Triple All-Time Highs Across Indexes on Friday, Potential Headwinds for Markets in July Likely Followed by Strong 2H
Summary
– S&P 500 closes at another all-time high of 4,352.34 up from 4,280.70 last Friday. The DJIA inched closer to its May ATH and the Nasdaq also closed at an ATH.
– The delta variant is rising, and we have amended our base case to now reflect a surge in the states with the lowest proportional levels of vaccinated residents.
– While there are complicated headline risks and problematic developments with COVID-19 economic data remains very strong and re-opening will be hard to restrain.
– We discuss 1H2021 and what we see on the horizon for the 2H2021. Despite short-term headwinds we expect it to be a very strong half.
The market has shown some pretty extraordinary strength given all the potential tripwires it faced this half. This week, contrary to what you might think given the news on the Delta variant, the stay-at-home names floundered while FAANG and Epicenter names have done well. Maybe the market is perceiving, as my colleague Tom Lee, suspects that, despite a likely rise in cases, the policy tool of the lockdown is quite unlikely to make a comeback in our estimation. Remember, the cessation of economic activity and prohibition of gatherings caused much of the economic tumult associated with COVID-19 in addition to altered consumer behavior.
The S&P 500 gains would be considered impressive for a full year historically. Since 1928, the start to 2021 is almost a top-ten best start to a year ever coming in just short at #11. The natural question is what we can expect in the back half of the year, and we see several reasons to think it is more gains. We are tied for street high with a year-end price target of 4,600. This approximates to a P/E ratio of around 21x market, which hardly seems expensive especially when you compare this level to bonds.
Energy has been volatile lately, but it is still our favorite sector. We’d like to remind you friend: volatility is often the price of a superior risk-adjusted return. If something just goes up without volatility everyone piles into it and thus it contributed less to alpha since so many investors have exposure to it. The principle of risk adjusted return is an important one to understand. Many retail investors who are loading up on short-dated call options with very little hope of expiring on a favorable basis should always use this metric as one of your North Stars. You see, you want to get a better return than the risk you’re taking would normally afford.
We’re big believers in active management versus the alternative here at FSInsight. According to Economist Burton Malkiel, nobody should be able to beat the market. Taken to the extreme, as he postulates, over time monkeys randomly throwing a dart at a board (a hyperbolically ridiculous method of stock selection to dramatize and illustrate his point) should be able to beat any active manager in returns. Firstly, we’d like to point our that Mr. Malkiel’s delivery seems needlessly disparaging and might even hurt the feelings of those more sensitive among us. Of course we’re better than monkeys!
When you buy an ETF like the SPY, as the best example, you are not trying to beat the index you are merely trying to mirror its returns. The governing covenants of the ETF itself force the folks administering it to take actions in order to closely mimic the price of the underlying, which is the S&P 500.
In senior markets, like credit, the bullish signals continue to abound. The accommodative Federal Reserve, very deep demand, and a stable treasury environment are all helping set the stage for the record-setting issuance environment in capital markets. Junk bond yields plunged to an all-time-low of 3.78% again on Monday, which is the fourth record-breaking move in about as many months.
Equity markets show strength too. IPO issurance in the first six months of the year broke the $282 billion record quite handily at an astronomical $350 billion. The National Retail Federation revised retail sales growth projections up more than 100% from 6.5% to 13.5%. It appears they are beginning to notice the “Revenge Spend” my colleague Tom Lee has been talking about. We are bullish, but we are also conscious of the many risks. Are we in an Iron Curtain moment? Or will the commercial and technological competition between the US and China be more positive for humanity than the more militarily dominated one between us and the USSR. We explore the environment for Chinese technology firms and the global anti-trust push against tech in this week’s Signal From Noise.
One thing we should all be grateful for is that we live in a free, open, and Democratic society, and we believe this is an underpinning of us having the healthiest and deepest capital and financial markets in the world. We sincerely wish you a thoughtful and fun-filled celebration of the founding of the United States of America and our Declaration of Independence. These events were long ago but they still provide the foundation of legitimacy for what we are firmly convinced has been the most successful and wealth-generating political system in the history of the planet Earth. Remember the sacrifices of all who have made our country great and stood for the common ideals that unite us as Americans regardless of race, party, creed or lifestyle!
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