• As we expected, many companies (about 67%) are beating the bottom line consensus estimates for Q1. The earnings bar was set low by both the companies and analysts coming into earnings season making the forecasts easier to beat. And the prior periods of weak guidance may be coming to an end as most companies expect solid business conditions going forward. Corporate America still lives and dies by the “quarterly beat” which punishes the shares of companies that don’t meet expectations. 
  • Barron’s recently published its semi-annual “Big Money Poll.” Here are the main takeaways:  49% of professional investors polled are bullish, 35% neutral, and only 16% bearish (even though 27% say the market is overvalued). Most managers think the next recession will occur in 2021 and view recession as the biggest danger to the stock market. The next biggest danger is earnings disappointments and a Fed misstep is third. The most purchased sectors are health care and technology. The most sold sectors are utilities and materials. About 56% expect Joe Biden to be the Democratic nominee and 67% expect President Trump to be re-elected.  

The Bull Market Powers Higher

With recent all-time highs for the S&P 500, the bull market officially continues and is now the second longest bull market since WW II at 3,703 days. Many other markets are joining the rally. More than half of 29 major global indexes are within 5% of 52-week highs. Here are returns for different investment categories over the bull market’s 10+ years:

Source:  Bespoke Investment Group
Here are a few observations:

  • Stocks substantially outperformed other asset classes including bonds, and remain one of the best ways to create wealth over time. U.S. large caps matched the performance of (riskier) U.S. small caps.
  • U.S. stocks substantially outperformed global equity markets, including emerging. We expect this will continue.
  • Growth outperformed value during this bull market. However, value usually outperforms growth in choppy or down markets and has outperformed over the long term. 

U.S. equity investors have enjoyed terrific returns year-to-date. It seems like the number one catalyst for the rally (a Fed that turned dovish) is still giving us the green light based on Fed Chairman Powell’s press conference yesterday. But there are always things to watch and valuation is one of them. Stock market valuations have now grown to be in line with the last year’s September peak and just slightly below January 2018’s peak. We know what happened the last two times we hit this valuation level so it is prudent to be cautious in the short term and trim overweighted positions, and also check that portfolio equity ratios are not extended outside the target range.
Another concern is faltering market internals. Breadth has been trending weaker and more stocks should be at their 52-week highs. About 50% of S&P 500 stocks are still below their 200-day moving average (source:  Drach Market Research).
Finally, there are signs of inflation creeping back into the economy. For example, a number of consumer companies including Kimberly-Clark and Procter and Gamble have raised prices for core products in part to offset their own rising costs. And rising wage inflation should be carefully monitored, too.
It is especially important after breathtaking rallies (and a 10-year bull market) to control risk. Even those managers who stay fully invested (like us) need to make sure their own disciplines are being carefully followed. Successful portfolio management always controls the amount of risk taken.

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