Investors Should Avoid Chicken Little
Stagflation? Supply chain headaches? Tapering of Fed stimulus? Yesterday’s worries have been relegated to the history books as the S&P 500 hit an all-time high this week. What has changed in the past few weeks to drive this capitulation? Not much.
Companies have made an excellent showing to kick off the earnings season. But otherwise little has changed over the past few weeks to justify the swing from “doom and gloom” to “sunshine and rainbows” that have propelled stocks to new highs. Such is the nature of the stock market. Equities are volatile. As stockholders, we are willing to accept that volatility because we believe attractive returns will reward the risk over time. The return cannot exist without the volatility.
The past few weeks are a great example of just how unpredictable stocks can be in the short term. Stocks are, by definition, risky assets, but for many investors, the more considerable risk is themselves. From early September to early October, US stocks fell. Every financial Chicken Little was spreading scare stories of inflation and stagflation. It would have been easy for a jittery investor to decide to take their assets and run to the sidelines. Yet, had they done that, they would have missed the 6% rally that brought stocks to fresh highs. That would have been an enormous loss of return. Once you make a market timing mistake like that, it is gone for good, and worse than that, the error will compound over time (a $50K mistake today can compound into a $400K disaster 30 years later in retirement).
But that is not to say we are out of the woods on high inflation and potential stagflation. The brightest economists at the Federal Reserve cannot even agree if we are even in the woods. The future is never that clear, and the investor who recognizes this has a strategic advantage. For us, that is at the heart of evidence-based investing.
Source: CartoonStock
Contributed by Doug Walters, Max Berkovich
Just a few weeks after stock market bears announced that the sky was falling, major US stock indexes like the S&P 500 hit all-time highs. Despite declines on Friday, stocks are up about 6% from the early October lows. While the “buy the dip” mentality remains a formidable force, corporate earnings season was also helpful in lifting investor sentiment this week.
An Earnings Boost
This week, third-quarter corporate earnings provided a lift to stocks as results have generally come in better than expected.
- Of the 23% of companies in the S&P 500 that reported, 82% have positively surprised on earnings, while 77% have positively surprised on revenue.
- Based on these early results, earnings and revenue growth for the entire S&P 500 are expected to be up 33% and 15%, respectively. Those are big numbers and help quell the concerns about stagflation that we discussed last week (The Great “-flation” Debate).
Inching Forward on Infrastructure
The next bout of fiscal stimulus is likely to be in the form of an infrastructure bill or two. The debate appeared to move forward this week regarding the more expensive “social infrastructure” bill.
- The White House had indicated the framework of a deal might be worked out this week, but, as we type, no framework has been agreed. The latest price tag expectations are $1.7-1.9T.
- Senators Manchin and Sinema are the holdouts for the Democrats, with concerns over the size of the bill and how it will be funded.
- There is a desire by the White House to pass both infrastructure bills next week, but that looks unlikely.
Not so Transient
The Fed this week appears to be hedging its bets on just how “transient” inflation will prove.
- High demand, combined with a tight labor market and supply chain constraints, has resulted in rising prices.
- We have also seen the impact of these dynamics in the bond markets, where yields have been steadily pushing higher.
- Notably, the Fed policymakers have been backing down on the “transient” commentary. It is not that they do not see inflation as transitory, but rather that the elevated pricing pressures may be with us longer than anticipated.
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