Market Pulse: The Roaring 20s?
Special to the Tribune
The market is off to a good start in 2021, even rising as the chaos at the Capitol unfolded. The rise is being called “The Everything Rally” because almost all sectors rose from their March lows, never mind earnings or prospects. Never mind valuations.
More and more there is talk of this decade being very much like one a century ago (except, thankfully, for prohibition). After World War I and the Spanish flu pandemic, Americans and people across the globe were ready to spend, buy, invest and even speculate. Businesses did their part as well. What a time. But it didn’t end well.
We learned a few things. First, that a trade war with rising tariffs (Smoot-Hawley) shouldn’t be repeated. That turned a recession into a depression. We also learned that shrinking the money supply as the economy weakened after the 1929 crash and into the ’30s was exactly the wrong approach. Now we do the opposite. Do we ever. Still, there are enough parallels to warrant caution and some concern. The degree to which speculation is growing is one.
If you watch CNBC early you’ll see trades in vehicles (SPACs) you’ve never seen before. Pure speculation. Not a good sign. The valuation levels alone should be cause for concern, not for many stocks, including industrials, banks and energy companies, but for some of the large tech companies. The same is true for IPOs, most of which have attracted a great deal of interest unrelated to company finances or realistic earnings prospects.
All that said, investors anticipate a strengthening economy thanks to the vaccines, stimulus, the Fed, and inventory rebuilding and with it rising profits. What could be a better environment for stocks? It seems I’ve been typing that sentence regularly since last spring. It was true then, it is true now. When will it not be true? Maybe rising inflation and with it higher interest rates and better alternatives to stocks will change the outlook. I suspect so. But when?
Bond investors see what’s coming and are reacting quickly. More spending means larger deficits in the trillions and increasing demands for credit from the Treasury and the private sector as the economy enjoys its short-term boost.
The yield on the 10-year Treasury is 1.09%, more than double its 2020 low, but not tempting. Income investors and savers have suffered for years due to low rates. That is about to change.
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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