Good to know that my recent writings have perked some of your interests.
Despite the health crisis, geopolitical issues and Afghanistan, the S&P 500 finished just under 1% of all time highs. That’s remarkable. In the last 12 years or so without counting the flash crash in 2010 and another two flash crashes in March 2015 and August, we have experienced a big fall only in March of 2020. But in all situations, the Fed has continued to position itself to backstop stability and confidence as stock markets play one of the major roles for the economy.
Currently many tailwinds continue to overwhelm the risks. I will list a few of them.
1. The second quarter earnings season in winding down, and mostly it has only surprised on the upside. The market was no doubt expecting big numbers and we got it. About nine out of ten companies beat estimates, with earnings growth of better than 90% (compared to the same period last year) .
2. The house will return to Capitol Hill next week to rubber stamp $4.5 trillion of government spending (additional stimulus that we have been talking about to transform the American economy).
3. The Fed while setting the table for an exit of emergency policies, it will continue to hold and promote ultra easy financial conditions. As the Texan saying goes, ‘it’s all hat and no cattle’. No doubt they are pivoting from the ‘easy forever’ stance in words, but their actions are in no way indicating the slowing of, current growth of 6 to 7 pct. Otherwise why would they go for a massive stimulus again? 10 year yields closed at 1.25 pct last week.
4. What was a significant worry last month has now become a relative tailwind. Oil prices are down almost 20% from last month. That clearly underpins consumption and if anything softens the inflation picture at least for the time being.
With this in mind the dips in stocks have been shallow thus far in 2021. We had a 6% decline and a couple of 5% decline all to be recovered in no time.
Risk enters quickly and the slides have been sharp. It is largely on the back of high leverage, high frequency traders and easy to use apps like Robinhood. So far it has only paid to buy the dip. It should continue for more to time to come, but we are getting into the danger zone and remember no one will ring a bell at the top!
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.