More Volatility Ahead But Not Necessarily a Correction
“Stock prices have reached what looks like a permanently high plateau.” – Irving Fisher, 1929
Last week was moderately volatile in markets but the net result wasn’t much as the S&P 500 saw a small decline, and I think last week was a good representation of the current macroeconomic set up, one that likely brings more volatility but not necessarily any meaningful declines.
Last week I stated that, after a year of constantly digesting positive events (Fed backstopping everything, CARES Act, electoral clarity, second stimulus, third stimulus, vaccination progress) the markets are transitioning to a new paradigm where 1) There isn’t a majorly positive event looming every three months, and 2) Some of the stimulus etc. will be dialed back, and that transition will be a process of starts and stops, and it likely will cause more volatility. And we got a taste of that last week.
General inflation fears are a headwind on stocks, and they will be until it becomes clear that inflation is a temporary phenomenon. Similarly, the Fed will have to transition to tapering of quantitative easing (QE), and how that transition is handled will go a long way to deciding whether the next 300 points in the S&P 500 are up, or down. Finally, after having that constant stream of “good” news to push stocks higher, we’re seeing a market that is in search of a positive catalyst to send the S&P 500 to 4400-4500, and right now there’s not an easily identifiable candidate.
But while those are legitimate concerns, the fact remains there are powerfully supportive forces for stocks still very much in play. The economy is roaring, and corporate earnings are breaking records. Consumers’ personal balance sheets are very strong (which makes this very, very different from other recoveries and makes this almost like a “post war” recovery), meanwhile the Fed is keeping rates low for years into the future and likely will not reduce QE until very late in 2021 or early 2022. That set up is very supportive of stocks, so while there are uncertainties and unknowns, support for stocks at these levels remains very strong.
As such, I continue to view the next several months as more volatile than we are used to, but volatility does not necessarily mean corrections. If these fundamentally positive supports for stocks are in place, and we do not have 1) Evidence that implies the Fed is getting behind the curve on inflation, 2) The Fed make a policy mistake (tapering too soon, or not soon enough) and 3) A resurgence in COVID, then the risk of a major decline in stocks remains generally low.
Now, we are still lacking a positive catalyst, but given the generally reduced downside risks I continue to think it makes sense to essentially “hold” in stocks and weather any uptick in volatility, using dips in cyclicals and value to add exposure and create a more balanced investment portfolio. As I have been preaching since November of 2020, these sectors are financials, banks, industrials, infrastructure, natural resources, materials, and commodities. I am not advocating against all tech. My preference for tech has been more towards “old tech” such as (FB/ AAPL/AMZN/NFLX/GOOGL/MSFT) - longer term investors don't often get the chance to buy these names at their current discounted multiples. I am not a fan of “next gen” tech/momentum (high growth, high return potential, but minimal earnings).
When it comes to investing, I consider myself a weatherman. I can’t tell you if you’re going to get into a car accident, but I can tell you when conditions are suggesting you should slow down.
“The one fact pertaining to all conditions is that they will change.” – Charles Dow, 1900
Yes, things can go wrong (as I listed above) but we will be watching for them, every day, and if it looks like things are going sideways, we will make the appropriate moves for you. Until then, expect a more volatile market—but at this point strong policy support for stocks remains very much in place, and that is a good thing.
As always, if you have any questions, please reach out to me directly.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President