The Bull Market Continues

By: Andrew T. Gardener, CFP®

 

We entered into this year expecting a stronger economy and healthy stock market, but even we are surprised at just how resilient things have been. Earnings help drive long-term stock gains, and what we’ve seen from earnings so far in 2021 is a big reason stock returns have been so impressive. A record-breaking second-quarter earnings season saw more than 86% of S&P 500 companies beat their consensus earnings estimates, the highest ever recorded and well above the 75% five-year average. S&P 500 earnings are now 26% above pre-COVID-19 levels based on the 2021 consensus estimate, helping to justify stocks at current levels. Another reason stocks have been so strong is Federal Reserve (Fed) monetary policies. The Fed is expected to begin to taper its monthly bond purchases (currently $120 billion), but it appears to be committed to leaving rates low for the foreseeable future. The Fed likely won’t consider increasing rates until the employment picture improves significantly, and it will be leery of quickly removing stimulus after the deepest recession of our lifetimes, especially if COVID-19 is still influencing behavior. We believe this historic Fed accommodation will continue to be a tailwind for equities. Worries are adding up though, even as stocks hit new highs. Supply chain disruptions are contributing to higher input prices in select industries. The highly contagious Delta variant has nearly 100,000 Americans nationwide currently hospitalized. And, China’s regulatory crackdowns could lead to further bouts of volatility. As a result, domestic consumer confidence has taken a hit recently, which could lead to a weaker-than-expected third quarter for the U.S. economy. However, if Delta concerns ease, any consumption that is lost in the third quarter will likely be made up in the fourth quarter. Additionally, late summer through early fall has historically been a seasonally volatile period for stocks. Although stocks shook off the traditionally weak August, September is upon us—and this month is historically the worst of the year for stock returns. Not to mention October is historically the most volatile month of the year for stocks. Also, the second year of a bull market has often seen stocks pull back after big gains in year one. Looking ahead to the final months of the year, we remain positive on stocks and the U.S. economy. However, stocks haven’t pulled back 5% for nearly a year, and we would not be surprised by seasonal volatility, aiming to use it as an opportunity when stocks go on sale. The stock market is the one place where buyers often go on strike when prices are on sale. While we don’t attempt to time the market, our “Honolulu Strategy” is designed to anticipate the very volatility that creates those sales and take advantage of them. If you have any questions or would like more information, feel free to contact us at your convenience.

 

Written by: Andrew T. Gardener, CFP® and David C. Stuyck