Soaring bull market stings the bear


First of all, this week’s commentary should not be taken to suggest that we are saying that stocks will rise forever. We’re also not saying stocks are immune to a pullback in the last four months of 2021. Corrections are an integral part of investing and the S&P 500 has yet to fall 5. % so far this year, which is happening on average. three times a year. However, we remain resolutely bullish, and this week we want to explore five things that some bears say we don’t worry about.

Bearish argument # 1: stocks have gone too far, too fast
2021 has been an incredible year for stocks, with the S&P 500 up about 20% for the year without a 5% decline. In addition, it has so far reached 52 new all-time highs. To put in context how rare this is, only 1964 and 1995 saw more than 50 new highs before the end of August. In fact, the all-time record for new highs in one year is 77, set in 1995, and this year is on the verge of getting closer to that record.

What should investors do now? One of the common concerns of bears is that stocks will go up a lot, which means stocks will go down a lot. Fortunately, this is just not true. In fact, as Figure 1 shows, when the S&P 500 is up more than 15% from the start of the year to the end of August (as 2021 likely will be), the last four months have been up for the last five, with the last three up 9.6%, 7.9% and 10.4%, respectively. In fact, the average return for the last four months after a good start to the year is 4.2%, with a very impressive median return of 5.2%. Both digits are above average and the median return for all years in the past four months is 3.6%.

Bear argument # 2: solid gains are due to easy comps
The remarkable economic recovery, aided by the stimulus measures, after the rapid but severe pandemic recession of 2020, paved the way for a tremendous increase in profits that has continued for a year now. And it’s true that a good chunk of that growth was due to lockdowns in the quarter of last year, boosting the rate of growth. But that’s not the whole story, not even close. Our S&P 500 earnings per share (EPS) estimate for 2021 is now $ 205, up 46% from $ 140 in 2020 and, even more impressive, 26% above the d level. ‘before the $ 163 pandemic in 2019. These earnings gains have kept stocks from getting more expensive this year, as the S&P 500 price-to-earnings ratio has remained stable despite the index’s 20% gain since the beginning of the year.

In our overview of second quarter results, we asked the question, “Is this as good as it gets?” The answer is almost certainly yes, as the 90% growth rate in the second quarter is unlikely to be duplicated for a long time. However, we expect earnings growth at a very strong pace of over 20% in the third and fourth quarters. Companies have generally provided an optimistic outlook during the earnings season, with 58% of the forecast being positive over the 5-year average of 37%, which we believe increases the likelihood of better-than-expected results for the next or so. the next two quarters. We cannot entirely rule out risks, including the Delta variant, supply chain disruptions and inflationary pressures, especially wages. But we expect the efficiency of U.S. companies and the strength of the reopening to continue to push earnings up and lead to further gains for stocks over the remainder of 2021.

Bearish argument # 3: cyclical stocks signal a warning
It is true that cyclical stocks have significantly underperformed the market in recent months. The Dow Jones Transportation Average peaked in early May, as areas like banking and small caps have moved sideways for even longer. However, the context of these movements is lost when looking only at recent performances. All of these sectors and asset classes have seen sideways action after historic runs in Q4 2020 earlier this year. However, despite the recent underperformance, all of these groups remain above the upward 200-day moving averages, a sign that the uptrends are firmly intact.

We believe the recent underperformance is simply due to extreme overbought conditions, but these conditions are bullish in the long term. But perhaps more importantly, we are seeing signs that this underperformance may come to an end. Small caps outperformed large ones the most since March last week. Banks have expanded to new highs, and airlines, which have been one of the biggest dragging downs to transportation in recent months, are actually up 8% in the past six weeks despite fears surrounding Delta.

The final variable to watch may be interest rates, which are highly correlated with cyclical outperformance and small caps. We believe the yield on 10-year Treasuries has bottomed out and should continue to rise until the end of the year.

Bear Argument # 4: A tantrum is coming
According to recent investor surveys, equity and fixed income investors are worried about a possible “taper tantrum” when the Federal Reserve (Fed) begins to scale back its bond buying programs. As a reminder, in 2013, Fed Chairman Ben Bernanke casually mentioned that the Fed would start cutting (tapping) its bond buying programs in the coming months. His comments surprised equity and fixed income investors and both markets reacted negatively, although equity markets continued to return 30% for the year. While we are in a similar situation today with the Fed ready to announce its intention to cut its bond buying programs, the markets have no reason to be surprised. The Fed has been communicating for several months its intention to reduce its bond purchases over time. Markets should be well prepared at this point, as the Fed learned the lesson of 2013 and did a much better job of communicating its intentions.

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