Market Pulse: 5 good months after pandemic
With every week there are signs that the economy is rebounding faster than expected. Perhaps people were merely too pessimistic, overwhelmed by the initial impact of the new virus.
Recently, the index of home builder sentiment hit a new high at a level not seen in its 35-year history. New home sales rose 36% in July and reached a 13-year high. July’s retail sales totaled $536 billion, an all-time record for a single month. Retail sales were higher than before the COVID-19 pandemic.
Investors who have been focusing on the better days to come post-pandemic have enjoyed five months of higher stock prices. The doubters and naysayers still wonder how this can be happening. They don’t get it. Many believe it is wise to prepare for the worst and hope for the best. That has a nice cliche feel about it, but people who last spring prepared for the worst missed out on a record-setting rally and will miss out on more to come.
Why the rally? Why more to come? Several reasons.
Cash ($5 trillion) is piling up on the sidelines earning nothing and the alternatives to stocks are unattractive. A fear of missing out on the long bull market, especially among hedge fund managers and professionals, will drive more money into stocks. The macro picture will provide a tailwind. After plunging in the second quarter, third-quarter GDP will bounce back sharply (plus 20-25%) and the fourth quarter will be good as well (plus 10-20%). Earnings will rebound, too.
Over the long term stock prices will be determined by future earnings. That is always the case. But in the short term emotions carry the day. Fear and greed are more important than future earnings. For now greed has the upper hand as investors buy big-cap tech and social media companies regardless of their valuations and earnings prospects while they ignore most others.
In the bond market investors are nailing down low yields, encouraged by Fed Chair Powell’s comment that interest rates will stay “ultra low” even after inflation rises or exceeds the Fed’s 2% target. Think years. The Fed only controls short-term rates and I don’t doubt Powell’s commitment, but investors determine long-term rates based on demands for credit and expectations for inflation. Just when they’ll demand a higher interest rate due to rising inflation fears remains to be seen. But someday they will.
David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Consult your financial advisor before purchasing any security.
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