A Personal Note from Cam – Dated June 30, 2021
Today represents the final trading day for the first half 2021. And what a first half it has been!
If this week finishes anything like the past two weeks, I believe we are in for a strong showing as we enter the second half of the year.
During the week of June 14th, the U.S. Federal Reserve put the world on notice that the super-easy monetary policies the Fed put in place early in 2020 is unlikely to last beyond 2023.
The financial markets sold off on this news. The question is why?
As I have shared in the past, the COVID-19 pandemic is waning, the U.S. economy is booming, and inflation is running at multiyear highs.
What I find amazing is that the financial markets found the Fed statement surprising. The economy, from the Fed’s perspective, no longer needs emergency measures.
Think of it like this – like the news that a good friend or family member is in the hospital, recovering and no longer needs life support – don’t you think that is a good thing?[1]
The Fed has what is called a “dual mandate.” That is, it has two goals: maximize U.S. employment and keeping prices stable (or keeping inflation under control).
What makes the Fed’s job tricky is that much of the time these two goals are at odds. If you pump more money into the economy so there are more jobs and higher employment, you risk inflation. If you tamp down on growth to control inflation, you will probably cause some unemployment.[2]
Wall Street and the Media are Overreacting
I believe this is the same message the Fed signaled to us two weeks ago. You see, Wall Street (driven in part by the media) often tends to overreact.
This happened on June 16th when the Federal Open Market Committee announced that it was moving up its timeline for raising interest rates.
Rather than waiting until 2024, it will now look to raise rates at least twice by the end of 2023.
After the meeting, some analysts projected that the Federal Reserve may also taper its bond buying program – meaning lessening the amount of money the Fed has been pumping into the financial markets every month – earlier than expected.
What I find amazing is that even though the Fed does not plan to hike interest rates or trim its bond buying program for months, the financial markets took the news as immediate, and the markets went into a freefall.[3]
This unexpected shift in Fed policy set off a huge repositioning in the global financial markets. That week, the S&P 500 closed its worst week since February, 2021. The S&P 500 energy sector and industrials dropped 5.2% and 3.8%, respectively. Financials and materials lost more than 6% each.[4] The Dow Jones Industrial Average had its worst week for the blue-chip index since October, 2020.[5]
Last week, when the markets closed on Friday, June 25, 2021, the S&P 500 Index rose 2.7% and the Dow Jones Industrial rose 3.4% for the week. For the S&P 500, this represented its biggest weekly gain since early February while the blue-chip Dow had its best week since mid-March 2021, erasing the loss from the previous week.[6]
I, for one, am tired of Wall Streets and the media’s inability to separate the present from the future. Daily, the media offers hours of commentary on the “whys and wherefores” about changes that occur in the financial markets each day the markets are open.
Everyone is entitled to their own opinion, yet it seems to me that the media’s main focus is on reporting negative news, that they spin for their own story purposes.
The way that I deal with negative news is simple: I tune out the noise of the mainstream media and tune into sources that have helped me manage a successful wealth management business for the past 39 years, sources that I know are on my side.
Are We in a Stock Market Bubble?
I acknowledge that the sheer number of unanswered questions about the economy and the financial markets right now can leave your head spinning.
From my perspective, the financial markets are overdue for a market correction at some point in the future. The question is when?
When I evaluate current market valuations, the valuations suggest a correction is due. For example, the well-known cyclically adjusted price-to-earnings ratio stands at 37.6 as I write this. It has been higher only once, right before the dot-com crash in 2000.
Ominous? Yes.
That said, first quarter earnings knocked it out of the park. The S&P 500 reported earnings growth of 52% in the quarter, according to FactSet – the highest year-over-year growth in more than a decade. In addition, 86% of S&P 500 companies exceeded the consensus estimate of what they would report in earnings. And expectations for second quarter earnings continue to be increasing.
Several strong earnings quarters will increase the denominator of the price-to-earnings (P/E) ratio and bring the market’s overall P/E ratio back down to earth.
Still, one sign that a bubble is beginning to burst is when the most speculative investments pop. And you can see that happening in several such investments right now.
Although I seldom talk about some of the fundamental and charting information that Trevor and I use in helping us make investment decisions, I feel now might be a good time to do so.
First let’s focus on Electric Vehicle (EV) stocks. EV stocks have multiplied, as electric cars attempt to go mainstream.
In our opinion, companies with strong track records of earnings growth and market outperformance are the best candidates for stocks to buy. But most EV stocks lack earnings or have limited market penetration, while others are not yet public.
Broadly stated, what we have found is that in the universe of EV stocks, which includes carmakers and companies that make car batteries and car charging stations, that these securities are volatile, with large price swings over short periods of time.
Right now, a number of EV stocks are down more than 30% + from their recent peaks, suggesting a correction is underway in this sector of the market.
Second, let’s focus on “cryptocurrency.” The crypto space is full of daily surprises, and it is an area where we are beginning to receive questions.
Although we are not allowed to make recommendations on specific cryptocurrencies, the charting tools we use suggest that a major correction is taking place in the broad cryptocurrency market at this time. With 50-day moving averages falling below 200-day moving averages, the dreaded “death cross” is forming, which is a very bearish signal.
Will the rest of the financial markets follow EV stocks and crypto down? Or are these two investments outliers in an otherwise rational market where earnings are rising to justify valuations?
It’s hard to say. So here is my advice: Stay the course.
If we have picked good companies with solid fundamentals, including revenue and earnings growth, good management, etc., your portfolio will likely weather this confusing spell. [7]
Should you have any questions, please let us know.
Yours truly,
Cam
Disclosures:
The information provided is not a complete analysis of every material fact and are subject to change.
Securities and some investment advisory services are offered through Cetera Advisor Networks LLC, member FINRA/SIPC, a broker/dealer and Registered Investment Adviser.
Financial Planning and some investment advisory services are offered through CTA Wealth Advisors, Inc., a Registered Investment Adviser.
CTA Wealth Advisors, Inc. and Cetera Advisor Networks LLC are non-affiliated companies.
The opinions expressed in this letter are those of Cameron M. Thornton, CFP®. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Past performance does not guarantee results.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.
A diversified portfolio does not assure a profit or protect against loss in a declining market.
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Websites provided as a courtesy and are not under the control of Cetera Advisor Networks LLC or CTA Wealth Advisors, Inc.
Cameron M. Thornton, CFP® is a Registered Representative with Cetera Advisor Networks LLC and may be reached at www.ctawealthadvisors.com or
(818) 841-1746.
Citations:
[1] The Insider Alert. Alexander Green. June 21, 2021.
[2] The Oxford Club. Matt Benjamin. Junons:e 26, 2021.
[3] Smart Profits Daily. Banyan Hill Publishing. June 19, 2021.
[4] Oxford Swing Trader. Nicholas Vardy. June 21, 2021.
[5] Zacks Advisor Insights. Zacks Professional Services. June 21, 2021.
[6] Wall Street Journal. June 26, 2021.
[7] The Oxford Insight. Matt Benjamin. June 23, 2021.