Market pulse: Here we go again
Special to the Tribune
A week or more of profit-taking followed by a quick recovery. Sound familiar? It’s a bull market.
It’s a case primarily based on economic and earnings growth, as at their core all bull markets are. The outlook is improving. Still, many investors are becoming increasingly concerned about rising interest rates and inflation, and with reasons.
Some stocks had run too far, too fast, and were grossly overpriced, but not most, and many of those that were briefly in vogue made a fast u-turn. The most speculative stocks (electric vehicle plays, marijuana stocks, SPACs, etc.) suffered the most. Taking some speculation out of the market now and then is a good thing. Reducing the extreme valuations of some big-cap tech stocks is also good. Technology heavy Nasdaq led the market for two years. Three straight years of outperformance would be very rate.
Relatively small companies in the Russell 2000 have been among the best. They are under-followed on Wall Street and under-owned by institutions. Many are also so-called “re-opening” plays that would benefit far more than others as the economy returns to pre-COVID conditions.
Other re-opening plays include restaurants, hotels, airlines, cruise lines and anything travel related. Value stocks have led the way. Those include financial and energy issues, the former because interest rate margins are widening, the latter because crude is up and global demand for oil will increase as economies grow.
The improving economic data bulls have been anticipating has arrived. The Atlanta Fed sees 10% growth in the first quarter on the heels of a surge in personal income.
The year is shaping up very well, but the best is yet to come thanks to fiscal stimulus of $1.9 trillion, the Fed’s easy money policy, plus pent-up demand. Argue if you will on whether we need that much stimulus, it will happen and investors should be invested accordingly.
As for the market, growing optimism for the economy and with it profits is linked to the improving outlook on the virus front. That is the good news.
The worst case was priced into stocks last year until the bottom in March, then investors began to change. They are now focused on value stocks, not growth, and that should serve us well provided interest rates do not continue to rise at the present pace.
It is too early to say Powell is making a huge policy error by keeping rates near zero. If he is, both stock and bond investors will pay the price. We may soon see.
David Vomund is an Incline Village-based Independent Investment Advisor. 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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