In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
STATE OF THE MARKETS (S&P 500 +13.38% YTD through 7/19/21)
Stocks continued to climb in the second quarter finishing up 8.2% as Covid-19 cases plunged 96% and almost 70% of U.S. adults got vaccinated. While concerns about the Covid Delta variant and inflation have investors on edge, the stock market performance in 2021 remains strong due to booming economic activity, accelerating profits, and the rapid reopening of businesses.
The most recent hiccup in the stock market in mid-July is to be expected. By the end of the 2nd quarter, stocks were up almost 16% for the year, and 92% off the lows from March 2020. The market needs time to clear out excesses caused by meme speculation, record margin borrowing, and a rash of new IPOs. Plus, we have not seen a 5% correction since last October and the stock market is historically weak during the summer months, particularly August & September.
Despite the recent correction in stocks, earnings remain strong. Analysts predict S&P 500 earnings will rise 35% and revenues will rise 12% for calendar year 2021. The combination of moderate price gains and rapidly expanding profits are making stocks more reasonably priced.
In the second year of a new bull market, stocks typically rise 13%, but if they are coming off a 30% or more bear market, like we just did, stocks tend to rise further – on average 17%. Despite strong second year historical performance, declines in the second year of a new bull market average 10%.
This year the worst decline has been just 6%, so if history is any guide, a bigger pullback could be forthcoming, particularly if inflation is not transitory or if the Fed begins moving towards tightening and raising interest rates.
ECONOMIC UPDATE
The U.S. economy is booming with GDP expected to rise 10% in the second quarter and third quarter. Demand for goods and services is so strong that supply cannot keep up, triggering bottlenecks and wage/price pressures.
U.S. home prices are soaring as multiple bids and price wars are pushing prices skyward. In May, the median price for a home rose +24%, the biggest annual increase in more than two decades. The median price for a home is now at a record high of $350,000. Homes are on the market for only 17 days before they are bought, a record low.
The only thing that may quell this housing market boom is prices getting out of hand. That may already be happening. Existing home sales dropped 0.9% from April to May, the fourth straight month of decline. It appears that the massive gain in prices is finally slowing the pace of home sales, because more and more potential buyers simply cannot afford the steep rise in prices. While builders are trying to build more homes to keep up with demand, construction costs have climbed rapidly and the supply of land is limited.
INVESTMENT THEMES
In addition to opportunities that exist broadly in the current economic and market climate, there are several areas we are emphasizing in client portfolios:
INCREASING DIVIDEND PAYOUTS
After more than a year of hoarding cash, companies are giving back cash stockpiles to shareholders. In the first quarter, companies increased dividend payouts by over $20 billion. That is the largest quarterly increase since 2012.
As the economy continues to improve, we expect optimism to increase to the point where companies have the confidence to increase payouts in a meaningful way. Despite being largely ignored by investors today in favor of big tech firms, most high-quality dividend-growing stocks have provided consistent dividend payouts year in and year out, a feature that is hard to duplicate with other types of investments. That is just one of the reasons why we continue to recommend dividend-growing stocks as the primary foundation of client portfolios.
FOREIGN INVESTING
Europe and the rest of the developed world are finally starting to come out of the pandemic. Economies around the world are opening back up, business is recovering, and life is gradually returning to normal. The U.S. was well ahead of the rest of the world in terms of economic recovery. Now its Europe’s turn. With economies around the world spring loaded to take off, now is the time to start investing overseas. Foreign stocks are cheap when compared to their U.S. counterpart, and yields are higher.
BOTTOM LINE
Plunging Covid-19 cases, accelerating earnings, and increased demand, all led to a strong second quarter. The economy is on the verge of a boom and profits are exploding to the upside. A 10% pullback would not be surprising. It would help clear out speculative excesses.
