Firing on All Cylinders

The economy continues to fire on all cylinders as COVID-19 vaccinations continue and restrictions on many businesses continue to ease, albeit in fits and starts, given the rise of the new Delta variant. According to the Bureau of Economic Advisors[1], real GDP grew at annual rate of 6.1% in Q1 2021 and posted an initial estimate for Q2 2021 of 6.5%. The Atlanta Fed website www.gdpnow.com is currently forecasting Q3 2021 real GDP growth of 6.1%. If these forecasts hold true as expected the four quarter average for GDP growth will be nearly 5.7%. That’s impressive growth!

Moreover, after falling 22% in 2020, corporate earnings are forecast to increase by 56% in 2021, according to FactSet[2]. The rebound in the economy, corporate profits and accommodative monetary policy by the Federal Reserve has help contribute to  the ~ 18% increase in the S&P 500 this year.  That’s more good news! 

What might be considered bad news is the surge in prices i.e., inflation for things like housing, building materials, and the more volatile food and energy prices. As we discuss below, the current surge in prices could very well prove to be transitory as suggested by Fed Chair Jerome Powell during his recent semi-annual congressional testimony[3]. As we will discuss in our upcoming article, Is Inflation Here to Stay?, this is a key variable that bears watching!

Are we Overvalued, Overextended and Overdue for a Correction?

The fly in the ointment, however, is the rather lofty valuations for stocks, growing speculation among individual investors, technical divergences in the broader market as small cap stocks lag behind FANG and other mega-cap stocks and a rather protracted period of time without the typical 5%-10% intra-year correction.

Regarding valuations, and according to JP Morgan’s Guide to the Markets[4], the S&P 500 trades at 21 times forward earnings, well-above the long-range average of 16.5, which not only exceeds valuation levels seen in 2007, but is also approaching 1999-2000 valuation levels. Undoubtedly, investors will remember the significant declines that followed the bursting of the Tech Bubble in 2000 and the Great Recession in 2007-2008.

Strategy Update While we acknowledge that valuations are “stretched” at present, we remind our readers that, in and of themselves, lofty valuations don’t create bear markets. They can, however, be the burning embers that start a forest fire. Hence, we believe that investors should be vigilant when managing short term volatility over the typically erratic summer months and not be surprised if we see a correction in the broader market over the coming few months. In our view, and assuming that recent inflationary pressures are transitory as we will discuss further in a future article, we view a 5% -10% “correction” in the stock market as a buying opportunity. Having said that, we see a continuation of historically low interest rates coupled with the prospects for stronger economic growth and higher earnings over the next several quarters as bullish for stock prices overall. Moreover, with the 10-year Treasury bond yielding approximately 1.25% it’s reasonable to assume that long-term investors still prefer quality blue chip companies with dividends that exceed 1.25% as a reasonable alternative to bonds. The “TINA” phenomenon (There Is No Alternative) is alive well for the time being. For now, and as we have been for quite some time, we are inclined to allow our equity allocation to drift 3%-5% above our stated neutral targets.
[1] 2nd Quarter 2021 GDP Estimate, Bureau of Economic Analysis July 29, 2021, https://www.bea.gov/news/2021/gross-domestic-product-second-quarter-2021-advance-estimate-and-annual-update [2] Stocks Keep Moving Higher Even As Earnings Estimates Continue to Fall April 28, 2020, https://www.forbes.com/sites/chuckjones/2020/04/28/stocks-keep-moving-higher-even-as-earnings-estimates-continue-to-fall/?sh=57a1b1af5598 [3] Semiannual Monetary Policy Report to Congress July 14, 2021, https://www.federalreserve.gov/newsevents/testimony/powell20210714a.htm [4] Market Insights – Guide to the Markets July 31, 2021, https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/

Keep Calm and Save On!

With consumer prices surging to a four-decade high over the past year, uncertainty about when inflationary prices may ease makes the concept of stretching your dollar, or saving more money, significantly more relevant. I recently had the opportunity to discuss this exact topic during an interview with Lindsey Mastis on her ABC 7 show, “The Wellness Desk.” Read more here…

It’s Not Too Late to Help Your Young Investor Fund an IRA and Take the First Step Toward Financial Independence!

When you are a parent, you want your children to have the most financial success possible. Influencing them to take steps to save, as soon as they begin earning income, will benefit their future finances even further. The first step that your child can take, once they’ve started earning income, in high school or college, is to fund an Individual Retirement Account. Learn more here…

Celebrating Our 1st Year!

In March of 2021, and after more than three decades of advising individual investors, I founded Kirk Capital Advisors, LLC with the goal of delivering investment and financial planning advice that is 100% conflict-free, 100% transparent and 100% personal. Read more here…

Winds of Change and Europe… An Update…

The crisis in Europe is truly different and navigating it requires all of the facets of sound investing cited above. Russia’s invasion of Ukraine has thrown financial markets into disarray, and by all measures, the outcome is highly uncertain. This exercise helps us pivot in the right direction with confidence, once we are able to clarify and combine unknown information with known information. Read more here…