Musical Chairs

A surprisingly profitable first half of the year is in the books and we have the midsummer holiday to sit back and reflect. Since the market effectively crashed with the onset of the pandemic, stock prices have been rallying for the ensuing 15 months. Stocks ended June up 2.2%, and are now up an impressive 15.25% year to date. We are in a bull market, and there is a risk of missing out if investors cannot overcome their inherent doubt.

According to Bespoke Research, the market is up 5% in each of the last 5 quarters and prices have been higher 12 of the 15 months since April 2020. That is an impressive batting average and presents a favorable backdrop in support of remaining well invested. When stocks are in a bull market, or trending upward, history has shown it is typically profitable to stay long and avoid trying to guess what might derail the market, or more importantly, when the trend might end.

There are a number of factors to support continued strength in stock prices. Stock prices are enjoying the continued messaging from the Federal Reserve that the emerging signs of inflation are transitory and any rate hikes will be more closely linked to signs of strain in the labor market (low unemployment and higher wages). Consumers are flush with cash and spending money on houses, cars and, now that the pandemic has subsided, dinner out and travel. Job formation is robust and it appears likely that US schools will re-open again this fall as the pandemic here subsides.

Corporations are issuing positive guidance for the remainder of ’21 and the technology sector is leading the way. According to FactSet Research, analysts expect double digit earnings growth for 2Q and the second half of ’21. Earnings estimates have increased notably since the end of Q1. Analysts project a 12% increase in stock prices over the next 12 months (S&P 500 price target of $4,785) and also expect S&P 500 forward earnings of just under $210 a share in the same time span, putting current prices at approximately 20 times forward earnings.

The fears investors are wrestling with are many. The one most often discussed today is inflation – will structurally higher prices in wages and goods ultimately bog down the economy, to the detriment of stock prices? Another worry is valuations. If interest rates are in fact on the rise, will that have a negative effect on what is already a relatively high PE ratio? Seasonally lower liquidity may lead to higher volatility as summer comes into full swing. This is because many investors will head for the beach and leave their concerns behind – possibly more so in the aftermath of the pandemic. The obvious fear as we near the end of the stimulus-induced bull-run is that when the melt up is complete, stock prices will inevitably melt down.

The key to success will be diligently holding on to an appropriate asset allocation. Investors with ample liquidity, income or time can well afford to hold on to a full stock weighting. Investors without other sources of liquidity, income or with near term spending needs will want to continue a disciplined adherence to their diversified asset allocation. This aspect of the investment process has been made more difficult with the historically low interest rates.

We remain confident in our stocks in the growth camp, those with higher PE ratios, but also with long histories of exceptional growth and innovation. We are also taking positions in stocks in the value camp, with lower PE ratios. These stocks are poised to benefit the most from a continued post-pandemic economic boom. Importantly, good stock selection is critical. Investors making indexed bets may will likely be left wanting.

Finally, I am pleased to introduce you to the two newest members of our talented team. Colton Growney, CFA recently joined us as an investment advisor with a specialization in portfolio management. Hannali Patidar joins us from JP Morgan and will begin by assisting Jennie in back office administration. Separately, Jennie and Jesse are immersed in the CFP certification process, sharpening their financial planning skills to better serve your needs. As always, please do not hesitate to reach out if life brings you change and you would like our help.

Bruce Hotaling, CFA
Managing Partner

The views and opinions stated herein are those of Bruce Hotaling, are as of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation. This note contains forward-looking statements, predictions and forecasts (“forward-looking statements”) concerning our beliefs and opinions in respect of the future. Forward-looking statements necessarily involve risks and uncertainties, and undue reliance should not be placed on them. There can be no assurance that forward-looking statements will prove to be accurate, and actual results and future events could differ materially from those anticipated in such statements.

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