October 29, 2021
Good morning,
Following a +1% day on the S&P 500 index yesterday and recording just another in a now long list of new all-time highs this year, it looks like today may be shaping up to be an eventful one. With yesterday’s post-close disappointments from Apple and Amazon (the mega of the mega-caps), and another upside surprise to European inflation, and of-course month end, most financial assets are lower overnight. Futures are off ~ 50bps as we approach the opening of cash market session. Is that it? Does this mark the end of this rally that started with the beginning of earnings season a couple of weeks ago? I think not and I expect you’re a little surprised by that.
Nothing has changed in my view as a fully invested bear, waiting for the market to signal a warning that this cyclical bull market, that began in March 2020, may be approaching its conclusion. I fear that a post-pandemic economy with an extraordinary amount of debt laying on top of it, may not match the pre-pandemic economy or be able to support the valuations that massive liquidity infusions have delivered. So – a bear because of valuations, fully invested because I will not fight the tape. I believe that the structure of the market is a mechanism that discounts time. Said another way, it brings some of the future into present prices. The mechanism has often been referred to as the bloodless verdict of the market.
I think the message of the market over the past few weeks of rally suggests that the rally has more to go, and that it will move past Apple and Amazon’s miss. Stagflation worry in September has broadly given way to reflation recognition in October. Outperformance from cyclical sectors and risk-on proxies along with underperformance from defensive sectors and risk-off proxies is at the highest relative level since the bull market began and could be a sign that renewed economic confidence is driving the year-end rally, keeping earnings optimism elevated. Seasonality doesn’t hurt either – 2018 notwithstanding.
______________________________________________________________________________________________________________________________
Big Bonus Day – our Chief Investment Officer, Stuart Katz, published his Investment Office’s monthly insight. The topic: China. An excellent weekend read (here).
Be well and have a nice weekend,
Mike