Earnings Season’s Hot Start
As a stock nerd and NFL fan, I love this quote from Ryan Detrick , the chief market strategist at LPL Financial.
April 2021 has been no exception. Although March, and Q1, for that matter, ended with more questions than answers, this month has been nothing but white-hot.
The month kicked off with a blowout jobs report. It then continued with two consecutive weeks of jobless claims crushing estimates, retail sales coming in almost ⅓ higher than projected, and bank earnings blowing past forecasts. The Dow Jones and S&P 500 seemingly hit fresh record-highs every other day, and despite complications with JnJ’s one-dose vaccine, all signs point towards our life returning to normal by this summer.
While optimism is high right now, I implore you to remain cautious. I’m really not sure how much higher the Dow and S&P can go without pulling back somewhat. Not to mention, it still has not been smooth sailing for Cathie Wood stocks or SPACs for the last two months either. This rotation into recovery names is very real.
Remember that every month in 2021 thus far has started off hot and saw a pullback and volatility occur by the second half of the month.
We are now officially in the latter half of April. Although, as I said, April is historically a strong performing month, think about this. By the second half of January, we had Reddit trades spooking investors. In February and March, we had surging bond yields, inflation fears, or Jay Powell comments that rubbed people the wrong way. These concerns won’t just disappear because we want them to. If we could make things magically disappear, COVID would’ve been over yesterday.
According to Binky Chadha , Deutsche Bank’s chief U.S. equity strategist, we could see a significant pullback between 6% and 10% over the next three months because of potentially full valuations and inflation fears. Even if this $2 trillion infrastructure plan doesn’t pass in full, do we really need to spend any more trillions with an economy starting to turn red hot?
Plus, how do you think this will be paid for? Hiking taxes- namely corporate taxes . Those gains that high growth stocks saw after Trump cut corporate taxes in 2017 could very well go away. While President Biden has indicated a willingness to negotiate his 28% corporate tax proposal, it’s still a tax hike.
We’re hot right now.
April is historically strong, but please monitor overvaluation, inflation, bond yields, and potential tax hikes. Be optimistic but realistic. A decline above ~20%, leading to a bear market, appears unlikely. Yet, we could eventually see a minor pullback by the summer, as Deutsche Bank said.
Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.
The Dow Jones remains red hot in 2021. Strong bank earnings, a recovering economy, and the potential for further infrastructure spending have sent the index to record highs in what seems to be every other day. Unfortunately, we are nowhere close to buyable any longer and are firmly overbought with an RSI over 72.
Having Dow exposure is valuable. The index has many strong recovery cyclical plays that should benefit from what appears to be an economic recovery and reopening going even better than expected. The Dow could also be quite beneficial as a hedge against volatile growth stocks and SPACs. You won’t see bond yields spooking this index as much.
But at this level, it’s probably better to SELL and consider trimming profits.
Matthew Levy, CFA
Stock Trading Strategist
Sunshine Profits: Effective Investment through Diligence & Care
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