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Muted Week for Stock Markets as Earnings Season Winds Down

February 15, 2021
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Monday Morning QB - Market Observations:

  • Last Thursday Was the 9th Record Close of 2021 for the Stock Market
  • Friday Became the 10th
  • Economist Survey Raised Expectations for 2021 GDP Growth
  • Regulators Looking into GameStop Mania for Potential Manipulation
  • U.S. Government Buying 200 Million More Vaccines
  • Continuing Stimulus Spending Projects U.S. Debt to Reach 107% of GDP by 2031
  • Acceptance Broadens for Bitcoin…Tesla, BNY Melon, and Mastercard will either Invest in It, Accept It as Payment, or Both
  • Covid-19 Hospitalizations Reach Lowest Level in Months

Monday Morning QB - Market Performance:

A choppy week for the stock market ends with the major U.S. indexes crawling their way to the second week of gains and new record highs.

The Dow Jones Industrial Average added 310 points to close at 31,458, a gain of 1.0%. The technology-heavy NASDAQ Composite gained 1.7%, finishing at 14,095.

By market cap, the large-cap S&P 500 rose 1.2%, while the mid-cap S&P 400 and small-cap Russell 2000 extended their lead over large-caps, adding 2.7% and 2.5%, respectively.

What Has Earnings Season Suggested about the Future Direction of the Stock Market?

Yes, last week saw the major U.S. stock market indexes reach new highs. The issue is what is next to keep the party going?

According to FactSet, around 72% of companies in the S&P 500 have reported results for the quarter, with more than 80% reporting better-than-expected results. Higher earnings have helped the climb of the stock market to continue.

One school of thought is the stock market has climbed too far too fast, and the valuations are now too high to support further gains. One traditional market metric, the price-to-earnings ratio (P/E) of many stocks, is near some of the priciest levels seen in a while for these stocks.

There are several useful adaptions of the standard P/E ratio.

One such adaptation is Robert Shiller's Cyclically Adjusted Price to Earnings Ratio, or "CAPE." The CAPE ratio helps with a long-term valuation of the market by smoothing out shorter-term earnings swings to get a longer-term market valuation assessment.

A CAPE level of 30 is the upper end of the normal range and the level at which further P/E ratio expansion comes to a halt. This means that further increases in market prices only occur as a general response to earnings increases, instead of rising "just because".

The market has reached that level.

The CAPE is now at 35.83. Since 1881, the average annual return for all ten-year periods that began with a CAPE in the 30-40 range has been slightly negative. Yikes!

Of course, a "mania" could come along and drive prices higher for some time. Manias occur when valuation no longer seems to matter, and caution is thrown completely to the wind as buyers rush in to buy first and ask questions later (FOMO – Fear of Missing Out).

In addition, roughly $58 Billion moved into the stock market last week via mutual funds and exchange-traded funds (ETFs). This amount of "new money" is a weekly record for the market.

What Does a Mania Look Like?

Well, we may be in one that is remarkably similar to a mania we have seen before.

After the Great Recession in 2008-2009, the Federal Reserve responded to the crises with quantitative easing, pumping money into the financial markets while keeping interest rates low.

Federal Reserve Chairman Jerome Powell reiterated last week that the central bank would continue to boost the economy with low-interest rates and asset purchases. Sound Familiar!?

In addition to the easy Fed money, more stimulus spending from the Biden administration is likely on the way as well, with another Covid-19 relief package and an infrastructure bill to follow.

We remain optimistic given the positive forward guidance given by companies this earnings season along with an all-hands-on-deck approach from the Fed Chairmen and our current Administration.

All this money sloshing around is likely to find its way to the stock market as we all wait for the global economic re-awakening, hopefully coming soon this summer.

We will continue to evaluate your portfolio's positions and the general market while applying one of our basic investing tenants. "Sell your losers and let your winners run!"

There are simply too many good stocks to choose from to continue to hold a loser.

The Valentine's Day Barometer

Listening to CNBC on Friday, I was introduced to the "Valentine Market Indicator." Being someone who loves quirky stock market anomalies, it certainly caught my attention.

According to guest Ryan Detrick, if you are up 4% for the year on Valentine's Day for the S&P 500 (which we are), the rest of the year will be higher over 90% of the time with a 13% average.

Remember, these anomalies are exciting, but they are in the past, which does not always repeat itself.

However, this barometer comes simultaneously with a move toward a reopening of the economy as more and more Americans are vaccinated. New vaccines are on the way and still being developed as coronavirus cases are in decline. This news alone can propel the market higher.

Vaccination progress is not the only reason for optimism.

The Federal Reserve continues its low-interest-rate policy, and another round of stimulus, potentially $1.9 Trillion, along with possibly an infrastructure spending of billons is on the horizon.

The stock market has many reasons to think the "Bull Market" that started less than a year ago can keep rolling – Sit Back and Enjoy the Ride for However Long it Lasts!

As always, we are here for any questions you may have. Do not hesitate to call!

Enjoy Presidents Day, and have a great week!

(sources: all index return data from Yahoo Finance; Reuters, Barron's, Wall St Journal, Bloomberg.com, ft.com, guggenheimpartners.com, zerohedge.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics Canada, Yahoo! Finance, www.stocksandnews.com, www.chaikinanalytics.com Chaikin Analytics, www.marketwatch.com, www.BBC.com, www.361capital.com, www.pensionpartners.com, www.cnbc.com, www.FactSet.com, W E Sherman & Co, LLC)
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