It’s not breaking news that we’re in the midst of a bull market with the S&P 500 touching record highs on a regular basis. Although valuations are extended and are historically high, we don’t believe that a major pullback is likely in the near future. With massive liquidity flooding the US economy, from the US government stimulus programs, an extremely accommodative Fed, and money that has been saved up during the pandemic with the lack of travel, entertainment, etc. ready to be spent as the country reopens and we approach summer, there should be plenty of economic growth to keep stocks going higher over the next couple of months at least. Of course, there will be occasional pullbacks, and those are healthy to help alleviate some of the froth that builds up during a bull run.
Areas of the market that we believe are poised to continue to do better include sections of the retail sector, some industrial names, the materials area and some financials, with tech continuing to move higher but likely not at the same pace as has been the case over the past year. Retail names should benefit from the pent-up savings mentioned above, while also benefitting from higher profit margins as a result of tighter inventories as supply problems persist. Names like Home Depot, Costco and Target are some that should benefit. Industrials should also benefit as companies invest in helping alleviate some of those supply problems by building new capacity, while also benefitting from hopes that the US government is poised to increase spending on infrastructure. Some of the travel-related names in the industrial space (like Boeing and some of the airlines) should benefit from the increase in travel as vaccine distribution increases. Similarly, materials names should benefit from many of the things that should help the industrial area, while also potentially benefit from an increase in inflationary concerns that may build as economic activity increases and supplies remain tight.
Financials have taken a breather recently, but should resume their upward march as interest rates will likely creep higher, loan demand starts to increase as economic prospects improve, default rates remain low as businesses and consumers have cautiously been saving money and paying down debt over the past year, and interest in the stock market has increased.
Having said all this, risks are elevated because of the high valuation and keeping a relatively diversified portfolio with a little cash on the sidelines is always prudent. As the economic expansion becomes more widely known and accepted, stocks will have a harder time going higher—stocks move on surprises-positive or negative—we will reach the point later in the year it seems that surprising to the upside will become more difficult—but we’ll adjust our positions as we get closer to that time.