May 4, 2021
Enthusiasm for stocks remains extremely high, with individual investors holding more equities than ever before. This high-spiritedness appears fueled by a robust earnings season, the prospect of a post pandemic economic recovery, and additional stimulus checks which have helped bolster not only household earnings but also savings. Stockholdings among U.S. households rose to 41% of their total financial assets in April1, the highest level on record, according to data from JPMorgan and the Federal Reserve. That kind of optimism has led the S&P 500 to hit 25 records this year alone, while logging its third straight month of gains in April by adding more than 5% to the index.
Even so, the same report indicates that individual investors are also becoming increasingly comfortable using margin, or borrowed money, to increase the size of their exposure to already-hot markets. A recent report from The Financial Industry Regulatory Authority, FINRA, noted that investors borrowing against their portfolios increased 49% over the past year. The two most recent periods during which borrowing increased at such a rate were those immediately before the financial crisis of 2008 and in 1999 during the highly speculative dot-com bubble.2
Stocks across the globe were higher in April, but the major U.S. indices like the S&P 500 and the NASDAQ Composite continued to be the clear leaders for the month. Growth stocks resumed their dominance over value stocks as well. The climb in interest rates we have seen over the past several months tapered off in April giving growth investors some confidence.
We believe the major headwinds still facing the market are 1) already stretched valuation levels with stocks sitting at or very near all-time highs, 2) overheated investor confidence levels, a phenomenon which can typically indicate that prices are primed to revert to their mean, and 3) the unknown impact of proposed higher corporate taxes & higher capital gains tax legislation.
We do, however, still see a number of nice tailwinds that remain in play for stocks. Among these are the facts that the economy continues to heat back up as more and more businesses are re-opening, and the Fed has signaled it will continue its bond buying program while keeping rates low.
As is the case most of the time, there are plenty of reasons why the market will continue climbing higher and plenty of reasons to be concerned that it will not. The prudent thing to do is to continue to follow your investment process, and that is what we will do.
The technical market trends all look favorable as of April 30th. Both the shorter term and longer term trend based models are positive. There are a handful of breadth indicators that are not as strong as we would like, but this lack of strength is not enough to cause our models to signal for a more defensive posture.
Published May 2, 2021; Accessed May 3, 2021
Published April 7, 2021; Accessed May 3, 2021
The S&P 500 Index is the Standard & Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.
The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance of stocks of technology companies and growth companies.
The Financial Industry Regulatory Authority is a private American corporation that acts as a self-regulatory organization which regulates member brokerage firms and exchange markets.
A reversion to the mean involves retracing any condition back to a previous state. In cases of mean reversion, the thought is that any price that strays far from the long-term norm will again return, reverting to its understood state.
Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average.
Value stocks are shares of a company that appears to trade at a lower price relative to its fundamentals, such as dividends, earnings, or sales.
There are certain limitations to technical analysis research, such as the calculation results being impacted by changes in security price during periods of market volatility. Technical measurements are one of many indicators that may be used to analyze market data for investing purposes and should not be considered a guaranteed prediction of market activity.
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