How to analyze today’s market
Many factors are at play as we look to analyze today’s market. The major indexes were positive in May, but technology and other growth stocks continued to underperform. The technology-heavy Nasdaq lost 1.53% in May, while the S&P 500 index was positive 0.55%. Since we updated our trading strategy on 4/1/2021, our portfolios have performed well, and we encourage you to review your statements. Please contact us if you would like to discuss your account in more detail.
Just like last month, value stocks have been increasing the fastest, especially materials and energy prices. If you were considering building a new deck in your yard, you probably noticed the cost of lumber had increased by 261%. If you’d like to learn more about inflation, check our latest blog post: Consumer Prices Rise: The US Inflation Rate Explained.
Should you sell in May and go away?
There is an old saying in stock market circles that sometimes comes true: Sell in May and go away. From 1919-2017, including 65 different countries’ stock markets, the stock market averages earnings of close to 1% from May to October but averages 5% during the winter months. Because of this, some investors adopted a strategy of selling in May and buying in November. In our opinion, this is not a phrase to live by because there are so many outlier years. However, we also believe it’s possible to outperform by selecting the right sectors (such as lumber and other raw materials mentioned above).
Analyze today’s market with these key factors
There will be a point when the stock market needs to take a breather. It may lose 5-10% quickly. That may very well happen at some point this summer, but we’re most likely going to view that as a buying opportunity. So as we look to analyze today’s market, here is a list of reasons to be optimistic, despite short term volatility:
- President Biden is working on a bipartisan infrastructure plan. The plan would include one billion in new spending. He is also open to not raising taxes on corporations. Since the assumption today is that taxes would increase, this is a positive development. Between the additional spending and pause on corporate tax increases, this could be a tremendous stimulus package for the market.
- Vaccines have so far stopped the new Covid variants. Nationwide, infections and deaths continue to decrease and have reached the lowest numbers in a year. The economy continues to re-open as people get back to work, shop, travel, and generally spend more. In addition, younger age groups now have the opportunity to get vaccinated. This can reduce both infections and deaths moving forward.
- Corporate profits are calculated year over year. Corporations will begin reporting their earnings for 2021 versus the Covid ravaged 2020 numbers in the next three months. So far, the second-quarter pre-reports are coming out great.
- The Federal Reserve has been printing money and buying investments with it, commonly called Quantitative Easing. This is accommodative to investors and is why the market rebounded last year after Covid hit. We’re watching the Federal Reserve and the Federal Government for signs that they will tighten the money supply to likely influence the markets.
- Demographics will continue to be a tailwind for the next 15-20 years, the same way the stock market roared up in the 1980s and 1990s. For example, Generation X is in its peak spending years. Likewise, the Millennial generation is entering its peak spending years. When we study this data over hundreds of years, we find that a country that has a significant portion of its population in its peak spending years is perfect for stock markets. As a result, we believe this tailwind will aid the stock market in 2021 and years to come.
What does this analysis mean for the market?
Because of these optimistic points, we hold stock positions in our portfolio. In addition, recent market activity points to the potential for new all-time highs in the stock market.
Need more help analyzing today’s market?
We hope you’ve learned something from this market analysis. Please reach out if you’d like to review how your portfolio is positioned from a risk standpoint. In addition, if you’ve had any changes to your income, job status, 401k options, address, or any other financial changes, please contact us right away. We’ll continue to monitor your investments daily and do everything in our power to protect and grow your accounts. Finally, if you have any feedback or suggestions, our team at Summit Financial would love to hear them.
Bob, Ken, Jim, and Zach