May 12th saw heavy selling in the markets. While many media pundits piled on during the decline, some perspective is needed. Currently the markets are down roughly 5% from the highs of the S&P 500 and less than 8% from the Nasdaq’s highs, not even a correction (10%) so far. Additionally, we had worse declines in the beginning of September and then again in October 2020 (roughly 10% & 8% respectively for the S&P500 and 14% & 10% respectively for the Nasdaq 100). And I do not see this current environment as something worse than then.
While it is never comfortable to see something you own drop in value, it is normal occurrence in the markets. Over the past 31 years it has been proven to me time and again that everyone loves a sale except when it happens in the stock market. Sure, people always say, “I wish I had bought when it was down.” But are emotions override our plans all to often. I come across people all the time who sold after a big decline and then missed out on the subsequent rally, only to buy back in higher than they got out. Therefore, all too often the average investor realized returns are less than the market averages in study after study during the past 4 decades. Since 2008 we have been steadily littered with prognosis of doom and gloom and the impending “even-worse-crash”. I cannot know for sure if this time is the beginning of a horrific crash or just another short-term sell-off. But I do know that asset values have been inflated by mind-blowing government stimulus that’s not over. Remember we still have around $1trillion (yes with a ‘T”) left from the last stimulus package passed during President Trump’s term, plus the $1.9 trillion passed so far during Pres. Biden’s term that has not even entered the system yet. Plus, we still have the yet to be determined infrastructure package being bandied about. Folks, our GDP is roughly $21.5 Trillion total per the 2020 US Commerce Bureau of Economic Analysis, and we are still looking at another $2.9 trillion PLUS being injected into the system. That is a lot of dry powder yet that can drive stock values higher. Also, further release of pent-up spending by consumers and corporations as Covid-19 threat settles down seems likely. Meanwhile, remember that many companies recently announced earnings ahead of estimates and raised their forecasts.
So why did markets sell off amidst this good news? The primary answer to me is the same as has been much of my 33 year career: fear of interest rate changes. We are seeing some inflation currently. That’s expected to me with higher liquidity (demand) than we had pre-Covid coupled with manufacturing logistics (supply) still less than pre-covid levels.
I believe that we have been in the shadow of deflation for so long that we have forgot that some inflation is good. I cannot tell you how many ‘doom & gloomers’ scream hyper-inflation at me daily for that past 12 years. Not long ago we were worried that we were going into deflation for goodness sakes. Japan has printed money like no economy in history and yet still has stagnation.
I’m not saying that we should keep a watchful eye on inflationary pressures or other pending hurdles (e.g., legislative) but for the near term there is too much liquidity being force fed into the markets, earnings and forecasts remain robust, valuations are becoming attractive again for many investments that were overheated previously.
Over the past month I have shared with many clients with whom I’ve spoken, that I believed it was likely to see a sell off as earnings season ended and that if that happens, it would be a buying opportunity to me (barring US military action). To me this is another pullback as earnings wind down for this quarter. I think markets could be range bound over the summer before setting up another rally possibly in the fall with favorable year over year comps for many companies. If the stock market is a party, then the government stimulus keeps restocking the bar and food for it. Next year is when I worry, not this year. Thus, l aim to continue to use near term selloffs to acquire quality upside potential to try to use fear to my advantage and try to make hay while the sun is shing this year. As I say all the time: using emotions with investing is like drinking and driving: a horrible mix.
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I remain grateful to work for you as your advisor and I wish you a blessed weekend ahead.
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