A few weeks ago, Punxsutawney Phil came out of his hole and saw its shadow, predicting more winter weeks. Spring will have to wait a bit longer. The economy hasn’t quite turned the corner either, with lower than expected GDP in the fourth quarter and very slow jobs growth in January. Yet markets are still confident in a future recovery, focused on looking ahead to springtime growth and hitting fresh new highs. These same few themes have generally driven these lofty values:
- Vaccine Deployment
- Easy Monetary Policy
- Stimulus Packages
As of February 16th, it has been an impressive start to the year for stocks. The S&P 500 is up 4.89% (green line below), and international indexes up 5.16% (orangish line below). Bonds (blue line below) are down slightly at -1.62%. Those are good stock returns over a six-week time period in just about any market, especially one where COVID-19 is still wreaking havoc on parts of the economy.
Companies are in the midst of reporting earnings for Q42020, and they have looked good. As a whole, it looks like Q4 earnings may end up climbing 2% year over year. 2% is not exciting by any means, but the prediction going into earnings season was that they would fall by 11%. So far, roughly 79% of companies in the S&P 500 have beat expectations. Expectations going forward have also been going up, with far more companies globally having their estimates revised upwards than downwards. Earnings growth has to follow to justify the record high prices. Despite what the Reddit traders may say, earnings and earnings expectations are key driver of stock prices in the long run.
The Bottom Line
The pieces are out there for the economy to recover, but they still have to line up. Additional government stimulus, vaccine rollout with continued re-openings, and ridiculously low interest rates are all supportive to the markets. Investors seem very confident and optimistic, and that optimism is drawing in a lot of new investors. However, let’s not forget that it was just about one year ago today that the market was at all-time highs. Most talking heads weren’t predicting a global pandemic, government forced shutdowns or a 30% correction in the markets. The current optimism could turn quickly and cause a pullback if the pieces don’t align as quickly as expected. Other factors could also easily come into play. While future tax increases are likely, current COVID restrictions and high unemployment will probably put that legislation on the back burner, at least for this year. In short, while we recognize risks, we are cautiously optimistic for the markets in the near future. While markets are once again hitting new highs, it's prudent to re-evaluate the risk in your portfolio and make any necessary adjustments.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index.