Published February 19, 2021
Below is a good overview of the powerful forces behind the market’s seemingly endless uptrend. The market will pull back at some point. But the factors below, provided by our friends at DIM, suggest that pullback is likely to be short-lived.
‘Goldman Sachs says they are seeing the “most accommodative financial conditions on record.” What this means is we have a springboard for higher equity valuations. The “springs” in the springboard are:
1. A zero to 25 basis point Fed Funds interest rate projected through this year with a 98% confidence level.
2. An inflation rate (measured by the CPI this week) showing inflation remaining steady at a rate below the Federal Reserve target rate implying the Fed will hold the Fed Funds rate very low at least through the end of this year if not substantially longer.
3. Very low corporate borrowing costs. The average yield on high-yield (junk) bonds fell below 4% this week for the first time ever. This implies a relatively “safe” lending environment and may incentivize some investors to look for higher returns elsewhere – including equities.
4. Junk-rated companies (companies with bonds that are rated below investment grade) are experiencing bond rating upgrades this quarter at the highest level relative to downgrades since 2013. This means that the financial prospects of many companies are improving and their borrowing costs are declining. Bankruptcies are below pre-pandemic levels.
5. The U.S. Treasury Yield Curve has a slope “up and to the right.” This is good for banks (that borrow at the short-end of the curve and lend at the long-end) and suggests the chance of recession is low – along with a positive Leading Economic Index – chart in Market Dashboard at end of newsletter.
6. The Household savings rate is at 12.9%. Household leverage (debt as a percent of equity value) is at 35-year low.
7. Through the end of last week, roughly 60% of the S&P 500 Index companies had reported earnings. 81% beat estimates (versus the five-year average of 74%). Of the companies beating estimates, the average upside is 15.2% above estimates versus a five-year average of 6.3%. 79% of the companies reported better-than-expected revenues. The percentage of revenue beats ties for the highest rate since FactSet began tracking this metric in 2008.
8. To-date, the Federal Reserve and the U.S. Congress have injected $7 trillion worth of stimulus/liquidity into the economy. President Biden is proposing another $1.9 trillion currently.
9. Across the country, the COVID-19 case trend is improving rapidly. At some point, the economy will be fully reopened.
The upward trend from the March market low last year has been persistent. If anything, it appears to be gaining momentum. The trend remains our friend.’
Investors returned from the Monday holiday to a mixed market Tuesday. The S&P 500 rode strength in financials and energy shares to a +0.2% rise while the Nasdaq slipped by the same amount. A similar story Wednesday with weakness in Apple (AAPL) and other large-cap tech stocks continuing to limit the Nasdaq. Rising oil prices kept the broader market flat. All the indexes dipped Thursday with Walmart’s earnings report adding to the generally soft mood in tech shares, which stumbled for a third straight day. A tick higher in unemployment added to the risk-off mood, bringing several of the primary market indexes resting at key technical levels. Those levels offered support for Friday’s rebound in shares of smallcap companies. Friday’s moves left the smallcap index higher by +2% while the broader market was mixed. Interest rates popped higher throughout the week boosting financial shares.
Stocks mostly slipped back this week. The S&P 500 (SPY) gave back a very modest -0.66% while the Nasdaq 100 (QQQ) tumbled -1.61%. The smallcap Russell 2000 index (IWM) used Friday’s recovery to limit the weekly loss to only -0.91%.
Warm wishes and until next week.