Paulsen's Perspective
It’s “REVAL” Time!
Most bull markets of the last 40 years commenced when company fundamentals and earnings were still declining from a recession. Because of that, valuations often worsen considerably during a fresh bull run as the stock market surges despite continued earnings weakness.
Gold Suggests Only “Transitory” Inflation?
Investors turn to gold when they fear inflation. Therefore, historically, the price of gold has often significantly outpaced other commodity prices “before” the rate of consumer inflation accelerates.
Will Cyclicals Keep Cruising Or Crash?
As the economy recovers from its COVID bust, cyclical stocks have enjoyed a nice run. Based on a geo-weighted index of the primary, economically sensitive sectors comprising the S&P 500 Index—Materials, Industrials, Consumer Discretionary, and Financials—cyclicals have outpaced by +4% this year and close to +10% over the last year, but it has not been uneventful.
A Self-Sustaining Bull
The current Bull Market has so far exhibited an attractive self-sustaining character. The accompanying charts highlight the relative performance of eight distinct investment attributes: Value, Growth, Cyclical, Price Momentum, High Quality, Small Cap, EM, and High Beta. Although each of these has had its day in the sun, no single investment attribute has persistently dominated since the Bull Market began after the March 23, 2020, Bear Market low.
Meet The “Inflation Slayers”
A sustained period of significant inflation is probably the biggest risk facing investors. Signs abound that inflationary pressure is building. The S&P GSCI Commodity Price Index has more than doubled from its lows last April, bond-market breakeven rates have surged this past year (i.e., illustrating bond-investors’ inflation expectations), and both manufacturing and service-sector companies report some of the strongest selling-price flexibility on record.
Sustained SURPRISES!
Last week, a unique character of the contemporary, economic recovery was highlighted. Blowout numbers were widely anticipated for the retail sales report on Thursday and expectations were huge. Nonetheless, when the early-morning report was released, the actual numbers were nearly double the elevated forecasts.
Small Caps Stagger?
After steadily rising since last fall, small-cap stocks have recently staggered. Although the Russell 2000 is off by only about 5.5% from its record high in mid-March, it has underperformed the S&P 500 by almost 10%.
Monday’s Musings?
Just a few unrelated thoughts to ponder this afternoon…
Are The Wealthy Feeling Healthy?
Not surprisingly, confidence among the highest earners is generally more positive than that of low earners. However, the extent of this “confidence-differential” will vary over an economic cycle. The confidence-differential compares the results of the highest 33% of earners to that of the lowest 33% of earners, based on the University of Michigan’s Consumer Sentiment Index.
When Leadership Fades?
The seventh-longest persistent period of leadership by a single U.S. stock-market sector since 1928 came to an end in March. What does this imply, if anything, about the future of the contemporary bull market?
The Dubious DOLLAR?
The U.S. dollar declined last year, but, so far, in 2021, the dollar has been rising. U.S. bond yields have surged far more than foreign yields lately, making dollar investments more attractive. However, U.S. inflation is definitely accelerating, which is never good for the U.S. currency.
Running It HOT!
Because of extraordinarily accommodative monetary and fiscal policies, a complete synchronization of the global-economic expansion, unprecedented savings, substantial pent-up demand, a post-pandemic reopening, and a record-low inventory/GDP ratio, the U.S. economy is poised to run HOT!
When Disagreement Is GOOD!
The stock market and bond market usually get along, but sometimes they simply see things differently. Although disagreements can be difficult, their currently divergent views may prove profitable for equity investors.
Fed Fears?
Investors lose a lot of sleep worrying about the Federal Reserve. Should they?
“Fed Legends” are plentiful and as heeded as ever. Several popular adages highlighting their importance have survived the test of time, including: “Don’t fight the Fed,” “Three steps and stumble,” and “The stock market is just one big sugar high.”
Best Investment? The ECONOMY!
Yields are climbing, and who knows how high they will go? Will Inflation eventually get out of control? The Federal Reserve says they won’t tighten for a long time, but is that believable? Are Tech stocks headed for a bigger correction? As always, there is so much that’s “unknowable?”
TECH CHECK?
After prolonged and noteworthy outperformance, Technology stocks lagged the market last summer and have again underperformed over the past month. Because this sector comprises the largest share of market capitalization, portfolio managers are forced to decide “What to do with Tech?”
Is New-Era “Peaking Out” Or “Breaking Out?”
It might seem like a silly question. After all, recently, New-Era stocks have clearly rolled over and fallen out of favor. Stronger economic growth (fueled by policy stimulus and reopenings) certainly benefits investments that are more sensitive to improved economic-recovery speed. This includes small caps, cyclical sectors, value stocks, and international equities.
Yield PRESSURE
The financial markets have become obsessed with “Yield PRESSURE!” The 10-year Treasury yield has tripled from its low a year ago and has surged from below 1.0% to 1.6% since year-end. This pressure has killed bonds and is increasingly causing turbulence in the high-flying stock market.
Main Street Caution
Considering how well the stock market has done this past year, it is not surprising that most indicators show optimism reigns on Wall Street. Individual and institutional investors, Wall Street strategists, and newsletter writers all currently have rosy outlooks.
What Matters Is The “Mix”
Inflation fears have justifiably ratcheted higher in recent weeks. The expected inflation rate embedded in the bond market (i.e., the 10-year breakeven rate) surged off a low last March to more than 1% above the 10-year Treasury yield. Industrial commodity prices have reached their highest levels since 2011, and the price of crude oil—tripling from year-ago levels—is now higher than before the pandemic.
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