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The stock market's recent behavior has been nothing less than spectacular and one for the record books. The market rebound that got underway in March last year still continues, with all the major indexes at or near record levels. Helping the stock market's momentum is optimism about the vaccination effort and notable improvement in the economic picture, with the latest economic reading showing the U.S. economy growing at +6.4% in Q1. But there are those with less optimism about the outlook given the ongoing resurgence in infection levels and slow-moving vaccination effort in many parts of the world that are allowing new strains of the virus to take hold. There are worries about inflation as well, with many in the market fearing a resurgence of pricing pressures in response to expansive fiscal measures forcing the Fed's hands to tighten policy sooner than currently expected. The interplay of these competing views will determine how the market performs in the coming months and quarters. To that end, let's examine the landscape of bullish and bearish arguments to help you make up your own mind. Let's talk about the Bull case first. An Accelerating Recovery: The pandemic dealt the U.S. economy a severe blow whose effects will likely linger for a while, particularly for some parts of the economy. But the markets correctly saw through to the fact that the U.S. economy entered the downturn in the best possible shape, with household and business confidence at near record levels on the back of a multi-decade low unemployment rate, rising wages and record corporate profits. The recovery got underway with a record rebound in Q3 last year that continued in the last quarter of the year, albeit at a slower pace. While pockets of severe pain still remain, the economy's momentum can be gauged from the fact that the U.S. GDP is now just a hair below its pre-Covid level. There is actually a group of economic forecasters that sees current 2021 consensus GDP growth forecasts underestimating the full extent of the rebound in activity levels as the vaccination effort reaches a critical mass this Spring and beyond. This group of forecasters expects growth to be significantly above what is imbedded in consensus projections. Unprecedented Policy Response: The Biden administration's infrastructure plan has not been passed yet, but it is another sign of the extraordinary fiscal measures that have been in place since the start of the pandemic. The recently enacted $1.9 trillion Covid relief package came on top of the big fiscal and monetary measures put in place last year. These measures helped replace lost wages for workers, assisted small businesses in staying open and staved off solvency issues in industries hit hard by the pandemic. The new relief measures will not only sustain and strengthen the existing supports, but also facilitate the ongoing vaccination effort that promises to put the pandemic behind us. Strong Banks Mean Smooth Recovery: Regulatory reforms instituted after the global financial crisis ensured that the U.S. banking sector was in rude health as the pandemic arrived. Banks' profitability suffered a severe blow as they built up reserve cushions in the first two quarters of 2020. But as the group's strong Q1 results show, they have started to release those reserves already as they can see light beyond the pandemic tunnel. Banks are the lifeblood of the economy as they ensure the efficient transmission of capital to different economic actors. The successful implementation of the small-business relief program, which was a key part of the earlier fiscal relief measures and was also included in the newly enacted $1.9 trillion relief bill, has been possible only because of the health of the banking sector. The Fed continues to reiterate that its monetary policy stance remains favorable and supportive of the market. What this means is that it will continue to keep interest rates and overall financial conditions supportive of stocks for the foreseeable future. Let's see what the Bears have to say in response. Market Complacency about Economic Recovery: The stock market's rebound from the last year's March lows that got a fresh boost from favorable vaccine announcements reflected a best-case scenario for the U.S. economy. The economy has enjoyed a strong rebound, as Thursday's +6.4% Q1 GDP growth rate shows, with estimates of even higher growth in Q2. But it is hard to sustain that level of growth without stoking inflationary pressures. There is understandable optimism about the vaccine rollout, with most projections assuming an almost normal operating environment in the second half of the year. This is likely no more than wishful thinking, given the pathogen's ability to mutate into something that is less vulnerable to the existing cures. A realistic read of the vaccination effort will also need to keep in mind the not-so-small segment of the population that will be less-than-forthcoming in submitting to the jabs and what effect that will have on our ability to reach the so-called herd immunity. We should also not lose sight of the fact that the U.S. vaccination effort is among the most successful ones globally, with most parts of the world way behind in vaccinating their populations. The recovery has gotten underway, but it will likely be slower and more drawn out than many in the market are banking on. More . . . | |||||||||||||
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| A Durable Hit to Confidence? The risk to human life, a function of the highly contagious pathogen, has been a unique aspect of this economic downturn. As a result, previously benign activities like eating out or taking a flight or any activity that involved physical interaction with others got weaponized. The operating assumption appears to be that we all hit a collective reset button and go back to normal once we are vaccinated. It seems reasonable to assume that people are starved for social interactions and badly miss the leisure and entertainment activities of their pre-pandemic lives. But how fair and reasonable is the assumption that all of these activities will simply resume once at some stage in the coming months? The Market's Fed Addiction: The market's Fed dependence has only increased as a result of this pandemic. The central bank not only cut interest rates to near-zero, but has been playing an active role in ensuring market liquidity and backstopping corporate balance sheets. In other words, the Fed has reinitiated on open-ended quantitative easing or QE program that will significantly expand its balance sheet. Some projections suggest that the Fed's balance sheet could reach $10 trillion, more than the double the level in March 2020, with the central bank committed to this policy for an extended period. It is unfashionable to be concerned about growing fiscal deficit and the associated ballooning Federal debt as everyone seems to have subscribed to the so-called 'modern monetary theory', or MMT, that calls for open-ended and unlimited borrowing. The open-ended Fed commitment and expansive fiscal measures are the reason why the market's recent inflation worries have a lot more traction than before. It is far from clear at this stage how the inflation picture will unfold in the coming quarters, but it nevertheless remains a notable risk to the outlook. Where Do I Stand? I don't dismiss the bearish arguments entirely, but I don't see them adding up to coming in the way of the U.S. economy's rebound or reversing the spectacular rally in the market. The reality is that we have learned enough during the pandemic to navigate this transition period as the vaccination effort takes us into herd immunity. The health of the U.S. economy ahead of the pandemic and the very strong fiscal and monetary response, coupled with pent up demand, ensures that the economic recovery will only gain strength going forward. I am actually partial to the view that sees the consensus economic and earnings growth rate this year as on the low side. The worst of the pandemic's economic and corporate earnings impact is now behind us, with the picture already starting to improve. As regular readers of my earnings commentary know, the earnings picture has notably improved with estimates for the current and coming quarters already going up, a trend that I strongly feel will only accelerate in the second half of the year as we put the pandemic behind us. Markets are forward-looking pricing mechanisms; they have already discounted the economic rebound and is looking forward to the aforementioned turnaround in earnings outlook. Continued confirmation of this favorable trend will further strengthen bullish sentiment in the market. These are historic times for the economy and the market. And historic times create historic opportunity. All in all, this is the best time to be fully invested in the market, particularly if you are investing for the long haul. And I would definitely be a buyer on any dip because with annual GDP growth this year to be the strongest in years, it looks like there's a lot more upside to go. How to Make Our Economic Recovery Work for You Today is the perfect time to take advantage of the current strength of our economic recovery. That's why I'm inviting you to look into our unique arrangement called Zacks Investor Collection. It gives you access to the picks and commentary from all our long-term portfolios in real time for the next 30 days. Plus, it includes Zacks Premium research so you can find winning stocks, ETFs and mutual funds on your own. In 2020, these portfolios closed 67 double- and triple-digit gains with winners such as +251.1%, +386.8% and even +475.8%.¹ To put the odds of success even more in your favor, you are also invited to download, our just-released Special Report, 5 Stocks Set to Double. Each stock was handpicked by a Zacks expert as their personal favorite to have the best chance of gaining +100% and more in the months ahead: Stock #1 – Looking for a Growth Stock? It's a Monster! Stock #2 – Riding Waves of Earnings and Demand Stock #3 – Emerging Biotech Reveals Stunning Interim Results Stock #4 – Growth Explosion for the 4th Industrial Revolution Stock #5 – Non-Essential Retailer Thrived as Others Failed The earlier you get into these stocks the higher their profit potential. Also, the opportunity to download this report ends at midnight on Sunday, May 2. Get started now with Zacks Investor Collection and 5 Stocks Set to Double » Thanks and good trading,
Sheraz Mian serves as the Director of Research and manages the entire research department. He also manages the Zacks Focus List and Zacks Top 10 Stocks portfolios. He invites you to access Zacks Investor Collection. | |||||||||||||
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| ¹ The results listed above are not (or may not be) representative of the performance of all selections made by Zacks Investment Research's newsletter editors and may represent the partial close of a position. This free resource is being sent by Zacks.com. We look for investment resources and inform you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms of Service". https://www.zacks.com/terms_of_service. Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research is not a licensed securities dealer, broker or US investment adviser or investment bank. The Zacks #1 Rank Performance covers the period beginning on January 1, 1988 through April 5, 2021. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank #1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance_disclosure for information about the performance numbers displayed above. Zacks Emails Zacks Investment Research |
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