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Tags: stocks | summer | rally | growth

Saddle Up for a Summer Rally in the Stock Market

Saddle Up for a Summer Rally in the Stock Market

Peter Morici By Thursday, 17 June 2021 09:51 AM EDT Current | Bio | Archive

Brace for a summer rally.

Even with stocks pushing new records and the Federal Reserve under pressure from inflation to push up interest rates, the outlook for corporate profits is strong and that will overwhelm the pessimism among a chorus of experts.

COVID-19 shutdowns caused the most dramatic economic contraction since the Great Depression but in 2020, the Federal Reserve printed $3.1 trillion to effectively finance stimulus payments and aid to small businesses and the unemployed, and to shore up state and corporate finances.

Ordinary investors piled in

Ordinary investors remained sanguine. After the market tumbled 34% with the onset of COVID, many ordinary folks—enabled by commission-free trading pioneered by Robinhood—became investors and others piled up record sums in tax-sheltered retirement vehicles.

Since March of last year, the S&P 500 has rebounded about 90% but how that happened in an economy that lost 22 million jobs and is still 10 million below pre-COVID trend owes a lot to the peculiar nature of the COVID recession.

In large measure, permanent business closures were concentrated among small enterprises. Healthy corporations were able to curtail investments to build cash buffers. Rock-bottom interest rates permitted firms rendered to junk status, such as Ford, to raise funds in bond markets.

The private economy proved surprisingly adaptable.

Zooming and other cloud software replaced business travel and daily commutes with the potential historic significance that the Gutenberg printing press displaced the monk’s quill. Hybrid office-home work arrangements will become more the norm after the pandemic is behind us.

As restaurants, stores and other businesses reopened, encouraging stories abounded about American companies pouring billions into the next generation’s technologies. Consider electric-vehicle startups such as Tesla and Rivian, Amazon’s Cloud revolution, Apple’s call for engineers to literally invent 6G internet technology, and Alphabet’s, Apple’s and GM’s investments in artificial intelligence for autonomous driving.

Profits surging

With the vaccines’ rollout a dramatic success, economic growth and corporate profits are now surging. The ordinary investor—the same guy who routed professional short sellers in the GameStop saga—anticipated all this and poured money into stocks for big gains.

They had few other choices. Treasury securities, CDs and money-market funds sported negative real yields, and the important thing to remember is that calculus still applies.

Should the Fed curtail its $120 billion in monthly bond purchases or raise the federal funds rate, the 10-year Treasury rate could rise to 2.5%. That’s still on the low-end of the historical range and only in line with expected inflation.

Government bonds, high-quality corporate debt and CDs will pay ordinary folks very little or nothing after adjusting for expected inflation—and negative rates after they pay income taxes. But equities still offer ordinary folks the opportunity for returns that outrun inflation.

61% growth

Don’t be fooled by today’s frothy valuations.

The S&P 500 is currently selling for about 45 times current earnings—well above the 25-year average of 26—but profits are accelerating at a torrid pace and those have yet to hit the scoreboard.

Second-quarter earnings, which will be reported in July and August, are expected to surge 61%. That would lower the S&P 500 price-earnings ratio to 25—a bit below the 25-year average. That implies an equivalent interest rate of about 4%—well above the likely 10-year Treasury rate even if the Fed tightens monetary policy.

Those returns make stocks look like a bargain and a safe haven if investors’ personal circumstances permit them to ride out year-to-year turbulence and invest for five years or longer—specifically, their retirement nest eggs and college funds.

For the adventurous, bitcoin may appear to replace gold as the inflation hedge and political-risk asset of choice but like gold, it exhibits a great deal of volatility. Much higher transactions fees than credit and debit cards and IRS tax rules that force capital-gains calculations for each purchase make it virtually useless for day-to-day shopping. And cryptocurrencies likely face increased government regulation.

Picking winners among stocks is tough in an economy quickly shifting in the composition of goods and services people buy and with technological edges among companies rapidly shifting.

The outlook for profits in the second half of this year and into the next remains strong. Ordinary investors would still do well to set aside enough cash for emergencies and put long-term savings into an S&P 500 or broader index fund.

Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.

© 2022 Newsmax Finance. All rights reserved.

Brace for a summer rally.Even with stocks pushing new records and the Federal Reserve under pressure from inflation to push up interest rates, the outlook for corporate profits is strong and that will overwhelm the pessimism among a chorus of experts.COVID-19 shutdowns...
stocks, summer, rally, growth
Thursday, 17 June 2021 09:51 AM
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