Corporate earnings are on fire. This year’s first quarter was significantly better than expectations with growth coming in at 52% yr/yr. The consensus expectation for the second quarter sits at 61%, after which earnings growth is expected to be 23% in the third quarter and 17% in the fourth quarter (source: FactSet). So even though earnings growth will peak this quarter, earnings should remain strong throughout the remainder of this year. Certainly enough to propel the E in P/E for possible higher share prices. Interestingly, the forward P/E has been trending down (now 21x for forward 12 months) because stock market gains have been lower than earnings gains.
No changes in policy are expected from this week’s Federal Reserve meeting, but Fed forecasts will be updated. Will there be any signs of cracks in the Fed’s stance that higher inflation readings are transitory? After all, labor costs are picking up and recently reported inflation headlines are running hot. Nonetheless, the disappointing jobs numbers are likely to mean the Fed continues to believe it is too early to discuss quantitative-easing tapering. Some Fed officials are moving in that direction, but it is likely to take another couple of months of strong activity, elevated inflation data, and rising employment costs for serious tapering talks to start.
The Fed isn’t expected to raise interest rates before 2023 (which is only eighteen months away). Economists are extremely concerned about the associated interest costs on the Federal debt over the next cycle of rate increases. For example, an increase of 3% from current rates on Federal debt would result in annual debt servicing costs rising from $303 billion to $975 billion (source: Peak Capital Management). This would be more than we spend on defense and almost as much as funding Social Security. The Fed knows how tenuous it would be if rates surge higher. So instead, the Fed is providing as much liquidity as possible in the interim to encourage further economic recovery. It seems to be working quite well.
DOT.COM VERSUS DOT.CRYPTO: A PROFILE OF TODAY’S MILLENNIAL INVESTOR
So many comparisons have been made of the dot.com bubble to today’s market that we don’t need to compare the two in detail here. Suffice it to say today’s “bubble” is confined to meme stocks and crypto. The broader market is not in a bubble, in our view.
What is driving today’s millennial investors to speculate on specific areas of the market hoping to hit a home run? We can look to a few factors that have shaped younger investors’ behavior:
Mistrust. This isn’t unique to this generation. It is the mistrust of financial advisors and Wall Street institutions altogether. Millennials witnessed the 2008 Financial Crisis that began and ended with Wall Street. More recently, they have watched criticism of SEC regulations and calls for tightening of the fiduciary standard.
Financial strain. Add that mistrust to a generation that finds itself with flat real wage growth, higher education costs, and ballooning home prices, and you can see why there is a change of mindset. Average pay relative to buying power has stagnated over the past 40 years. Millennials are facing higher debts with income relatively unchanged from generations before. For many, jackpot-style investing is the only way they can see changing their circumstances.
Access to information. Younger investors have everything they need on their laptops or phone. With an iPhone, you can open a brokerage account, read about hot stocks, discuss ideas on Reddit, and execute trades instantly at zero commissions.
Of course the irony here is that they are exactly the type of investor that needs financial advice. We have younger investors on board, but they tend to be the children or grandchildren of our older clients. Often they have already been schooled by their families about the benefits of having a long-term investment plan and the power of compounding. Over 30 years at an 8% growth rate, an investment grows tenfold. By helping younger investors understand how small investments can grow over time, particularly when supplemented with regular contributions, we can make rational investing look more attractive.