Strong market comeback during horrific news cycle
This week’s news cycle was rightly dominated by the United States’ ‘departure’ from Afghanistan and the tragic earthquake in Haiti (followed by an untimely storm hampering search and rescue efforts) . The references to the fall of Saigon with helicopters on top of the embassy were hard to bear. A newsreel showing desperate Afghan nationals literally falling from the sky as they attempted to cling to the departing plane was difficult to watch. What a week of tragedy. If it is difficult for us to watch, imagine what life is like at the airport in Kabul where the chaos is heartbreaking. So what is the US market doing – setting another all-time high? Although we have seen ups and downs in the markets, I reached out to my contacts at Federated Hermes for comment.
Linda Duessel, senior equity strategist, put it this way: Everyone’s talking about the growth spike in the worst pandemic quarter of last year (and so) and investor caution. But there is a tremendous amount of liquidity in the market (i.e. a lot of money flowing). The Federal Reserve’s broad gauge of money set a record in June – and that money has to go somewhere. Everyone expects a decline of at least 5% (which has not happened in 10 months), and they continue to be disappointed. Analysts cannot follow corporate earnings. The second quarter was another blast – with 90% of Standard and Poor companies reporting, aggregate profits were up 99% year-over-year. So while the market continues to hit new highs, valuations have barely budged. The main measure of market valuation, the forward price / earnings ratio has fluctuated around â21 timesâ for a year. That’s high on a historical basis, but reasonable given the low interest rates. Net inflows to the stock market are positive (which has not happened since 2017) but interestingly, inflows into bond mutual funds are also skyrocketing and are on the verge of breaking records set in 2017. 2019 and 2020. All of the above prompted Fundstreet to declare “the consensus is that everything comes together at the end of the year” 1
All of the above appears to be driven by the following: a belief that the delta variant of Covid-19 will peak soon and that there will be no flare this fall. Economic momentum is expected to strengthen as the âdelta panicâ subsides. The ten-year cash flow is expected to rise (now only paying 1.265%), and the infrastructure bill is expected to pass the Senate. All of the above should give the markets continued strength as the end of the year approaches. Value socks, tech stocks and bonds should all pick up! Keep your fingers crossed. The odds are pretty decent! 2
To perhaps add a different angle to this optimistic point of view, consider the following: whether one can currently “lock in” 1.265% for ten years on a US Treasury bill – or vice versa, invest in a branded company? (like maybe Exxon or Verizon) and get a 3.5x dividend, where do you think the money would go? 3 In fact, consider the recent movement in money market accounts – where most of us are hiding our money. According to the Investment Company Institute, from 1/1/20 (before the pandemic) to 5/27/2020, the size of the money market fund industry increased from $ 3.6 trillion to $ 4.8 trillion. From 5/27/2020 to 8/21/21, the money market fund industry declined by $ 278 billion (from $ 4.8 trillion to $ 4.5 trillion). Where did this money go? To the stock and bond markets – hence the setting of all-time highs! 4 Again, there is plenty of evidence to support a positive year-end for your investment account.
The opinions expressed in this document are for general information only and are not intended to provide specific advice or recommendations to an individual. To determine which investment (s) might be right for you, consult your financial advisor before investing. The economic forecasts set forth in the presentation may not develop as expected and there can be no assurance that the strategies promoted will be successful. The referenced performances are historical and do not guarantee future results. Not all indices are managed and cannot be invested directly. Investing involves risks, including loss of capital.
RFG Advisory and its investment representatives do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied upon, for tax, legal or accounting advice. Please consult your own tax, legal and accounting professional for advice on these matters.
Visit us at www.williamsfa.com. Tommy Williams is a Professional CERTIFIED FINANCIAL PLANNER â¢ with Williams Financial Advisors, LLC. Titles offered by representatives registered via Private Client Services, member of FINRA / SIPC. Advisory products and services offered by investment advisory representatives through RFG Advisory, a registered investment adviser. RFG Advisory, Williams Financial Advisors, LLC and Private Client Services are unaffiliated entities. The branch is located at 6425 Youree Drive, Suite 180, Shreveport, LA 71105.