What’s with the stock market?
The stock market has been really volatile, causing many investors to be concerned. However, when you hear things like, “taxes might be going up!” “Capital gains or deductions may be changed!” “inflation has been really heating up, leading to fears about rising interest rates…the market sees uncertainty!!
Year-to-date, the Dow Jones Industrials are up over 11% as I write this, but we have seen big swings just in the last week. The NASDAQ is barely up & the technology sector has had a lot of weakness. Remember, contrary to what most people belief, so do go up and go down! Market pull backs happen and we haven’t seen any significant corrections for some time!
The good news is that the economy is re-opening with many sectors picking up, and many people are getting vaccinated. Also, many people have extra money in the bank because the stimulus packages infused cash, but with so many Covid restrictions in place, people didn’t have anywhere to spend their “new found” money. However, we are seeing it now with record demand for many products, but not nearly enough supply to meet demands…driving prices higher.
For example, Warren Buffett was telling his shareholders recently how they own many homebuilder stocks, a paint company and flooring giant that are seeing record demand. This has caused higher prices for homes, lumber, drywall, paint, basic materials, etc. When prices are heating up, the Federal Reserve fears inflation and the recipe to slow things down is raising interest rates. The stock market sees higher interest rates costing companies more money in interest, or increased prices for materials to produce more products and services. This potentially means less money to the bottom line, causing a readjustment in stock prices potentially lower. I know that it sounds ironic, because more demand sounds good for business, but not when it comes at higher costs, or pushes up prices to consumers!
Additionally, there are some other concerns, such as stocks have been on tear for many years, causing some fears that maybe stock prices are overvalued. You have “unplanned” surprises, like gas prices at a 7-year high because of outside hackers, or uneasiness overseas with the Israeli and Palestine conflict. There are problems in the labor markets, as many businesses can’t find people to work, which could lead to higher wages to draw people in. A $2.3 trillion infrastructure bill, the Suez Canal blockage lingering problems, and Fed Chairman Powell expecting inflation to rise short-term. All of this impacts the stock market!
I’m going to summarize a few last points with my thoughts:
- Higher interest rates means higher yields with investors moving out of stocks to higher yielding bonds. I feel with so many people getting vaccinated, a return to more normal activities and pent-up demand, actually means more economic growth. The potential of growth could give companies more revenues and earnings, which seems to make potential stock price growth seem to be more rewarding, than moving into a bond yielding 2.5%. Also, the average dividend yields on many stocks is still attractive relative to current bond yields, like Exxon or AT&T over 6%. Why would investors settle for 2% to 3 % when you could get 5 or 6% dividend and growth potential to boot?
- The Federal deficit keeps going up and we need more taxes to pay for this, it will hurt growth. First of all, debt has always been there through this and Republicans & Democrats don’t seem to agree on anything. This proposed new infrastructure package sounds promising, but it’s a guess as to what ultimately happens and what it looks like. Unfortunately, everyone wants better bridges, roads, and power services, but no one has any ideas or wants to pay for it! So, I’m not sure this argument holds water.
- Our Debt is spiraling out of control and this will end badly. The debt is really not so much from the stimulus packages as just decades of entitlement programs steadily growing. Also, the majority of our debt isn’t in foreign hands, like Russia or China, but owned mostly by Americans. The “other countries will sell everything and we will lose our preferred status,” isn’t as concerning to me. I guess it depends on if the debt ultimately provides further growth and economic activity or if it’s just an outgoing expense to cover expenses. Unfortunately, most of our debt doesn’t help GDP growth, or create value like let’s say taking on a home mortgage debt where the house can actually appreciate over time. I don’t like that the US seems to have fallen way behind in spending for R&D, research, science, tech, AI, internet, etc., because that doesn’t translate into new products, science, industries with longer term value or tax revenues. I would say that we get an “F” for this, but entitlements like social security, Medicare and even services like the military are the trade-off! However, I guess the silver lining is that most of our debt is financed with 30-year Treasury bonds at 2%, so it’s much less costly. If inflation keeps pace, then this is a cost offset and the government isn’t paying out that much. At least they are racking up this debt on very favorable interest rate terms.
- Where does that leave us? If the by-product of any of this increased debt also leads to future tax revenue or GDP growth, it’s not going to be a huge problem to help pay for the cost. The US is borrowing low and covering those obligation, and I don’t see that changing for a while. Our debt is still very attractive to many!
The stock market does have a risk of corrections, but long-term has usually rewarded patient investors. The secret is being properly diversified, protected against the unexpected, paying off debt and knowing your direction and destination. I have been in this business for 35 years and have seen so many things, but being properly prepared & educated solves a lot of the uncertainty!!
Pat Moran, managing partner of Healthier Money, and he can be reached at www.healthiermoney.com or (602) 571-1035.