Kinetic Wealth Management Update

May 2021 Update

Mon, 10 May 2021 13:04:10 GMT

The U.S. economy continues to storm back from the pandemic lockdown-driven recession

As the calendar has turned to May, the popular “Sell in May and Go Away” stock market cliché is getting a lot of airtime. This is the idea that the stock market tends to be weakest between May and October (and strongest between November and April). Stocks have done so well recently that preparing for a pause in the rally makes sense. A lot of good news is priced into stocks. Worries about the Federal Reserve tightening its monetary policy may intensify this summer as inflation picks up, potentially pushing interest rates higher. Tax increases are probably coming in 2022, and deficit spending continues largely unabated.

Investors have not been well served recently by following the “Sell in May” pattern and avoiding stocks from May through October. Over the past decade, during that six-month period the S&P 500 Index was higher eight out of 10 times, with an average gain of 3.8%. Going back to 1950, even though the May-through-October period has been the weakest, stocks have gained 1.7% on average and have been higher 65% of the time—hardly a disaster worth avoiding.

The U.S. economy continues to storm back from the pandemic lockdown-driven recession

After growing at a solid 6.4% annualized pace during the first quarter of 2021, U.S. gross domestic product (GDP) is just a small fraction away from recovering all of its lost output from 2020. Economists' consensus forecast for U.S. economic growth of 8.1% in the second quarter of 2021 (source: Bloomberg) may be too low given the additional progress toward a fully reopened economy and continued steady vaccine distribution. With more fiscal stimulus likely coming soon, GDP growth in 2021 may be the strongest in four decades, hardly supportive of a bearish view. Nearly 1 million jobs were created in March, and April’s number due out on May 7 could be even bigger.

First-quarter earnings season has been a record-setter. The percentage of S&P 500 companies beating earnings per share targets (88%) and upside to revenue targets (over 4%) are both the highest that earnings data aggregator FactSet has ever recorded. The year-over-year increase in S&P 500 Index earnings will likely double— yes double —the 24% estimate as of April 1—one of the biggest earnings upside surprises ever, and frankly hard to believe!

The strong earnings growth has allowed stocks to grow into their valuations. In fact, stock valuations remain quite reasonable compared with bonds given still-low interest rates, suggesting a “Sell in May” decision based on elevated stock valuations may be a mistake. This fundamental backdrop suggests any market selloffs may be shallow and short-lived, and therefore difficult to time.

Volatility is like a toll investors pay on the road to solid long-term investment returns

In general, we think investors should pay that toll and favor equities over bonds in their portfolios. For those with extra cash on the sidelines, we would look to buy on weakness given the favorable fundamental backdrop. But for investors with extra risk in portfolios, now might be a good time to consider taking a little bit off the table.

February 2021: Economic Trends with Long-Term Impact

Tue, 09 Feb 2021 13:50:51 GMT

In the short-term, the market is a popularity contest. In the long-term, the market is a weighing machine.” — Warren Buffett

2021 is underway, as our nation and the rest of the world look to begin to put the global pandemic behind us. The path forward for the US economy, as well as that of the global economy, will continue to depend heavily on the success of combatting the virus.

While many of the risks presented by the outbreak of COVID-19 persist, it appears we may be in the later innings of the pandemic. Following increased restrictions to quell the holiday surge, new daily COVID-19 cases and hospitalizations have peaked, and are down significantly the past few weeks (source: COVID Tracking Project). Reopening is taking place as well, highlighted by New York City’s plans to bring back indoor dining by Valentine’s Day. Meanwhile, the distribution of currently approved vaccines is well underway—and accelerating.

The United States has added over 1 million shots per day over the past week (source: CDC) and 1.5 million per day is quite possible soon. Adding to this optimistic trend, new vaccine candidates from Johnson & Johnson and Novavax have also shown efficacy in combatting the effects of the virus and new mutations. If these two candidates are authorized for use as most experts expect, the boost in supply will be a welcome development in the US and abroad.

Despite the positive trends in COVID-19 data, volatility began to return to the stock market in the final days of January, as retail traders set their eyes on GameStop (GME) stock and other heavily shorted securities, captivating the nation’s imagination. As Warren Buffett explained above, while many of these securities may be popular now, the real winners will likely be investors with longer-term horizons.

While these developments could be another sign of excessive optimism in certain segments of the equity markets, we do not believe they represent a sign of a broader market bubble or indicate a major correction is forthcoming.

After the powerful snapback of economic growth seen in the third quarter, the economy continued to grow at a solid 4% in the fourth quarter despite the holiday surge in COVID-19 cases. This improving economic backdrop has provided tailwinds to corporate profits, which should help stocks grow into their elevated valuations.

S&P 500 Index earnings for the fourth quarter are impressively tracking 9 percentage points ahead of consensus expectations, while more than 80% of companies have beaten earnings estimates (source: FactSet). Meanwhile, housing remains extremely strong nationally and manufacturing data continues to show an economy that is firmly on the mend.

The improving economic backdrop, along with US government and Federal Reserve policies designed to boost the economy, suggests the environment for risk assets may remain favorable in 2021. Don’t get complacent though; after the S&P 500 Index rallied more than 70% since the March 2020 lows, some volatility would be perfectly warranted.

Remember, they say that the stock market is the only place where things go on sale, yet people run out of the store screaming. Have a plan in place to be ready to take advantage when the sales come and don’t run out screaming.

Back to School is Different

Tue, 08 Sep 2020 14:30:57 GMT

Back to school this year will be different. On the one hand, like other years, it marks the end of summer, the arrival of cooler weather, kids hitting the books again, and Labor Day gatherings. But unlike other years, going back to school carries unique concerns because of COVID-19. This year, we’re all getting an education in remote learning, working from home, and social distancing.

While the COVID-19 fight is not over, more progress has been made recently. New cases and hospitalizations in the United States have been falling steadily since mid-July. Several promising vaccine candidates have entered phase-three trials in the United States, and the FDA could potentially fast-track approval for emergency use later this year. Abbott Laboratories has developed a $5 COVID-19 test that the company claims can produce reliable results in only 15 minutes. The fruition of pandemic developments may be getting us closer to the end of the pandemic.

The stock market has responded to these promising developments with fresh record highs for the S&P 500 Index and its strongest August performance since 1984. Stocks have also received a boost from surprisingly strong recent economic data, which already may have brought an end to the “lockdown recession.”

The brightening economic picture helped second-quarter corporate earnings beat estimates by an average of 23%, more than in any quarter since FactSet began tracking earnings statistics in 2008. Estimates have risen to the point where analysts expect 2021 S&P 500 earnings to surpass the 2019 level.

But even if the recession may be over technically, the path forward may be challenging. MGM, American Airlines, Coca-Cola, and other major corporations recently announced thousands of layoffs. If lawmakers can’t agree on another stimulus package soon, the road ahead will get tougher.

Now that the Democratic and Republican national conventions are behind us, election season is in full swing—and with that comes the potential for increased market volatility. September historically has been the weakest month for S&P 500 stock performance, but during election years, it switches to October, when policy anxiety typically peaks. With stocks pricing in significant optimism after such a strong rally from the March lows and these seasonal headwinds on the way, the potential for a pullback may be high.

At the same time, it’s possible we’re in the beginning stages of a new bull market, which suggests additional gains for stocks may be forthcoming. That’s why it probably makes sense for suitable investors to be patient, stick with their target allocations—particularly those with multiyear time horizons—and resist the urge to get more defensive. Stocks appear to be expensive, but so do bonds. Even though stock market volatility may increase and stock returns potentially may fall below long-term averages, stocks may continue to outperform bonds over the next 12 months.

Good luck with the transition back to school, to a new season, and to the new norms—and stay safe. As always, please contact me with questions.