It’s not easy … but it doesn’t have to be complicated

DJIA:  34,060

It’s not easy … but it doesn’t have to be complicated.  From the lows this year the most important technical tool may well have been a ruler.  All you had to do was draw a line under the S&P lows, and follow the bouncing ball.  Another simple approach to trend analysis might have been to watch the number of advancing and declining stocks.  The market is about supply and demand.  As supply begins to outstrip demand, fewer and fewer stocks advance.  The large-cap stocks that drive the averages continue up, the ranks of the average stock begin to diminish.  It may continue a bull market in the averages, but not so in most stocks.  Rather than think of the Advance-Decline index as just some technical indicator, think of it in terms of supply and demand.  When there are 2000-2500 advancing stocks most days, that takes money.  When there’s still that kind of money out there, the uptrend should continue.

It’s only human nature to worry about a market up this much, and to look for problems.  We are as guilty as anyone, including a recent concern about the defensive parts of the market suddenly taking the lead.  How often do you hear “overbought” or “extended,” a 10% correction would be healthy?  We get the point here, but losing 10% has never made us feel particularly healthy.  It has been the kind of market where the simple stuff has worked so well, most of the complicated technical stuff has not.  Out of 22 technical trading strategies followed by Bloomberg, only seven have shown a profit in 2021, among the lowest in 25 years.  Bloomberg notes, “It’s testament to the straight up trajectory of stocks that virtually all signals that told investors to do anything but buy have done them a disservice this year.”  So there, you technical so and so‘s.  Every sunken ship had a chart room.  Then, too, that could’ve been about the guy reading those charts.

All of this, of course, misses what might be the most salient feature of the market this year, the rotation.  It wasn’t hard to just buy and hold the market this year, but it was hard to just buy and hold almost any group.  The FANG stocks have outperformed recently, for example, but this after a few months where they pretty much just yawned.  Solar was one of the best groups early in the year, but has suffered since February.  The same might be said of the software stocks, at least until recently.  It may not have been complicated, but it hasn’t been easy.  Easy has been buying the S&P.  Recently there were 85% of S&P components above their 50 day, while only 50% of the NASDAQ and Russell 2000 components were above their 50 day.  That makes it hard to beat the S&P without owning it.

All this having been said, there’s little question that where you’re in the market can be as important as whether you’re in.  To speak generally, we still favor the re-open stocks, the commodities and industrials.  Copper had a great week and got all the attention, but Steel was just as good and there are many of them.  Relevant ETFs here are COPX (41), SLX (61), XLI (103), XLB (84) and PAVE (26).  They don’t have the volatility of Tech but, hey, they’re in uptrends.  Fans of low price stocks that we are, Wednesday’s pickup in the energy sector caught our attention.  There are many of these which might help explain Wednesday’s unusual configuration – the Dow down 165 with 700 net advancing issues.  Of course, Microsoft (253) didn’t help the Dow.  The stock market has its own logic and oil can have many influences. Still, oil seems an obvious re-open play.  We would also note the improvement in precious metals.

Last Thursday afternoon the Dow dropped some 300 points and there were almost 900 net declining issues.  The tax news was hardly a surprise, but the announcement timing was.  Weakness isn’t a problem, it happens.  The problem is when weak rallies follow.  The next day saw the Dow rally 200 points, with a net of some 2200 advancing issues.  That’s not the weak rally about which we worry.  Meanwhile, we confess to a knee-jerk negative reaction to the market’s poor response to some seemingly good earnings numbers.  If, as we strongly believe, it’s the market that makes the news, in a good market good news should be treated as such.  The answer may be simple – the numbers we’re seeing are why the stocks are where they are.  The numbers, in a sense, are just catching up to price.  These poor responses, by the way, pretty much are confined to Tech, which no longer seems the real leadership. They’re selling on the news to move to the cyclicals/commodities?

Frank D. Gretz

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Some Uncertainty On The Horizon

While stocks advanced in the first quarter, the market has clearly changed its tone. Last year’s theme was quality growth, but as the economy has started to recover, investors’ attention has shifted to more cyclical investments, only to be followed by almost daily rotation between these two groups. We get the sense that there is some uneasiness about the future, and the markets may be starting to fear policy errors coming from Washington D.C.

To be sure, the immediate future seems bright. As Q1 2021 reported earnings get underway, it would appear that S&P 500 earnings per share growth will again outpace end-of-quarter estimates, as it has done in 36 of the last 37 quarters. Consensus is for 31.5% year-over-year growth, nearly double the gains predicted at the start of the year. The New York Fed also reported that consumers are more upbeat about spending. The median expected growth in household spending rose to 4.73%, the highest since December 2019. In addition, fewer and fewer companies are reporting poor sales as their single most important problem—a measure that is at its lowest since the start of the pandemic, and equal to where it was in March 2019.

As the pandemic is still ongoing, parts of the global economy continue to face renewed lockdowns. But the end game still appears to be the availability of effective vaccines, which would in turn allow most, and perhaps eventually all, of the economy to reopen.

Against this backdrop, inflation is increasing. Pipeline inflation pressures have been building in PPI readings. The U.S. CPI rose 0.6% month-over-month in March, with the core up 0.3%. Thus far, while outsized increases in U.S. inflation look tied to re-openings, we cannot be sure of this correlation. The Central Bank remains committed to an easy monetary policy as its focus is on unemployment and under-employment, rather than price stability.  The more 0.3%-or-higher readings we see, however, the harder this posture will be to maintain.

Earlier this year, the new presidential administration proposed, and the legislature passed, the largest spending bill in our country’s history, in the name of COVID relief. Now it would appear that $3.5 trillion of additional spending will be proposed, in the name of infrastructure improvements. This beacon of effort, however, will be accompanied by large tax increases on both individuals and corporations. The major problem is that the spending will be spread out over several years, while the tax increases would start immediately in 2022. This could affect the economy negatively at the same time that inflation is accelerating.

We are fundamentally bullish on the markets’ outlook, but with the increase in volatility, suspect investors are beginning to realize there may be some disconnects in the rosy forecasts. Positioning parts of the portfolio for an inflationary environment is prudent. However, even if inflation fears accelerate, certain corners of the equity market remain preferable to bonds. Indeed, some caution may be in order.

                                                                                                              April 2021

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US Strategy Weekly: American Families Plan and Housing

Monetary and fiscal policy will be in the spotlight this week. The FOMC meets Tuesday and Wednesday but no significant changes in monetary policy are expected. Federal Reserve Chairman Jerome Powell’s Wednesday afternoon statement will be followed by President Joe Biden’s first major address later that evening. Biden’s first appearance to a joint Congress takes place on the eve of his 100th day in office. Although newly inaugurated presidents typically address a joint Congress a month after they are inaugurated in January, this administration delayed the address to April due to “complications with the ongoing coronavirus pandemic.”

American Families Plan

Biden’s address will be widely covered, not only because it is his first major speech, but because it will highlight the administration’s American Families Plan, which the financial media expects will detail a $1.8 trillion spending and tax plan. President Biden may focus more on the hundreds of billions of dollars itemized for national childcare, prekindergarten, paid family leave, tuition-free community colleges, subsidies for the Affordable Care Act and other domestic programs. But Wall Street will be listening to hear how this plan will be funded. Most expect about a half-dozen tax hikes on high-income Americans and investors and many of the proposed changes are already eliciting fierce opposition in Congress and on Wall Street.

Keep in mind that this proposal represents the second part of Biden’s “Build Back Better” agenda, and it follows the $2.3 trillion jobs and manufacturing proposal the White House released a few weeks ago. If one includes Biden’s American Rescue Plan Act of 2021, a $1.9 trillion stimulus package which was passed in early March, the three plans total approximately $6 trillion in new spending and would be one of the most ambitious government overhauls of the economy since the Johnson administration.

Capital Gains Tax Hikes

Gathering the most attention and controversy about how the American Families Plan will be financed is the proposed capital gains tax. To finance the proposed spending, the administration hopes to raise the capital gains tax rate for people making more than $1 million from 20% to 39.6%. Note that the Affordable Care Act includes a 3.8% surtax on all capital gains. This would still be in force and would push the real capital gains tax rate to 43.4%. If passed, it would translate into the highest maximum capital gains tax rate in history. See page 3. Unfortunately, what some politicians fail to grasp is that raising the capital gains tax rate rarely, if ever, generates the tax revenue that is predicted. The reason is that tax laws change people’s behavior. Raising the capital gains tax rate may prove to be a boon for tax lawyers and accountants since they will find ways for clients to avoid taxes. Investors will invariably change their investment strategy, shift assets to trusts or move assets out of the US. As a reminder, when the tax laws changed and only made mortgage interest payments tax deductible, investors borrowed against their home to fund colleges, autos, home improvement and other personal loans. Government officials fail to understand this change in behavior. Projected revenue from a tax policy change will rarely be a straight line.

Moreover, a hike in the capital gains tax rate is always bad for stockholders. The reason is that a higher capital gains tax changes the risk-reward ratio for investors, in a negative way. The 39.6% would be the highest rate on capital gains in any global country and this would have a negative impact on foreign investment in the US. This means those who do not make $1 million or more will still be hurt by this potential tax hike. However, most strategists do not believe the bill will pass as proposed. We hope this proves correct.

Housing is On a Roll

March housing data was strong. Although still below the peaks recorded in November 2020, the National Association of Homebuilders’ single-family housing sentiment was generally higher in March. Traffic was the most improved segment of the survey at 75 versus 72 in February. Both new residential permits and housing starts rose in March on a month-over-month and year-over-year basis. Permits hit a record high in January; housing starts reached a record high in March 2021. See page 4. Housing received a big boost in 2020 from fiscal stimulus and stay-at-home restrictions. The massive fiscal stimulus seen in early in 2020 had a direct impact on median existing home prices. See page 5. Housing inventory is currently low, and this lack of supply will continue to support prices in the coming months. New home sales rose 66.8% YOY from a depressed March 2020 level and prices increased 6% YOY. Single-family existing home sales grew 12.3% YOY and prices jumped 11.8% YOY in March. See page 6. However, homeownership hit a cyclical peak of 67.9% in June 2020 and fell to 65.6% at the end of March. And despite the much-touted mass exodus from the Northeast to Florida, the South had the sharpest decline in homeownership, which fell from 71.1% in June 2020 to 67.4% in March. In the same time frame, Northeast homeownership fell merely 0.2%. See page 7. This decline in US homeownership rates is favorable since it implies there is more future demand for housing.

Earnings on a Roll

The best part of the last week has been first quarter earnings season. Early in the year, Refinitiv IBES consensus estimates were forecasting a 14.5% YOY growth rate for the first quarter, but as earnings season progresses, we have seen estimates rising sharply. IBES now assesses earnings will increase over 35% in the first quarter. To date, 85% of companies reporting first quarter results beat expectations. To date, all energy, healthcare, technology, and communications services companies have beaten their forecasts and have had positive surprise factors of 434%, 15%, 12%, and 8.6%, respectively. In aggregate, companies are reporting earnings that are 23% above estimates, which compares to the long-term average surprise factor of 3.7%. This display of earnings power is providing an excellent foundation to the current rally. 

Technical Indicator Review

There are good points to the market’s technical backdrop, and this includes the new highs in the NYSE cumulative advance-decline line on April 26 and the new high list which is averaging a strong 477 new highs per day. But higher prices do not impress us if volume is not supporting the advance. The 25-day up/down volume oscillator is currently 1.99 (preliminary) and neutral this week despite the new highs in the popular indices in recent sessions. This indicator was last overbought for five consecutive trading days between February 4 and February 10 which is when many momentum indicators peaked. At present, our indicator is revealing that the indices are moving to new highs on lower volume – a sign of diminishing demand. The longer this persists, the more worrisome it becomes. However, we should point out that prior to the March 2000 peak, this oscillator had not generated an overbought reading since November 1998 (17 consecutive days in overbought). This 16-month period of price advances without confirmation from advancing volume predicted a significant decline. At present, we have a 10-week non-confirmation, which is concerning, but not a sign of a bear market. Sentiment is also problematic. The AAII bullish sentiment for April 21 fell 1.1 points to 52.7% and has been above average for 21 weeks. Bearishness fell 4.1 points to 20.5% and is below average for the 11th time this year. Historically, periods of above-average bullishness and below-average bearishness have been followed by below-average 6- and 12-month equity performances. In sum, there is good news in the earnings backdrop, potentially negative news in the political scenario, and a mixed bag in the technical condition of the stock market. In our view, equities are apt to see a 5% to 10% correction in the second quarter – and this would be the healthiest development for investors.

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Give us a lot of money… and we’ll buy you something nice

 DJIA:  33,815

Give us a lot of money… and we’ll buy you something nice.  We’ll buy you something nice but we can’t tell you what it is.  We can’t tell you what it is because we don’t know what it is, yet. Doesn’t that sound like a good deal?  Deals like this are called SPACs.   And they laugh at the dot.coms.  There may be a difference between the SPACs and the dot.coms but they are similar in an important way – speculation.  Speculation is the dark side of this market.  The level of speculation now is what you would expect to see at the terminal stage of a multi-year bull market.  The saving grace is the market’s other side, the momentum side.  Measures like Advance-Declines and the percent of stocks above their 200 day average are those of a new bull market.  Since momentum typically trumps sentiment, and has done so to date, we don’t see any big risk to the uptrend.  More choppiness and rotation, however, does seem likely.

In yet another seeming leadership change, last week‘s best performing group was the utilities.  Or, shall we say, the utilities?  Add to that the staples, see the XLP ETF (70), and big Pharma, see the XLV ETF (123).  Why did the market suddenly go so defensive?  What does the market know the rest of us don’t know?  We can’t exactly point to any numbers here – utilities outperform and the market goes down, or anything like that.  When the market turns defensive it makes us want to be cautious.  It also wasn’t the best of signs last week when most of the banks reported generally better than expected numbers, and yet went nowhere or down.  If it’s the market that makes the news, when good news isn’t good, that isn’t good.  Economically speaking, we all know the second half is supposed to produce blow out numbers.  In the stock market, what we all know isn’t worth knowing – it’s discounted.

Suppose the economy isn’t as good as it looks?  That makes for interesting contrary thinking, but, the price action doesn’t really back that up.  As measured by the various ETF‘s, the Metals and Mining ETF, XME (40), Materials, XLB (82) and Infrastructure, PAVE (26) still act well.  An exception to the strength in commodities has been oil where we are still hopeful.  A little strength here would go a long way.  Meanwhile, gold finally has come to life, ironically as Bitcoin has come to struggle.  Everyone loves Coinbase (295), including Cathie, but the float here we understand is some 56 million shares while there are some 149 million shares outstanding.  We doubt staples are a new leadership just when for most their costs have begun to rise.  Still, you can’t argue with the charts here, or those of the utilities.

Last time we spoke of Tesla (720) as agnostic when it comes to most background noise – vaccines, war and peace, that sort of thing.  This week it appeared agnostic even when it comes to itself – the fatal crash and the China auto show protest.  Then there’s that overriding sort of negative.  Superior though it may be, it’s no longer the only EV game in town.  Ah, but can they send a rocket to space and land it on a dime in the Pacific Ocean?  Success always creates competition, though until this quarter it never seemed to bother Netflix (509).  If it’s not the competition, which is somewhat formidable, maybe it’s the going away of staying at home.  We see Zoom Video (328) as the poster child here, and it has basically been cut in half from his peak last October.  Netflix isn’t nearly as bad, as Wednesday’s weakness only knocked the stock to the lower end of the nine month trading range.  While you don’t want to see it slip below 460 – 480, the lower end of the range, we would rather not sit through the slog back to the upper end either.  We’d rather Tesla there.

Following the Monday and Tuesday weakness, the market came storming back on Wednesday.  The storming part was in terms of those Advance-Declines – 4-to-1 up and close to 2600 net advancing issues.  It’s not weakness that is the worry, it’s the weak rallies that follow, and that was anything but a weak rally.  Wednesday, however, did have a surprisingly negative characteristic.  For the S&P 500, 85% of the components ended above their 50 day average, while for the NASDAQ and Russell there were less than 50%, a historically large divergence.  Things may be changing, but we’re far from anything serious.  Pretty much most days most stocks go up, and that means no big problems.  Thursday afternoon happens when too many are on the complacent side of the boat, and there’s a negative surprise.  There was always going to be a tradeoff between stimulus/infrastructure and taxes.  The market knew that and the market quickly will figure out it knew that, and can live with it.  Thursday just seems more of the recent choppiness.

Frank D. Gretz

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Gap and go, or … gap and go nowhere

DJIA:  33,502

Gap and go, or … gap and go nowhere.  Monday’s low in the S&P futures was 0.5% above the prior day’s close. It then rallied another 0.5%, seemingly a set up to gap-and-go. Like most such patterns, the follow-through has been mediocre at least so far.  Another seeming anomaly was the Monday action of a week ago, which saw the Dow rise about 100 points while only 35% of stocks rose.  When this close to an all-time high, this was the worst configuration in more than 60 years, according to SentimenTrader.com.  The market subsequently was lower both one and two months later.  Recently, the Russell 2000 dropped below its 50 day average for the first time in three months.  When after a five-year high it typically leads to a prolonged period of underperformance, though in this case the index continues to dance around that 50 day.  Then came Thursday a week ago, which saw a 4-to-1 up day in Advance-Declines, numbers we just can’t fight.

While the bull market is the ongoing market story, as much a narrative has been the jockeying for leadership.  Whether it’s correlation or causality time will tell, to coin a phrase, but the stabilization in rates seems to have stopped the bleeding in Tech.  At the quarter’s end, Tech ranked last among the 11 industry sectors.  At some 26%, Tech is the S&P’s biggest weight, making it very unusual for the S&P to rise when Tech trails, let alone runs last.  So, for the market’s sake, stabilization here seems important.  And, of course, not all Tech is equal.  Semi’s trade like they’re re-open stocks, what we’ve called retro Tech, the Cisco’s (52), Intel’s (67) and Oracle’s (75) are having their renaissance.  Oracle lost a legal battle with Google (2251), and both rallied, which pretty much says it all.

Tesla (684) delivered, and then some.  In the first quarter, so the headline read, the company produced just over 180,000 vehicles and delivered nearly 185,000 vehicles.  That’s a pretty good trick.  If they continue to double charge some customers, they could really have a good year.  Rest assured, we’re not here to knock Tesla.  After more than a good run, the stock simply seems to be taking a needed rest.  As it happens, the rest is taking place right on the October uptrend line – funny how that happens.  After some five weeks, the stock seems to be trying to come out of its respite, something close to 750 should do the trick.  That’s the look of the weekly chart – each bar one week.  The daily chart shows a declining 50 day around 730, which could be a bit of resistance.  The daily also shows little volume expansion, and that should change to confirm any breakout

The key to making money in the stock market is to not lose a lot.  You can lose often and, indeed, it’s part of the business.  You just can’t absorb big losses.  Cutting your losses, of course, is something we all talk to talk about, but stocks have their way of doing a Paul Simon, slip sliding away.  You can use a rigid 8–10% rule, but that needs to be adjusted for volatility.  For one of the Bitcoin stocks 8% could be an hour or two.  Moving averages are our preferred stop method, but often they’re not close enough in uptrending stocks to prevent more damage than you might like.  A more esoteric stop is what we call a time stop.  You buy a stock because you think it’s going up.  If it doesn’t go up, at some point you have to say you’re wrong, and sell.  The stock itself may do nothing wrong, but given enough time it probably will.  As much as we like Disney (187), we’ve given it just about enough time.  Here at the 50 day, it is also running out of room.

As suggested above, it’s hard to fight markets that still can generate Advance-Declines of 4-to-1.  The other insight here is that it takes money to generate those days of 2500 net advancing issues.  There’s still money out there – the bull market remains intact.  Still there is some conflict in the technical backdrop. The measures related to momentum and breadth are those seen in the early phases of a bull market.  Measures of sentiment, particularly measures of speculation, are those seen near the end of a multi-year bull market.  As we have suggested many times, momentum trumps sentiment, and so far it has done so.  Then, too, there has been quite a bit of under the surface rotation, and that seems the biggest challenge in the weeks ahead.  Tech won’t go away, but it can underperform. To generalize about the stocks we like, we think of them as the under-owned.

Frank D. Gretz

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On the Alert for Inflation

April 7, 2021

The first quarter of 2021 was a rewarding one for most investors. The Dow Jones Industrial Average rose nearly 8%, the S&P 500 gained about 6% and the Russell 2000 index advanced over 12%. However, the real winner in the first quarter of the year was the Dow Jones Transportation Average which soared a stunning 17%. This stellar performance in the transport sector was in anticipation of COVID-19 vaccinations becoming widely available, of the economy opening up, and of abundant government spending on infrastructure. But in general, the gain in the DJ Transportation Average was a continuation of a shift initiated earlier in the year from growth to economically sensitive stocks. Plus, the action of the first few trading days of April is encouraging and suggests equities could move higher in the second quarter.

The first few months of the year were also good to investment bankers as seen by the number of IPO deals priced, capital raised, and new filings. One hundred new deals were priced, versus the 25 a year earlier. Capital raised hit $39.2 billion versus $6.7 billion in a year earlier and 126 new deals were filed versus the 35 new deals filed in the first quarter of 2020. In fact, the only measure of IPO activity that showed any weakness was the IPO after-market, where prices underperformed the overall equity stock market. This detail could be a sign of fading demand and as such, should be watched carefully in coming months.

The first quarter was also memorable since it introduced investors to GameStop (GME -$77.97), a struggling video game retailer whose price rose 1500% in a matter of days. An investment forum on Reddit called WallStreetBets, led a massive buying spree in GME to oppose hedge funds holding large short positions. It was somewhat of a David versus Goliath anti-establishment movement that demonstrated the changes and hazards social media can wreak on the stock market. GameStop’s stock price soared from $18 at the end of 2020 to a peak of $347.51 on January 27 and is now trading below $200.

The quarter also revealed the existence of a new form of leverage called contracts-for-difference, or CFDs. These swaps were at the center of the collapse of Archegos Capital Management, a family office run like a hedge fund. Archegos borrowed capital from at least five different prime brokers to buy CFDs and held a concentrated portfolio of stocks with leverage estimated to be at least five-to-one. When underlying stock prices fell, Archegos was unable to make its margin calls and brokers sold Archegos’ underlying collateral to avert massive losses. Even so, Credit Suisse expects to take a $4.7 billion hit. But during the chaos, stocks like ViacomCBS (VIAC.O – $43.89) fell 60% from a peak of $100 in early March. In short, the first quarter was a time of rising stock prices, but it was not without its pitfalls.

From an economic perspective the quarter ended on a high note. The March ISM manufacturing index jumped to 64.7, its highest level since the early 1980’s. The ISM nonmanufacturing index surged to 63.7, exceeding its October 2018 record of 60.9. March payrolls grew by 916,000 in March while the job figures for January and February were revised higher. Unit vehicle sales rose to an annualized rate of 18.2 million, the highest since October 2017. These reports were signs that the economy was strengthening in 2021. But there have also been warnings that the recovery was not as uniform as it could be. According to the Wall Street Journal, annual SEC reports filed between July 1 and March 31, showed global employment rose by roughly 370,000 for the 286 S&P companies that filed annual reports. However, Amazon (AMZN – $3279.39) added 500,000 workers around the world, creating nearly as many jobs last year as 136 other companies in the index. This means that job gains in some companies were masking job losses in other companies. This is something to be concerned about. In addition, a Census Bureau study in late March reported that 18% of small businesses stated they would need financial assistance or additional capital in the next six months. These are some of the reasons critics warn that raising tax rates in 2021 would hurt entrepreneurs and US companies competing on a global basis. Supporters of the tax increases, including President Biden, say tax increases will not cool down the economy. We think this latter point is unlikely to prove true.

A number of recent surveys show consumer sentiment is rising but other data suggests there is a steady dependence upon government support. February’s personal income report showed a 7% decline from January’s level due primarily to the waning of government transfers. This drop should reverse dramatically in March, however, there are indications of stress in some households. The percentage of subprime borrowers with outstanding auto loans or leases more than 60 days past due hit 9% in the fourth quarter, the highest quarterly figure since 2005. Clearly, some households have navigated the coronavirus downturn and others have not. Car loans can reveal how riskier borrowers are faring. For subprime borrowers who do not have mortgages or college debt, car loans represent the biggest monthly debt payment. Keep in mind that many subprime borrowers work in restaurants, hotels, and bars hurt badly by Covid-19. Getting back to “normal” is therefore critically important for many small businesses, employees, and households.

We believe it is possible that several events are converging at the start of the second quarter that could be the catalyst for a 5% to 10% correction in coming months. The S&P 500 index has breached the psychological 4000 level which is a positive, but it will be important to see more upward follow through from this level. The SPX 4000 is the equivalent of 20 times 2022 consensus forecasts which now center around $200 a share. In other words, at the SPX 4000 level, stock prices are discounting all the good news expected in the oncoming 21 months. Interestingly, this price point is materializing just as first quarter earnings season begins. For the first time in four earnings seasons, expectations are high for earnings growth. This alone lends itself to the possibility of disappointment. But at this juncture, earnings must continue to beat the consensus forecasts if stocks are to continue to advance. Last but far from least, inflation could be a big threat in 2021. Inflation is pivotal to both monetary policy and to price earnings multiples. We believe there is risk that inflation benchmarks for March could show a CPI over 2% and a PPI greater than 4% and spook the market. If so, this could threaten the consensus view of monetary policy remaining stable through mid-2023. Low inflation and low interest rates have been the foundation of above average PE multiples in several years. If inflation becomes a concern, PE multiples will not expand, but could be at risk of contracting. With the election behind us, vaccines becoming more abundant, states opening up for business, and job growth getting a second wind, we are concerned that most of the good news is already priced in. All in all, we are a bit more cautious today than earlier in the year. 

Gail Dudack, Chief Strategist

strategist@wellingtonshields.com

Disclosure: The information herein has been prepared by Dudack Research Group (“DRG”), a division of Wellington Shields & Co.  The material is based on data from sources considered to be reliable; however, DRG does not guarantee or warrant the accuracy or completeness of the information.   It is published for informational purposes only and should not be used as the primary basis of investment decisions.  Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security.  The opinions and estimates expressed reflect the current judgement of DRG and are subject to change without notice.  Actual results may differ from any forward-looking statements.  This letter is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity.

This communication is intended solely for use by Wellington Shields clients.  The recipient agrees not to forward or copy the information to any other person without the express written consent of DRG.

Copyright © Dudack Research Group, 2021.

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