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BMT Monday Market Insights – June 28, 2021

Top Weekly Themes

  1. “We have a deal.”  Last Thursday President Biden blessed a bipartisan infrastructure package that, if passed, would include $579 billion in new spending.  House Speaker Pelosi and Senate Majority Leader Schumer have tied the fate of the deal to the passage of a much larger ($5-$6 trillion) budget reconciliation package.  According to Dan Clifton, Head of Policy Research at Strategas Research, “There is still wide disagreement among Democrats over the level of spending and the level of tax increases, and that will need to be worked out in the coming weeks. Conflict is inevitable given the diversity of opinion in the Democratic Party. But tax increases will be included and headline risk around tax increases is set to pick up…Biden, Pelosi, and Schumer are now specifically tying passage of a bipartisan infrastructure deal to the successful completion of tax increases in a reconciliation bill.”
  2. Timber!  Over the past 12 months, lumber prices increased from $426 to a high of $1,629…a spectacular move.  The move lower since early May has been equally as aggressive, falling about 50% to $842 as of Friday.  Although each product is different, lumber’s recent price activity provides some insight into how other prices impacted by temporary supply/demand imbalances may evolve.  For example, used cars have recently felt upward price pressure, partly due to bottlenecks associated with new cars.  As these supply/demand imbalances normalize, price pressure will ease in our view.  Perhaps we saw further evidence of this last week, with the Fed’s preferred measure of inflation (the Personal Consumption Expenditure index) rising less than expected.  Taken together, this should begin to ease market fears related to an early tightening of monetary policy. 
  3. Some Cracks Under the Surface.  We are long-term investors, and never want to trade around what amounts to typical market corrections.  That said, we like to understand current market dynamics so we can better prepare ourselves for the inevitable ebbs and flows of asset prices.  As the S&P 500 makes new highs, we note that there is some weakening momentum under the surface.  In April, over 95% of S&P 500 stocks were trading above their 50-day moving price average – evidence of a broad, well-supported, market advance (more on this below).  Today, however, that percentage has deteriorated to 44%.  As fewer stocks support a higher index price, we begin to notice. We don’t believe this is cause for alarm, but we do believe it leaves the market more vulnerable to a correction, especially as we head into a traditionally weaker seasonal period.

Returns Table

EquitiesWeek(%)YTD(%)1-Year(%)3-Year(%)5-Year(%)Div Yield(%)
S&P 5000.217.235.418.1117.181.29
Russell 1000 Value(0.4)16.636.011.5211.081.85
Russell 1000 Growth1.216.637.824.7223.380.67
Russell 20000.411.949.210.4714.140.88
MSCI EAFE(0.6)8.925.98.1910.162.3*
MSCI EM (Emerging Markets)(1.6)4.125.710.2611.691.85*
Fixed IncomeWeekYTD1-Year3-Year5-YearDiv Yield
Bloomberg Barclays US Aggregate0.2(0.6)(0.5)5.643.201.39
Bloomberg Barclays US High Yield – Corporate(0.0)3.911.67.326.893.89
Bloomberg Barclays Municipal Bond0.11.93.75.233.450.88
Bloomberg Barclays Global Aggregate x US (Country)0.2(3.3)2.63.792.400.81
CommoditiesWeekYTD1-Year3-Year5-YearCurrent Level
Crude Oil WTI (NYM $/bbl) Continuous0.448.271.61.810.271.9
Natural Gas (NYM $/mmbtu) Continuous10.858.5138.113.27.64.0
Gold NYMEX Near Term ($/ozt)(1.3)(4.7)(3.2)13.76.41,805.0
Copper Cash Official LME ($/mt)0.421.243.715.613.69,382.5
Currencies1 Week AgoYTD1-Year Ago3-Years Ago5-Years AgoCurrent Level
U.S. Dollar per Euro1.181.221.161.171.101.18
Japanese Yen per U.S. Dollar110.04103.25107.19111.84106.27110.14
U.S. Dollar per British Pounds1.391.371.271.311.311.38
As of July 22, 2021 (close). Three-year and 5-year returns are annualized. *Dividend Yield For MSCI EAFE and MSCI EM are from 6/30/2021.

Chart of the Week: Stocks Keep Getting Cheaper

Chart of the Week
Sources: FactSet, Inc.; BMT

Takeaways

  • It is important to keep in mind that market price does not always equate to expensive or cheap.
  • Although still expensive by historical standards, the S&P 500’s price-to-earnings ratio (P/E) has fallen as the market has continued to march higher.
  • The S&P 500’s forward P/E ratio peaked at 23.9 on September 2, 2020, with the index trading at 3,580.  As a strengthening economy supports higher earnings expectations, the current P/E ratio stands at 21.0, even as the S&P 500 currently trades at 4,266 (19% higher versus September of 2020). 
  • Persistently strong economic data should continue to support earnings, providing a fundamental foundation for further market advances.

Commentary – Strong performance usually leads to strong performance

It is always hard to invest new cash after a big market run.  However, the data would not support this behavioral bias.  For example, the average return for the S&P 500 three years after a twelve-month rally greater than 50% is 42%.  The average return over the next five years is 65%.  Simply said, strong performance has historically been followed by strong performance. 

A look under the surface of today’s market provides additional evidence to support this optimistic view.  In mid-April, 97% of S&P 500 stocks were trading above their own 200-day moving price averages.  This represents a broad market advance, with almost all stocks participating.  It is exceedingly rare to see a market that strong, with only three other readings above 95% over the last forty years – May 1983, January 2004, and October 2009.  One would be correct to assume that such a strong reading may indicate a market that is “overbought”, but that is not the full picture. 

COMMENTARY Table
Sources: BMT; Robert J. Shiller, http://www.econ.yale.edu/~shiller/data.html

In each of these historical examples, a correction or lengthy pause followed, not dissimilar from the pause we’ve seen in stocks since April, but these periods also represented the early innings of very strong multi-year bull markets.  Perhaps bearish in the very near term, but the momentum and breadth we’ve seen in the stock market are positive when considering a multi-year investment horizon.

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