Incredible to think about, but the S&P 500 has advanced over 18% year-to-date and roughly 30% over the last 12 months. From the post-pandemic low last March equities have rallied over 100%. I made the graphic above before the recent 2% sell-off, but nevertheless equities have bounced back much faster than any post-recession period in history. What’s more is that this rebound has been absent of virtually any volatility. The S&P 500 has notched over 45 all-time high closings so far in 2021 while going over 10 months without a 5% pullback.
Recently our President sent out a letter conveying our premonition that markets would be undergoing a “transition period” whereas they would adjust to peak growth rates & liquidity, and also to reinforce why our investment strategy and philosophy is well positioned to move into this new phase (His letter is available here). When stepping back and taking into account the big picture of equity markets performance in the last 18 months we think it would make sense for markets to digest this strong performance and for volatility to increase. But despite this, looking forward earnings are projected to be strong and while perhaps tightening, liquidity will still be abundant and characteristic of past early tapering periods (see our note on this here).
This may seem like an overly optimistic view for the economy but it is not ignoring the list of problems that are easy to identify but hard to predict: Inflation, China Crackdowns, Rising Delta Cases, Supply Chain Bottlenecks, etc. But in the end, risks are always present in the world/economy and are what provides the “wall of worry” for markets to climb upon like they have been for 18 months. An example of this is the abundance of supply chain constraints which are hampering parts of the economy and causing pockets of inflation. While certainly a hindrance in the near term, solving these shortages is also going to drive a multi-year capital investment cycle which in the past has been a characteristic of a strong economic cycle. And for the companies solving and adapting to these problems, that is ultimately what drives their value.
So while uncertainties are high and the disconnect between a hobbled economy and a continuously advancing equity market may seem out of synch, when the problems are deconstructed and timeframes are lengthened, the relationship between economic fundamentals and equity prices do not seem as irrational.
Commentary Disclosures: Covington Investment Advisors, Inc. prepared this material for informational purposes only and is not an offer or solicitation to buy or sell. The information provided is for general guidance and is not a personal recommendation for any particular investor or client and does not take into account the financial, investment or other objectives or needs of a particular investor or client. Clients and investors should consider other factors in making their investment decision while taking into account the current market environment.
Covington Investment Advisors, Inc. uses reasonable efforts to obtain information from sources which it believes to be reliable. Any comments and opinions made in this correspondence are subject to change without notice. Past performance is no indication of future results.