In 2021 it seems that as time moves forward the story stays the same for the markets – stock market indices continue to quietly increase in value. All the equity indexes we track, with the exception of the S&P600, were positive for the month of August. This is notable as August is historically a poor month for stocks. Bonds continue to be slightly negative for the year. Commodities were flat for the month, which is actually strong when one considers the strengthening of the US dollar index.
All data as of 07/01/2021, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
As previously stated, August is historically a lousy month for the stock market, on average producing a negative return for the month. We do not find this surprising as 2021 has been a “different” kind of year for stock market returns. See, there’s this thing call volatility that has been missing from the stock market in 2021.
Most years the stock market will have a pullback/correction/whatever you want to call it of 10-15%. This is a very normal thing. This expected level of volatility is the reason why investing in the stock market usually produces better overall returns over less volatile investments like bonds – investors get paid for taking the risk of the variability of returns. Every now and then, however, we get investing nirvana. Every now and then, we get the Goldilocks scenario of outsized returns with little volatility. Hello Goldilocks!
Chart #1 shows the annual returns for the S&P 500 dating back to 1980 with the largest intra-year decline. The average decline is 14.3%. So far in 2021 the largest “correction” has been 4%.
Chart #1: Source: JPMorgan Guide to the Markets
What this low volatility grind higher for the market looks like can be seen in Chart #2. There are some minor ups and downs, with the 50 Day Moving Average acting as a support level, as the stock market slowly grinds higher.
Chart #2: Source: www.stockcharts.com
As long as this pattern continues, we have no reason to become bearish on the stock market.
What About the Bond Market?
Bond yields have been a mixed bag so far in 2021 with the 10-year Treasury Bond starting the year in the 1.00% area, moving swiftly up to almost 1.8% earlier this year, before finding a range these past few months between 1.20 and 1.35%. Overall, the Bloomberg Barclays Aggregate Bond Index is down 0.69% for the year. Consensus earlier this year was that 10-year Treasury yields were heading to 2% and that the bond index would be a rather large loser in 2021.
Chart #3: Source: www.stockcharts.com
On the surface the consensus thought makes sense – the economy is strong, inflation has become a thing again, and the Federal Reserve is going to be forced to raise interest rates sooner rather than later in response to an “overheated” economy. Sometimes (many times?) the consensus is not always correct.
We are not going to engage in debating if the current inflation is transitory or structural as we do not believe that rates are low or moving higher as a result of inflation. Different areas of the market do not exist in their own little silos, but instead are affected by other markets. The value of the dollar, for example, plays a big role in corporate profits for multinational corporations, thus helping us determine if a client portfolio should be overweight in US markets or overseas equities.
For the US bond market yields in other areas of the world, in part, help determine where yields can go here in the USA. With the Japanese 10-year bond paying right around zero interest and the Euro paying negative yields, it is hard to see a scenario where the 10-year Treasury could move much higher than 2.0% without some sort of major crisis. And the wider the spread between US rates and the rate one receives in their home country, the more likely that investor is to move money into US-based bonds to take advantage of the spread.
For those with an interest in getting into the weeds on the topic of intermarket bond markets you can read up on the topic here.
The Economy and Bull Markets
One of the questions we have been getting from both clients and prospects lately surround the issue of economic growth. Specifically, can the stock market continue to move higher if the economy slows down? With phenomenal growth in the first half of the year and a stock market that is up more than 20% (S&P500) so far this year, that is a fair question.
The quick answer is we remain positive on the stock market for two very important reasons.
The first reason is that we are in a cyclical bull market that began in 2013. Bull markets, of course, do not have a time limit nor do they simply die of old age. Not once has a long-term uptrend reversed itself because people got tired of seeing their investments grow. Quite the opposite. Bull markets die in the face of credit crunch, rampant speculation, wars or political turmoil.
Right now credit is in great shape, the questioning of the bull market is the exact opposite of rampant speculation, we literally just pulled out of a 20 year war, and the political turmoil you may be feeling is nothing like the Iran Hostage Crisis or JFK getting shot. Big picture: we believe there isn’t anything looming over the economy that can bring down the markets.
The second reason we believe the stock market can continue to move higher is that, even with the negative rhetoric surrounding inflation and the jobs market in the media, the economy is in a very good position. Growth in 2021 has been outstanding on both a nominal and real level. Slowing in 2022, expectations are for real growth in the 3.5-5.0% range. This as supply chain constraints have pushed spending out into the future. Automobiles, for example, are hard to come by. Drive by a dealership and it is obvious that there are many fewer cars available for purchase. This is confirmed by the report that auto dealerships now have 942,000 cars on lots vs. a normal average of 3,000,000 available across the nation. This is just one factor in the increase in US factory output.
On the jobs front the employee shortages reported across the country are about more than just government unemployment benefits. Some people haven’t come back into the workforce due to childcare constrains or fears of Covid. But two key pieces of data tell a positive story of substantial new business formation (meaning people are starting new businesses instead of being employed by others) while the “quits rate” is now at an all-time high. This last piece is interesting because it means that gainfully employed people are leaving their jobs to do something else. This only happens when the economy is doing well, and surely stepping up, not down.
Finally, there is a plethora of available capital available right now. Private equity has been booming. Angle Funds have been investing. Company 401k balances are as high as they have ever been.
American Retirement Savings News
According to Fidelity, the average 401k is 24% bigger than 1 year ago. In real numbers, this equates to:
- As of the end of the second quarter, that balance was $129,300, up from $123,900 at the end of the first quarter and $104,400 as of the second quarter of 2020.
- Among all 401(k) participants who have had accounts for at least 10 years, the average balance was nearly $403,000, the first such time it surpassed $400,000, according to Fidelity. Among 403(b) participants, that average balance was more than $233,000.
This is extremely positive for those who are getting close to or are just getting ready to retire.
- employee contribution level expected to increase $1k from $19,500 to $20,500 w/ catchup remaining the same
- the 415(c) DC plan maximum annual addition is projected to increase from $58,000 to $61,000 in 2022
This year has been very good for investors and the future appears bright. There are no big, glaring issues that look like they will derail the stock market and the economy will likely remain strong through at least 2022. Americans have been participating in the upside by taking advantage of their 401k plans, with savings now at record levels. While things won’t stay positive forever, right now there isn’t much to complain about.
We remain bullish on the stock market for the long term.
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All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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