Market Pulse: Believers
Special to the Tribune
By two measures — S&P 500 and Nasdaq (both heavy in FANG stocks) — the market is setting new highs week after week, never mind inflation, the COVID Delta variant, potential rate increases and high valuations. People want to own stocks. They believe.
Investing is all about future earnings, and we are seeing very strong profits in the second quarter and for the year. Anticipation of such growth in a low-rate environment has been driving stocks for months, that plus a lack of attractive alternatives.
Revenues and profits are growing as the global economy rebounds. GDP grew at an annual rate of 6.5% in the second quarter and exceeded its pre-pandemic size.
In a bull market unexpected and sometimes negative news is often greeted with indiscriminate selling. We saw that briefly two weeks ago when just a hint of possible higher rates down the road unsettled investors. In knee-jerk fashion investors (more accurately traders) saw a rise in interest rates as a negative no matter how small, no matter the level.
The data on inflation are cause for concern and will be for a while, but prices for many commodities peaked a while ago and have fallen. Even so, by the Fed’s preferred inflation metric (PCE) prices rose 3.4% in a year, the largest increase since 1992.
While Powell may be right about the rise in inflation being transitory, and I still give him the benefit of the doubt on that, how long is transitory? A quarter? A year? Two? No one says. In some cases price increases may not be transitory at all. It is a lot easier to increase wages than to cut them.
For most families, whether they own or rent, the single largest item in their budget is for housing, and prices and associated costs for houses and rentals have soared. Economists in and out of government and academia can dwell on macro data and prices, but in the real world where Americans pay rent and make mortgage payments they are hurting.
As for the market, I can still make a bull case today even with the clear headwinds I mentioned, including inflation, a surge in COVID cases, high valuations and perhaps rising rates among them. Trillions more in federal spending and the additional debt that will come with it loom large. Call that political risk, and it’s significant, maybe the main risk. I’d like to think it will be transitory. I’d like to.
David Vomund is an Incline Village-based Independent Investment Adviser. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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