I’ll start by apologizing for the tardy commentary as a result of the holiday week. I hope everyone had a nice short week after a happy Memorial Day weekend spent with friends and family. I also hope some time was spent reflecting and honoring those who have made the ultimate sacrifice so that we can live free and chase our dreams, whatever they may be. To those with family members that have fought and died for our country, thank you.
The stock market continues to hold at or near all-time highs. First quarter earnings beat expectations and recent economic data suggests the most robust demand side growth since before the financial crisis. Make no mistake, signs point to the fact that our economy is red hot, even with supply chain shortages and high input costs (inflation) due to the worldwide COVID shutdown and the resulting lag in bringing supply back online. We think that businesses should find a way to meet the demand and GDP will drive higher. This all translates to earnings, which are now projected to grow double digits (10%) on an annual basis.
The bond market seems to us to be satisfied that any spike in core inflation will be short lived and the Federal Reserve will remain accommodative and leave short term rates at historically low levels for the foreseeable future. All this adds up to a particularly bullish case for equities. I don’t want to dismiss the fact that stock prices are high by all traditional metrics, but the forward growth might justify it.
Additionally, bond investors are facing the likelihood of headwinds caused by rising rates, even if the move higher is gradual. This, coupled with easy-money Fed policies and an improvement in bank earnings, make stocks an awfully attractive bet in our view. We have had a nice start to the year and are entering a traditionally “weak season” for equity investors, so some volatility and sideways trading is possible, but I expect we eventually move higher.
I will be on vacation with my family next week and will leave the market commentary in the capable hands of our portfolio management team. Let us all begin our summer with gratitude and peace.