How the Stock Market is Doing Amid the Pandemic
We’ve experienced significant spikes of volatility in the stock and bond markets to end January and now February as well. Typically, when we see big dips in the stock market, bonds begin to cover the slack and offset losses, which has not happened to start the year. We have not seen this type of volatility and extended selling in the stock and bond markets at the same time since last year as the global pandemic gained stream.
In the last week of February, the Nasdaq index lost 4.9% (Source: https://news.yahoo.com/stock-market-news-live-updates-feb-26-2021-234900240.html). Because the areas of the market that have been hit the hardest recently are technology and growth stocks, which have been at the top of our performance and research list for months. We are paying very close attention to these developments. Periodically there are sector rotations in the market, where certain stocks stop outperforming and let new areas pick up the torch. For instance, value stocks have underperformed growth stocks for quite some time, and we may be experiencing a reversal from growth to value. We will be shifting our positions accordingly if our research confirms this to be true.
How could the stimulus bill affect the stock market?
February is historically an underwhelming month for stocks. However, March, April, and May are typically good months for the stock market. We’ve seen how fast the market can move just in the last week. We feel confident these short-term losses can potentially be made up in reduced time. If we begin seeing selling below key levels and believe the market will continue heading down, we may decrease risk across the board.
Factors that have the potential to rebound the markets
- A $1.9 Trillion stimulus bill should be passed within the next 2-3 weeks. We believe that will help jump-start the economy and the stock market. We will see improvement as people have discretionary money to spend and invest.
- Many people contribute to IRAs in March and April because of tax time. This buying is often beneficial to the overall market.
- Today in the state of Michigan, there was only one death from Covid (Source: https://www.clickondetroit.com/health/2021/02/26/coronavirus-in-michigan-heres-what-to-know-feb-26-2021/#//). The vaccines appear to be reducing cases and deaths. This has the potential to re-open the economy as people begin to eat out, go on vacation, and generally spend more money.
- Corporate profits are calculated year over year. In the next three months, corporations will begin reporting their earnings for 2021 versus the Covid ravaged 2020 numbers. The improvements should be fantastic for Wall Street.
- 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. Generation X is firmly in its peak spending years. The Millennial generation is entering its peak spending years. When we study this hundred-year data, we find a country with a large portion of its population in its peak spending years. This is beneficial for the economy. We believe this tailwind will aid the stock market in 2021 and the years to come.
What does this mean for your investments?
Because of these optimistic points, we have not run for cover in our portfolios. We do not want to miss out on a surge upwards in the stock market if it is indeed on the way in the coming months. However, if you’d like to discuss the positioning of your portfolio from a risk standpoint, please reach out. If you’ve had any changes to your income, job status, 401K options, address, or any other financial changes, please contact us. We’ll continue to monitor your investments daily. We will do everything in our power to protect and grow your accounts.
Bob, Ken, Jim, and Zach
An Introduction to Stock Rotation
We want to make our clients aware that we offer a higher-risk investment option called the Stock Rotation portfolio. TD Ameritrade does not charge commissions on individual stock transactions. We aim to take advantage of that potential. Each month, our research analyzes the S&P 500 to find the top 7 stocks heading up and have an excellent technical analysis pattern. In good times, this portfolio aims to be 100% invested in individual stocks. When our research is less optimistic, we will move to a less risky allocation. Overall, for clients that are hungry for the potential of more considerable gains, even if it’s a small allocation of your overall portfolio, this portfolio may be a good fit. If you’d like more information, please contact our office.