Coronavirus hospitalizations and deaths have been falling throughout 2021, and most health experts agree the worst of the pandemic is now behind us. I think we’re at a point where we can confidently look forward to economic and social ‘normalization,’ with restrictions gradually falling away. I’m bullish, but I’m also cautious.
Let me explain the bullish part first.
For starters, earnings looked really good in Q4. Total Q4 earnings for 482 of 500 S&P 500 companies were up +3.5% year-over-year on +2.9% revenues, with 79.7% beating earnings-per-share (EPS) estimates and 75.5% beating revenue estimates. Think about this earnings comparison for a minute: In Q4 2019, there was no pandemic, and the economy was strong by nearly every measure. Yet even with all of the pandemic-induced destruction, S&P 500 companies still managed to grow year-over-year in Q4 2020. Pretty remarkable.
What’s more, 79.7% represents an above-average proportion of companies beating consensus estimates, and guidance has been positive as well. This favorable guidance has been helping push estimates for the current and coming quarters higher – all good signs. Full-year 2021 earnings for the S&P 500 are expected to be up 28.1% relative to 2020 estimates. In short, earnings season has been very supportive of the ‘economic resurgence’ narrative, and for me it is certainly a bullish driver.1
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Focus on the Fundamentals Instead of Timing the Market!
There are currently many positives in the market, but there are still reasons to be cautious in your decision-making process. Factors, such as, interest rates, investor optimism, and over-supply, could shift the market at any time. So, instead of focusing on short-term choices, I recommend sticking to the fundamentals and maintaining a diversified portfolio.
To help you do this, I am offering all readers our just-released Stock Market Outlook report. This report contains some of our key forecasts to consider such as:
- S&P 500 earnings growth
- Outlook for underlying U.S. economy?
- U.S. returns expectations for 2021
- What produces 2021 optimism?
- Is it time to buy U.S. stocks?
- Update on U.S. fiscal stimulus
- And much more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
IT’S FREE. Download the Just-Released Stock Market Outlook Report2
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Then there are the monetary and fiscal policy drivers, which remain in full accommodative mode. The Federal Reserve used its January meeting to assure investors they will remain in support mode until the labor market shows significant improvement, which is likely to take at least this year but probably longer. The fed funds rate will not move in 2021, and the bond purchase program won’t be tapered without ample warning, in my view.
On the fiscal side, the House of Representatives has already passed a version of the $1.9 trillion American Rescue Plan, which includes another $1,400 in direct stimulus payments, an additional $1,000 child tax credit, and an extension of unemployment benefits to August 29. The sheer size of the bill and the inclusion of direct transfer payments only add to the already massive amounts of liquidity sloshing around in the capital markets.3
What makes me cautious? I’ll focus on three areas: interest rates, too much investor optimism, and over-supply.
Start with interest rates. One of the reasons the stock market has been comfortable trading at such a high multiple, in my view, is the understanding that interest rates would remain “lower for longer.” We know the Federal Reserve is likely to keep short rates anchored to the zero bound, but longer-dated US Treasuries have been marching steadily higher over the last year (see chart below). I’ve written before that as interest rates go up, the “risk premium” – which is the spread between the risk-free rate on Treasuries and the yield on the S&P 500 – shrinks. A narrowing risk premium could mean trouble for high valuation stocks, in my view.
The 10-Year and 30-Year U.S. Treasury Bond Yields: On the Rise
Source: Federal Reserve Bank of St. Louis4
The next cause for caution is investor optimism, or specifically, too much of it. Most readers are aware of the retail trading mania going on, with get-rich-quick storylines popping up every day (mostly on the internet). It’s also true that individual investors opened more than 10 million new brokerage accounts in 2020, which was a record, and margin balances have been steadily rising. Too much optimism is usually bad news for stocks, and I’m cautious in 2021 about investor sentiment creeping towards euphoria.
Finally, there’s the over-supply issue. The number of publicly-traded companies is on the rise after a 20+ year slump. From 1997 to 2017, the number of listed companies dropped from 8,500 to 4,500, spurred by the tech bubble bursting. The tide has been shifting. After modest upticks in 2018 and 2019, the number of listed companies surged by 200 in 2020, and investors expect 2021 to post even bigger increases. “SPACs” are all the rage on Wall Street, as an increasing number of (often risky) start-ups seem eager to raise capital and eschew the regulatory requirements associated with IPOs. When companies are clamoring to issue shares in a hot market, I think that’s generally a foreboding trend.
Bottom Line for Investors
There’s always a push and pull of positive and negative factors to weigh when investing in equities. When I look out at 2021, I see quite a few of both, which to me means the second half of this year could be quite volatile. Even still, I remain confident the economic surge on the other side of this pandemic will be even better than expected, and I think the positive forces in the economy and markets will far outweigh the negative forces.
Preparing for volatility instead of trying to time the market is the key to long-term financial success. To better prepare, you have to focus on key data points and economic indicators that could positively impact your investments in the future. To help guide you, I am offering all readers our Just-Released Stock Market Outlook Report.
This report looks at several factors that are producing optimism right now and contains some of our key forecasts to consider such as:
- S&P 500 earnings growth
- Outlook for underlying U.S. economy?
- U.S. returns expectations for 2021
- What produces 2021 optimism?
- Is it time to buy U.S. stocks?
- Update on U.S. fiscal stimulus
- And much more…
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Black Rock. February 12, 2021. https://www.blackrock.com/us/individual/insights/multi-asset-income-monthly
4 Fred Economic Data. February 26, 2021. https://fred.stlouisfed.org/series/DGS10#0
5 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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