Continued Strength

Despite a few short periods of weakness, the market has hardly taken a breath in 2021. The S&P 500 closed the week at another record high with the signing of a $1.9 Trillion stimulus package serving as a catalyst. Year-to-date, the S&P 500 has picked up just over 6%. Though the market has been undeniably strong, the character of leadership has been quite different compared with last year. In 2021, tech has been a laggard with energy, financials, communications, and industrials leading the way. This is reflective of the powerful combination of reopening and another round of helicopter money.  

The pace of covid deaths and cases continues to fall in the US despite a rise in new variants across Europe. The improvement in the US has largely been attributed to rising immunity through vaccinations and natural exposure. Data is showing that it may be possible for the US to reach herd immunity by the end of May. With this backdrop, the $1.9 Trillion stimulus package sets up an opportunity for a substantial pickup in economic growth over the summer. Already, estimates are calling for GDP growth of 10% in the first quarter. We could see even higher numbers if life can return to a more normal state in few months.  

The markets have been pricing in a looming rise in economic growth for the last several months. Stocks and bonds alike have been indicating that reflation is on the way. In the stock market, companies set to benefit from a higher level of inflation have been outperforming. In the bond market, the long end of the yield curve has been moving higher. This move higher in yields has been a prime concern for the equity market participants, but so far, the pace of the rise has been slow enough to keep order.  

The key question remains how the equity market will handle the inevitable spike in inflation we will see over the next few months. As we anniversary the depths of the Covid lockdown, we are going to see some shockingly high inflation readings. The Fed contends that these effects will be transitory and that sustained inflation above 2% remains a lofty goal. Don't fight the Fed is our mantra, and we believe in the secular forces weighing on inflation. Still, we acknowledge that the pressure on inflation is higher. Because of this, we have positioned our portfolios over the last few months towards companies we know will benefit from inflation and higher rates. We have added to energy and financial positions to take advantage of these trends.  

We remain bullish but on the lookout for a potential melt-up scenario. Typically, you don't see a melt-down without a melt-up. The pieces are there for a meteoric rise in stocks, but inflation concerns might be serving as much-needed restrictor. We would much prefer a steady grind higher in stock prices to a fast-paced and overwhelming rise.  

Thanks, 

Preston May, CBE®
Research Analyst