By John Persinos
Welcome to my video presentation for Monday, March 29, 2021. The article below provides more details and also pinpoints compelling investment opportunities based on current conditions.
Stocks surged Friday to close the week higher, with the Dow Jones Industrial Average and the S&P 500 hitting new record highs. The Dow jumped 453.38 points (+1.39%), as cyclicals rallied amid economic re-openings. The S&P 500 climbed 65.02 points (+1.66%), and the tech-heavy NASDAQ rose 181.02 points (+1.24%).
Nothing seems able to sink investor optimism. Signs of rising inflation, higher bond yields, the lingering pandemic…investors are shrugging off the risks. It's damn the torpedoes, full speed ahead.
Even a curmudgeon like me must admit that the economic backdrop is encouraging. After a pandemic-battered year in which the stock market ran ahead of economic fundamentals, the recovery is catching up with equities.
The combination of fiscal and monetary stimulus, waning coronavirus cases, higher vaccination rates, the lifting of lockdowns, and robust household savings rates will probably ignite the economy (and by extension the stock market) like a rocket.
The spousal factor...
A quick personal note: My wife Carole has never pestered me so vehemently in our 31 years of marriage to go on vacation, once it appears safe. Multiply my anecdotal experience by a few million stir-crazy people and you get an idea of the explosion in consumer spending that awaits the economy.
Starting this year, I expect the emergence of an economic boom that rivals the expansion of the Roaring 1920s, which was born in the aftermath of the Spanish flu of 1918-1920.
Read This Story: Get Ready for the Roaring 2020s
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Equity performance over the last 12 months has been exceptionally strong, ever since the market hit rock bottom in late March 2020. The market rebound has been powered by expectations for the economic recovery and a commensurate rebound in corporate profits (see chart).
U.S. gross domestic product is on track to return to pre-pandemic levels this year. To be sure, the threat of inflation has increased and interest rates are climbing higher, with 10-year Treasury yields at a 14-month high. The Federal Reserve's balance sheet currently hovers at $7.6 trillion and is expanding at $120 billion a month. At this rate, it will surpass $8 trillion by June.
Nonetheless, the Fed has promised to keep the monetary spigots open, even if inflation temporarily rears its head. Investors are keeping a wary eye on inflation but they're not cowed by it.
The U.S. central bank is succeeding (so far) with its mandate to simultaneously spur growth but keep inflation in check. You shouldn't be complacent about inflation, but neither should you panic if it ticks up this year. I was a young working adult during the 1970s and I know how painful "stagflation" can be. However, it's extremely unlikely that we'll see a repeat of the inflationary Carter era.
The earnings picture brightens…
There's improving news on the earnings front. As the end of the first quarter approaches, 94 S&P 500 companies have issued earnings per share (EPS) guidance for the quarter, according to FactSet data as of March 26.
Among these 94 companies, 34 have issued negative EPS guidance and 60 have issued positive EPS guidance. Considering the uncertainties of the pandemic, it's a sign of growing confidence in the C-Suite that an increasing number of companies are issuing guidance (see chart).
The number of companies issuing negative EPS guidance is well below the five-year average of 66, while the number of companies issuing positive EPS guidance is well above the five-year average of 35. First-quarter 2021 earnings growth for the S&P 500 is expected to be 23.3%, according to FactSet.
The U.S. Labor Department reported Thursday that the number of new applications for unemployment benefits dipped below 700,000 in late March for the first time since the coronavirus outbreak.
Initial jobless claims filed through the states fell by 97,000 to 684,000 for the week ended March 20, the lowest level since March of last year, underscoring the strength of the economic recovery (see chart).
The stock market rally in recent weeks has shown broader shoulders. In 2020, a handful of U.S. mega-cap technology brand names accounted for a disproportionate share of market appreciation. As the economic recovery accelerates this year, sectors and asset classes that have lagged are picking up the pace.
Specifically, the rally is broadening to include small-cap and international stocks, within economically sensitive cyclical sectors. The movement toward value continues to unfold as well.
Read This Story: A Tip of the Cap…to Small Caps
We're in the early-to-middle stage of economic recovery; the following graphic shows you the appropriate sectors for each stage of the economic cycle:
I expect inflation and interest-rate fears to generate greater volatility, but they won't pose enough of a threat to undermine the economic recovery and bull market. I'm not ruling out pullbacks along the way, of course, but you should view them as buying opportunities.
To help you fully leverage the strengthening economic recovery, our investment team has put together a special report: "5 Red Hot Stocks to Own in 2021." In this report, we provide the names and ticker symbols of the highest-quality stocks to buy for this stage of the cycle. Click here for your copy.
PS: Are there any topics that you'd like me to cover more often or in greater depth? Let me know: mailbag@investingdaily.com.
John Persinos is the editorial director of Investing Daily. To subscribe to his video channel, follow this link.
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