Shedding Light on Future Economic Developments [Market Analysis]

Dan SederFrom The Desk Of Dan Seder

Stocks Lead the Economy

The rally in stocks has perplexed many investors. How can stocks fare so well in an environment where the government is literally mailing out stimulus checks? According to The Conference Board, the S&P 500 is one of ten leading economic indicators That’s right, stocks lead future economic developments…typically by 9-12 months. If doom and gloom were imminent, investors today wouldn’t be hiding out in risky assets like stocks. Instead, they would be seeking out safe havens like bonds or gold. As you can see below, the S&P 500 and Dow Jones Industrial Average are breaking out to all-time highs while bonds and gold are selling off. These types of leading price developments suggest we are headed for a robust economic recovery in the back half of 2021. 

Shedding Light on Future Economic Developments [Market Analysis] - Blog - Blue Chip Partners - StocksLeadTheEconomy2

Pent-Up Demand

On the heels of a historic election, many investors are worried about changes in legislation. In general, tax hikes are considered a headwind for stocks. However, those headwinds are being more than offset by the anticipated release of pent-up consumer demand as restrictions are lifted from the COVID vaccine. According to the U.S. Bureau of Economic Analysis, personal consumption has become more powerful over the years, accounting for nearly 70% of US Gross Domestic Product (GDP).

Pent Up Demand

Think about it. We’ll book flights to visit friends. We’ll take trips to Disney with our kids. Cruises. Hotels. We’ll eat out at local restaurants (indoors!). While the consumer has spent online for the last year, we are ready to do it “in real life”. We’re ready for the pre-COVID normalcy many of us took for granted.  

That being said, investors must be open to the possibility that the stock market could start cooling down just as the economy takes off in the second half of 2021. At that time, stocks will be looking forward well into 2022. But who knows, maybe 2022 will look bright. TBD.

Bonds Lead Stocks

While stocks lead the economy, bonds generally lead stocks. In fact, many refer to the bond market as “the smart money”. If a crash were imminent, we’d expect bonds of risky companies to be sold first. In this type of risk off environment, proceeds from junk bonds generally flow into safe-havens such as US Treasuries, leading to a widening of the yield spread between these bond types. Today, we’re seeing the opposite occur. Investors are buying junk bonds and selling US Treasuries, leading to spread compression. We’re keeping an eye out for a material change in spreads, which have historically been an early indicator for a sell-off in stocks.

Shedding Light on Future Economic Developments [Market Analysis] - Blog - Blue Chip Partners - BondsLeadStocks2

Analyzing price as a leading indicator is simply one of the arrows in our quiver. Price developments are not always perfect, but they help us frame the edges of the investment puzzle. There’s one thing for certain, the Wall Street Journal and CNBC don’t have the answers. By the time a story hits the press the move in price is generally behind us, hence the saying “buy the rumor, sell the news”. It’s important to remember that the financial media exists to sell advertising, not to provide financial advice.

 

Disclosures: 
Expressions of opinion are as of this date and are subject to change without notice. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The S&P 500 Index is a market capitalizationweighted index of 500 widely held stocks often used as a proxy for the stock market and chosen based on market size, liquidity, and industry group representation. Individuals may not invest in any index. Every investor's situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct.

Speculating Vs. Investing: Know The Difference

Notice a change recently in the financial media? Make no mistake, the headline names may have changed, but fads in investing are nothing new. It’s important to understand the difference between investing and speculating.

Outperforming the S&P 500 in 2020

 From the desk of Dan Seder:   Are We There Yet? When researching family vacations, I determined it’s precisely 1,169 miles from my house to Disney World in Orlando, Florida. If we pack a cooler and take one bathroom break...

Healthy Consolidation in Technology

From the desk of Dan Seder Sector rotation is the lifeblood of a bull market. Cyclical sectors like Financials, Energy, Industrials and Materials have recently caught a bid, while Technology has taken a breather. However, don’t let this...

The "Big Company" Effect

From the desk of Dan Seder, CFA, CMT, CFP® The S&P 500 was up over 2% yesterday…with more than half of its constituents declining! What a reminder of how a small number of HUGE companies can influence a market cap‐weighted...

Consumer Strength

From the desk of Dan Seder Discretionary stocks have outperformed the S&P 500 Index since the stock market bottomed on 3/23/20. It’s easy to attribute this rally to Amazon’s +22% stake in the market cap-weighted Consumer...

CEO Optimism Turning a Corner?

From the desk of Matt Mondoux, CFA, CMT, CFP® Confidence levels among U.S. CEOs are beginning to show signs of bottoming out. According to Business Roundtable’s quarterly business sentiment survey, after 9 straight quarters of...

Reality Check

From the desk of Dan Seder, CFA, CMT, CFP® Yes, equities have rallied since the end of March. However, the path of a bull market is NEVER straight up. At this point, the recent pullback is nothing but normal.

Who Says Indices Aren’t Actively Managed?

From the desk of Matt Mondoux, CFA, CMT, CFP® The Dow Jones Industrial Average (the “Dow”) experienced a significant rebalance today. Raytheon and ExxonMobil, two of the longest tenured members of the index dating back to the...

New Fed Policy: Average Inflation Targeting

From the desk of Dan Seder, CFA, CMT, CFP® In a subtle but important change to policy, Fed Chairman Jerome Powell confirmed yesterday that rates will stay at rock-bottom levels for longer. The Fed will be less apt to raise rates until...

S&P500 Market Capitalization

From the desk of Dan Seder, CFA, CMT, CFP® Apple (ticker: AAPL) recently topped $2 TRILLION in market capitalization – making it now larger than the market capitalization of the smallest 194 companies in the S&P 500 combined. Why...

Market Recovery

From the desk of Matt Mondoux, CFA, CMT, CFP® WOW! The S&P 500 clocked an all-time closing high on August 18th. What’s more shocking – that the loss of nearly 34% from February’s high required a gain of over 51% to...

S&P 500 Equal Weight Points to Strong Market Rally

From the desk of Omar Ezz, CFP® It’s easy to dismiss the move off the March lows as being driven by Large Cap Tech or day trading on Robinhood. However, there is evidence that the bullish move in the market is more than just big tech...
Page: 123 - All