The market volatility followed by the tremendous rebound seen towards the beginning of the pandemic has caused many to fear a possible collapse or "burst" as recovery continues. So, in this quarter's Mid-Year Market Update, I will discuss in detail how the market has behaved recently and whether now is the time to be greedy or cautious.
In this video I address:
- What we're seeing in the S&P 500 Index
- The three risk factors:
- Volatility
- Low yields = low income
- Inflation
- Reasons for optimism
As I’ve said in my past, my mission is to provide meaningful education so you can make excellent financial decisions. If you have any questions, please reach out to me.
Transcript
Here we are in the middle of the summer of 2021 and a lot of folks are wondering about their investment portfolios. Is now the time to be greedy or to be cautious? Well, we’re going to answer that question right now.
Hey folks, Doug Pardieck with Talon Wealth Strategies, Senior Financial Advisor headquartered in Littleton, Colorado. So, we’re going to answer that question of your investment portfolio. Is now the time to be greedy or to be cautious. Quickly let’s look back and see where we’ve come from when it comes to the U.S. stock market.
This chart is showing you the S&P 500. It’s done very well over the last five years but even if you look back to the last 10 to 12 years, the stock market has done very well. We’ve only had one massive drop-off and that was during the pandemic of 2020 so we all know about that. That was recent. A 34% drop and then it rebounded very quickly which has caused people to have concern. Has the market come up too fast, too soon and at too high. Right now we’re sitting at all time highs and some stocks are very expensive and that could lead people to think hey, we’re in a bubble. The correction is coming and I’ve seen headlines out there saying the crash is coming. You need to get out now. You need to do some other investment other than the stock market. So, let’s talk about the risks that we are trying to mitigate and address right now as financial planners.
First of all there’s volatility risk. The up and down movement of the stock market. We just had an 800 point drop in the Dow Jones and that created some nervousness out there with investors, but in any given year do you know what the average drop is from the high in the stock market to the low in the stock market? The average drop from high to low in any given year is 14.5%. So, if we do see in the second half of 2021 – if we do see a 10% or 12% or 14% drop or pullback we think it’s temporary, but we know that is normal. And when that happens, that downside volatility typically that’s a good time to be a buyer getting more shares of stocks while they’re on sale.
Another risk that we need to be aware of, and we all are, cash and CDs are paying diddly-squat. We’re seeing interest rates of .1%, .2%, .3%. We used to be able to go out into our money market account and get 4%. Well, those days are long gone. Right now we’re almost down to zero. The problem with that is that inflation right now is rearing its ugly head. Inflation is over 5%. So, when you look at the rate of return on your money market or your CDs, inflation is killing you. And so it’s a risk out there that we need to mitigate. Do we think inflation is going to last longer? Do we think it’s going to stay at 4% or 5% or higher? And the answer is we don’t know. We honestly don’t know. But there’s enough information out there that tells us it is going to be higher than normal and there’s some very smart people that I love to listen to. Brian Wesbury of First Trust and Bob Mah who’s one of our senior advisors in our financial group here that builds portfolios for our clients. They do think inflation is going to be higher for longer. There’s just too much money out there, and I’ll get to that in a second but a lot of money has been pumped into the system. When you have too many dollars, so high demand chasing too many supplies – supply and demand is out of whack – that leads to inflation. And if the supply chains don’t get fixed and there’s all these dollars out there flooding the system, inflation is going to remain high and be a problem for longer. So, we’re doing our best to mitigate that in our investment portfolios and we’re watching that on a weekly basis.
Another risk that I want you to worry about is the COVID and the Delta variant possibly shutting down the economy. We do not think we’re going to go back to shutting down the economy like we saw in 2020. So, that risk in our mind is very low. There is fear out there and it’s going to cause volatility in the stock market again. That should be a buying opportunity for us investors but it’s something we’ve got to watch and be mindful of.
Okay, so what are we optimistic about? Well, economies around the world are doing well. The big recession, the big collapse in the economies in the U.S. the Eurozone, emerging markets were significant last year, but there’s been a really nice rebound and we expect that rebound to continue. What about jobs? Well, let’s look this chart showing us manufacturing. Red is bad, green is good. We can see that in 2020 most countries were in red, but now we’re seeing a lot more green so that’s reasons to be bullish about the economy and the stock market around the world.
The digital revolution. That is something that is going on and this theme played out wonderfully in 2020. That’s why your portfolios did so well is having exposure to the digital companies and themes like eCommerce, telehealth, digital streaming. And we see a long runway for this segment to continue to do well and we will continue to invest in this sector.
As I said before, cash levels are really high, both corporate cash and individual savings rates having all these dollars in the system. The M2 money supply is up 32%. All right folks, on average the M2 money supply, bank accounts, savings accounts, checking, both corporate and personal accounts rises on average around 6%. But since the pandemic the M2 money supply is up 32%. This is a lot of dry powder that can be infused into the economy and this will be good short term. This is like a sugar rush going into the economy. It can lead to problems down the road that we have to deal with but short term both for the economy and the stock market this is good.
So, in summary we are greedy right now. When it comes to the portfolios that are focused on growth for the long term we really like stocks right now. The next 12 months looks very solid for the stock market. Yes, we should expect volatility. Can we have a 10% or 14% drop? Sure, absolutely that can happen. We can get some bad news but we think it’s going to be temporary. By the end of the next 12 months, the stock market should be higher. We should have some decent returns so stay bullish, but if you have any questions give us a call. We’re here to help. Doug Pardieck with Talon Wealth Strategies. Have a safe and healthy summer and we’ll see you soon. Take care.