May 2021 Newsletter to Clients

Enjoy this month’s edition that features reflections on the stock market.

Do you remember where you were and what you were doing last May? A dollar says, whatever it was, you were close to home. And, if you were like most of the rest of the country, you weren’t spending your discretionary income on items like dinners out in restaurants, flights overseas, or Disney cruises. Additionally, you may have been worried about your investments.

In the May, 2020 Newsletter we wrote that, in a crisis, the stock market often moves ahead before the economy does and that’s what appeared to be happening. We wrote, “The S&P 500 crashed to Bear market territory in record time by falling more than 35% from its high on February 19 to the low on March 23. Since then, however, the market has rebounded quite well as the large cap S&P 500 was down just 11.83% year-to-date through May 1.”

Fast forward to May, 2021 and the economy seems to be well on its way to full recovery. While some estimate there are still approximately 8 million unemployed people, the U.S. economy, as measured by Gross Domestic Product (GDP), recorded an annualized increase of 6.4% in the 1st quarter. This marks the 3rd quarter of above-trend growth led by the services sector with air transportation up 11.5% over 4th quarter of 2020, accommodations up 9.5%, and food services up 5.8%.

Similarly, the stock market continues to soar. As of May 10, the large cap S&P 500 Index was up over 13% on the year. In fact, if it finishes the year up more than 10%, this will be only the fifth time in history the index has managed double-digit returns three years in a row. Even more impressive, the Russell 2000 Index of small companies has returned over 15% through the first week of May. The question now becomes, will the stock market continue to soar or will it rise too close to the sun and meet the same fate as Icarus? (In Greek mythology Icarus had wings made of wax and was instructed to not fly too close to the sun, for obvious reasons. You can guess what happened.)

Back to our May, 2020 Newsletter, we noted the top U.S. stock strategist for Bank of America/Merrill Lynch said that stocks are relatively expensive because the S&P 500 was priced then at 18 times last year’s earnings. Today? The S&P 500 is priced at almost 22 times the next 12 months’ earnings. In other words, even accounting for company earnings rising with economic growth, the stock price of large companies is even higher than those deemed “relatively expensive” a year ago. The BofA stock strategist continued by saying history tells us that stock prices relative to company earnings has very little predictive ability over the short term, meaning 1-2 years.

There is little evidence to suggest the stock market will decline dramatically anytime soon. However, stocks don’t necessarily decline because there are dark clouds on the horizon. Stocks decline because the prospects for companies are not quite as good tomorrow as they are today.

As always, we structure your specific investment strategy to meet your individual goals and our focus remains there.

Thank you for your continuing confidence.