On Our Minds

Equity markets moving higher

The equity markets continue to move higher on news of steady economic growth and the receding COVID virus. The S&P 500 Index has grown in each of the first seven months of the year and when this has occurred historically, it has led to further gains through year-end. Recent economic indicators are demonstrating slower and more stable U.S. domestic growth and that has inspired optimism for future earnings.

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WITH INTEREST RATES LOW, GROWTH STOCKS ARE COMING BACK.

Welcome to the Roaring ’20s

The S&P 500 Index gained 8.1% for the second quarter and 14.4% year-to-date despite concerns over Federal Reserve policy, fiscal spending and the spreading delta variant of COVID. Most investors see an improving economy with continued low interest rates being positive for corporate earnings. Small cap stocks, which are mostly leveraged to an improving domestic economy, are leading the market higher. The best performing sectors were energy, financial, healthcare, and materials as value and cyclical companies are perceived to have more inflation-induced pricing power. The reflationary and cyclical trade into financials, industrials, basic materials, and travel-related companies is beginning to wane, however, as earnings expectations are set astronomically high. This will make the second quarter earnings period more challenging for those companies that miss high expectations. In addition, most commodity prices appear to have peaked. Growth stocks, particularly large cap technology stocks that are known for more consistent earnings, are coming back into favor as interest rates remain lower for longer.

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Cryptocurrency Becoming Less Cryptic

The creation of cryptocurrencies or digital currencies such as Bitcoin has bankers, financiers and governments pondering the long-term potential economic and political ramifications for the future. While the increasing use of digital currencies demonstrates the power of a secure, secretive payment transfer system, it also has created a loophole from government control.

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Investment Market Update, Q3 2020

The S&P 500 and Nasdaq index had wonderful performance during the third quarter, with returns of 8.5% and 11%, respectively. However, pre-election politics obstructing a new federal stimulus package and an escalation in COVID cases caused both indexes to decline in September. The political stalemate over aid to bailout states and cities is dampening confidence. A multi-trillion-dollar stimulus package will eventually be implemented that should focus support for small businesses and unemployed individuals. The interminable wait for a COVID vaccine is also weighing on the markets and suppressing economic activity. The year-end target for a vaccine is unlikely, although a “cocktail” of antibiotics and steroids has shown to help patients recover, so the management of the virus is becoming more tenable. With the health crisis reduced, we should expect a gradual return to a stable growth economy.

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