Stocks continued their run, hitting new highs as volatility moved lower and investors found confidence in the strong earnings rebound seen in corporate reporting. Despite the headlines related to message-board driven stock mania in certain corners of the market, earnings for market leaders, mainly concentrated in technology firms, have been remarkable this season. Over 95% of firms in this sector have beaten earnings estimates, powering share prices and the markets in general higher. Meanwhile, the fiscal package being pushed through Congress has added further support to equities, with most calling for an over $1.5 trillion dollar spending figure. This significant spending bill has analysts revising GDP growth estimates for this year higher, with the trickle-down effect expected to translate to further gains ahead for corporate America. Add to that vaccination rates that are at 14% in the US and steadily climbing, and you have a recipe for strong potential growth ahead.
Despite the rosy picture many are painting with booming stock prices, an open government spending tap, and rock-bottom interest rates, the economy is still suffering significant pain from the pandemic that will take months and years to heal. For example, roughly 5% of renters and mortgage holders didn’t make payments in December, with several million households believing they’re at risk of eviction or foreclosure. Additionally, weekly activity indicators and mobility indexes are flatlining, showing a pause in the economic acceleration. The job picture also remains dismal, with over 20 million Americans receiving some form of financial assistance, 18 million more than this time last year. While the unemployment rate continues to slowly decrease, this has been largely driven by declines in labor force participation, meaning many millions of Americans have decided to permanently leave the workforce. The workforce is now down to the lowest participation rate since 1977, at around 61% of the working age population. Without a robust jobs recovery, it is difficult to see growth picking up meaningfully, as the US consumer cannot rely on government handouts indefinitely. With COVID continuing to evolve rapidly with more pernicious strains, questions about the efficacy of current vaccines and how long the virus will restrain our activity are also growing louder. If global coordination to subdue the virus is lacking, the economic reopening could drag out for many years to come.
At this time, we are maintaining a neutral equity allocation, as recent runups in stock prices have increased our cautious stance. We believe that a 5-10% pullback is necessary and likely for the bull market to stay on a healthy trajectory higher. For the year, however, momentum appears to be on the bull’s side and we believe the path is upward from here, with specific stocks and sectors providing new leadership. We will continue to reallocate to more economically-sensitive areas of the market, as we believe the reopening trade will continue to outperform. A focus on quality companies with strong balance sheets and cash flows continue to make up the core of our portfolios. As always, we continue to remain extremely focused on monitoring unfolding market dynamics and reacting only when appropriate. Please feel free to call our office with any questions you may have.