In another impressive week, the S&P 500 picked up just shy of 3% to once again close at a record high. We have now gained just under 12% on the year, and the index shows few signs of slowing down. The strength sits at the confluence of a country on the brink of getting back to normal, and consumers flush with cash from several rounds of stimulus. This has shown up in solid readings for measures of activity in both the manufacturing and service sectors. Employment trends have notably improved as a result, and economic growth is setting up to be quite strong in the back half of the year. With such a steady stream of good news, it is unsurprising that sentiment is starting to run hot. Both the bull/bear and put/call ratios are pushing towards levels of extreme complacency. This is something to be mindful of as we head into a crucial earnings season. Companies could have a hard time building on such lofty expectations. We will need to see them deliver if markets are to continue higher at the same pace.
Sector leadership has also changed quite dramatically over recent weeks. Despite the pickup in economic data, inflation expectations appear to be leveling off. The 10-year U.S. Treasury yield has paused its march higher. With this change, growth stocks are once again back in favor, with value names taking a break. Looming tax increases are a potential cause of this shift. President Biden has been releasing details of his $2 Trillion infrastructure plan over the last few weeks. Unlike the Covid relief bills, the impact of this stimulus will be spread out over the course of several years and will likely be paid for with some form of tax increases. Corporate tax increases were part of the initial proposal. On a net basis, an infrastructure package with this structure would be a fiscal drag in 2021. The market has likely been using this line of thinking to reign in its expectations for inflation. With less concern about inflation, interest rates are no longer surging as they had been for much of the year. Growth stocks are inherently more attractive if rates can stay anchored.
While we certainly pay attention to changes in leadership, we remain focused on identifying companies set to continue delivering earnings and dividend growth on the other side of reopening. We don't know what the next few weeks or months may hold in terms of prices, but we do know that there is a strong correlation between long-term dividend growth and long-term price growth. 117 companies in the S&P 500 have increased their dividends so far in 2021. This signals long-term confidence from managers in the direction of their businesses. We will be listening closely as companies talk their books over the next few weeks with the goal of sorting out who is best positioned to continue sustainably growing their dividends.
Preston May, CBE®
This report was prepared by Donaldson Capital Management, LLC, a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Information in these materials are from sources Donaldson Capital Management, LLC deems reliable, however we do not attest to their accuracy.
An index is a portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance to certain asset classes. Indexes are unmanaged portfolios and investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown. Past performance is not a guarantee of future results. The mention of specific securities and sectors illustrates the application of our investment approach only and is not to be considered a recommendation by Donaldson Capital Management, LLC.
S&P 500: Standard & Poor’s (S&P) 500 Index. The S&P 500 Index is an unmanaged, capitalization-weighted index designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries.