdles to surmount. The expected peaceful government change appears to be bringing with it stability in our foreign relations. To date, no significant international event has manifested itself, although it still could. Often our enemies test us during the transitional period from one administration to another. Our democratic process seems to have met its tests.

The orderly election process at the state and local levels has also displayed confidence in our system and thus our economy. Yay for us! And for the many local election officials and volunteers. And for the U.S. system of governance. Are we good or just lucky? Maybe another 250 years will reveal the answer.

The coronavirus

The virus threatened our economy, our government and our people. We are not out of the woods yet, and will not be for quite some time, but it appears we are making progress and restoring stability to the system.

The economy

Corporate profits across a broad spectrum […]

Published November 13, 2020

Former Vice President Joe Biden, Democrat nominee for president, gathered the largest vote total for a candidate in the history of U.S. presidential elections. President Trump repudiated the results, claiming that he had the most legitimate votes; few people backed his claims. Trump says the election is far from over. No doubt extensive litigation is still to come.

The election process was exceedingly slow, but exceedingly meticulous, as Biden ground through the primaries, defeating foe after foe. Newscasters are framing his election as an example to all of us of the importance of never giving up on one’s dream. The general election saw record voter turnout, not only in person but also by mail. Because of the turnout, the counting process took several days, but in the end America’s democracy survived and stood firm. The election was a triumph of our democracy. The result will be noted all over the world and in history books.

In transitional times like these, our enemies perceive an opportunity to undermine us. China and Russia are pointing to the aftermath of our election as an indicator of our failing democracy. There are many autocratic regimes that see the success of our democracy as the biggest threat to their illegitimate holds on power. They may seek to take advantage of our troubled times. Fortunately, Biden’s experience with our allies will help ensure that we won’t have to deal with these threats all on our own.

Now the work begins. The work is to restore balance and trust in our nation and restoration of the rule of law. Those who supported Biden believe he is up to the task. The first […]

Published October 9, 2020

Although the Federal Reserve is doing as much as it can to stimulate the economy, it has said repeatedly that the executive and legislative branches need to do likewise. There is little downside risk to taking action, the Fed chairman says. But even as the economy remains soft and layoffs continue, Congress and the White House have been dragging their feet in reaching an agreement on another stimulus package. It should be noted that nearly 4 trillion dollars have been spent so far in shoring up the economy from the effects of the virus.

The White House has continued its trade war with China – the second largest economy in the world. The trade war seems to have little positive benefit for the U.S., as our trade imbalance widens but the Chinese economy grows.

The coronavirus, which has been shaping the economy for months, took on the executive branch this past week. The personal health of top military officers and legislators suffered. The result is paralysis for both branches: an attempted coup by the virus to take over the government fewer than 30 days before Election Day.

The ability of the Senate to preside over the hearings for President Trump’s Supreme Court nomination has been thrown into doubt. At a time when the nation needs leadership, the virus usurps control.

Equity markets took heart from the notion that the president’s virus diagnosis would encourage Congress to pass a stimulus package. Yet after pushing hard for legislative action, the president abruptly stopped discussions, saying they would resume after the elections.  The Dow fell 375 points on the day. It is hard to rationalize the change of heart, […]