A headline in the Midwest print edition of The Wall Street Journal on February 9th declared “All Major Indexes Rise to Records.” The article quotes someone from a large global asset management company (one of my past employers, in fact), saying “It’s like your birthday and Christmas on the same day, and the markets are all happy.” Is all this apparent giddiness justified? Frequently mentioned reasons in support of this include healthy, real GDP growth prospects for major economies in 2021 (following negative global growth across the board last year); the possible passage of an economic stimulus package from the Biden Administration, and falling COVID-19 infection rates together with another vaccine potentially coming on stream soon from Johnson & Johnson.
November 9, 2020, was the date that Pfizer and BioNTech announced the results of their COVID-19 vaccine trials. That date is also cited by some analysts as a major turning point in U.S. stock market leadership, away from large growth stocks in favor of value and small cap stocks. The data so far seems to support that notion, with the average small cap stock returning over 51% since that date through February 9, versus the average large cap stock returning “only” 14%. Large cap growth stocks were up 15% compared to small cap value up 61% over that time period. No one knows, of course, if that trend will hold up, but it does seem as if there is a more broad-based market participation in stock returns over the past couple of months.
Like cliff swallows returning to Capistrano (or, if you prefer, turkey vultures to Hinckley, Ohio), whenever popular indexes hit new highs, people inevitably start asking about stock market “bubbles.” Financial journalist Jason Zweig writes: “bubble” has been used indiscriminately by investors to describe any asset they think is overpriced.” We have no problem applying that term to the recent price activity in Gamestop common stock trading (a possible topic for a future blog post). Gamestop notwithstanding, however, we agree with Zweig when he writes: “Reliably identifying and steering clear of bubbles, however, has never been easy and probably never will be – except in hindsight.” Trying to perfectly time the market is a fool’s errand.
As we never tire of repeating, corporate earnings ultimately drive stock market gains in the long run, and earnings have been steadily improving since last year’s pandemic-related earnings recession. According to Factset, 81% of S&P 500 Index companies that have reported fourth quarter 2020 earnings so far have surprised on the upside: “In aggregate, these positive earnings surprises have led to a net $39.2 billion increase in earnings (to $362.5 billion from $323.2 billion) for the index since December 31.” This increase was led by financial and technology companies. Factset expects earnings and revenue growth in the first quarter of 2021 to be robust across all sectors except industrials and energy. One economic data point that bears watching going forward is the level of personal savings in the U.S. As shown in the accompanying chart, consumers are now sitting on $2.4 trillion in savings, after spiking to well over $6 trillion last summer. This is about $1 trillion more than they held pre-pandemic. This represents a lot of potential pent-up demand for goods and services waiting to be unleashed on the economy once things begin to open up again.
As a closing thought, clients would be well advised to remember that equity price volatility has not suddenly gone away in spite of markets being “all happy” at the moment. Experienced investors have learned to expect volatility and drawdowns from time-to-time as the ongoing “cost” of owning stocks and bonds. They have also learned to take a long-term perspective on investing which puts them in the best position to reap the rewards historically offered by the market over long market cycles. So, in the short term, enjoy the party, but keep in mind that eventually someone takes away the punch bowl.
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 WSJ Print Edition 2/9/21
 Source: Morningstar Direct
 The Devil’s Financial Dictionary, by Jason Zweig, Public Affairs, 2015