S&P 500 and DJIA Close On Friday at Fresh All-Time Highs

Key Points

– S&P 500 closed at an all-time high of 4,468.00, up from 4,436.52 last week.

-The week started with cyclical and Epicenter sectors rallying, and the end of the week was marked by low volatility, but more defensive sectors and Technology lead gains.

– Earlier this week, we upgraded the Financial sector as we see the healthcare situation and thus outlook for growth and rates as likely to improve.

– An incredible 50% of wealth gains in US households from 1Q2020 to 1Q2021 were from the stock market. US households are participating at a higher rate than ever in the stock market, a trend that we believe will continue.
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Markets closed at all-time highs again, and although the rises today weren’t incredibly robust and were indeed led by defensive sectors, we’ll certainly take it for Friday the Thirteenth. Treasury yields popped to around 1.37% at the beginning of the week but then had a tamer end and didn’t do too much after CPI showed inflation might be slowing or peaking and consumer sentiment came in soft. They settled at 1.287% to end the week.

Nonetheless, we see evidence in the healthcare data and analysis from some of our favorite sources that the Delta variant indeed has more bark than bite, as my colleague Tom Lee suggested weeks ago. Cases appear to have peaked in the most adversely affected areas, and the scare caused by rising hospitalization, along with mandates, seems to encourage more Americans to get vaccinated. Clearly, there are still challenges ahead, but the American economy will likely not let this variant hold it back.

Earlier this week, we upgraded the Financial sector because of the changing macro environment related to tapering, healthcare, and a likely intermediate-term reversal of rates to reflect better growth prospects. The sector had underperformed the S&P 500 since we downgraded it on June 11^th. Check out this week’s Signal From Noise for a solid regional bank that offers insight into commercial and industrial (C&I) lending dynamics.

About 10 million brokerage accounts opened in 2020, and over a third of those are estimated to have been new investors. The meme-stock phenomenon has proven the relevance of retail investors who could follow simple advice and triumph against seemingly David and Goliath odds. Of course, that’s the headline, and the truth is more complex. We continue to closely monitor how the rise of millennials will affect markets.

Incredibly half of the gains to US household net worth have come from the stock market from 1Q2020 to 1Q2021, according to the Federal Reserve. As millennials, the largest and best-educated generation on Earth, come into their prime earning, borrowing, and spending years, the participation of US households in the stock market is likely to only increase in our estimation. The US consumer was a formidable force before the pandemic. Now they are wealthier, and they have a lot more savings and a lot less debt.

Markets are challenging, though. The recent Robinhood IPO gained a lot of headlines and, of course, experienced putative price volatility. The company certainly has more than its share of firm detractors and enthusiastic fans. Regardless of where you may fall, the company has brought many new investors in, and the share price movement of the IPO itself shows again the power that a like-minded community of investors can have. After all, at the end of the day our fortunes are determined by the ask and the bid.

New investors and old investors can always learn. One thing we always suggest at FSInsight is humility in investing. We try to give you an edge, but we’re also big fans of letting the benefits of equity ownership accrue over time. So, when we see many new investors engaging in the elevated use of short-dated call options, we get concerned because this cedes many benefits of owning the equity and tends to be more like a zero-sum game much of the time, particularly as maturities get shorter. While they are fantastic for defining and mitigating risk, derivatives are still no joke.

They are challenging even for the experts. Take, for example, the fact that Professors Robert Merton and Myron Scholes (Yes, the Scholes of the Black-Scholes model), who together won the 1997 Nobel Prize in Economics for a ‘new method to value derivatives,’ were on the board of Long-Term Capital Management (LCTM) when it failed spectacularly and required a $3.6 billion bailout from the New York Fed. Does this undermine their prodigious contribution to humanity and the ability to manage risk?

No, of course not. It does drive home the point that humility is key to markets. There are many clear signs of strength in the economy, but there are many risks, and it is very hard to predict to what degree they will affect markets. On the other hand, upside surprise and indicators that Wall Street may be underestimating the strength of the coming rebound keep proliferating. Disney shattered expectations along with most segments, including ones sensitive to adverse healthcare developments like theme parks. Earnings continue to be spectacular.

Other signs may be considered ominous, like the recent outperformance of European markets. This is encouraging in some ways but will likely not last. We expect a major risk-on rally into the year-end led by Epicenter sectors.

The impact of Delta will still be felt. We don’t want to trivialize what is undoubtedly an abject human tragedy. Still, we will absorb it. From a shareholders ‘ perspective, the pent-up demand and financially robust US consumer will likely pair up nicely with the historically high quarterly operating margins seen in Q2 S&P 500 earnings. We know the sectoral and value/growth rotations have been harsh. Markets are challenging, but remember that time is on your side if you own stocks and crypto. For all the complex advice out there, one ancient source provides just as much valuable insight as much of what we come across. It is the Delphic Maxims that hung over the entrance to the Temple of Apollo at Delphi.

Know Thyself

Nothing in Excess

Surety Brings Ruin