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July 2021 Monthly Review

"Yeah... That's the Ticket"

By Loyd Johnson, Chief Investment Officer
LJohnson@fcbanking.com
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Loyd Johnson PhotoA Look Back

The above line was made famous by the fictional character Tommy Flanagan played by Jon Lovitz on Saturday Night Live in the late 1980’s and early 1990’s. The character was known to stretch the truth more than just a little as he tried to convince himself and others that what he was saying was actually true. In one skit a person said they were in a rock and roll band and Tommy replied, “Oh, yeah? I wrote a book about rock and roll. Yeah, it was about the guy that invented rock and roll. Yeah, in fact it was an autobiography…yeah that’s the ticket.” As we approach a year and a half of a new normal brought on by the global coronavirus pandemic, those old skits came to mind in seeing all of the commentary about where the economy and markets are…and what may lie ahead. There is little question that most stock indices are in rarefied air from a historical valuation standpoint. Both the S&P 500 and the Nasdaq set seven all-time highs in the month of July, while the Dow Jones Industrial Average recorded five. This is on top of the first half of 2021 that saw the S&P 500 return over 15%, after delivering more than 18% in the pandemic year of 2020. If you are in the camp that believes the good times can keep on rolling, you point to the strong second quarter earnings, where 85% of companies reporting beat earnings estimates. Further, results beat estimates by an elevated 19%, compared to a 5% historical average. You point to the latest second quarter U.S. GDP number of +6.5% recently released as additional evidence of a flourishing economy. If you are in the other camp, and are a bit more concerned about where we go from here, you point out that the same GDP number was high because we were coming off such a low base as a result of the economy being battered by the shutdowns and slowdowns brought on by the Coronavirus. You might also point out that, although high compared to historical numbers, the 6.5% number actually disappointed versus consensus +8.5% estimates. The negative Nelly camp might also worry more about inflation, the headline grabbing word of the last several months, being more than just transitory. You might trust your eyes more than the pundits as you pay more for fuel, groceries, health care, appliances and just about everything else you can think of versus a year ago. As it was, the big cap S&P 500 was up for the sixth straight month, with a 2.38% gain. Core fixed income came back strong in the month with a 1.12% return, and is now only negative by .5% for the year…after being down by more than 3% in the first quarter. For balanced accounts that rely on a combination of stocks and bonds for overall returns, that really was the ticket…

A Look Ahead

We become a little troubled when we start to hear phrases like “it’s different this time” to bolster the case of why stocks can keep running up indefinitely. It was used to rationalize the Dot-Com bubble and also in the housing bubble that preceded the Great Recession of 2007-2009. So far, it’s never been different. In general, when investors are inclined to speculate and take on more risk, they bid up prices higher. When the opposite takes hold, and investors as a group look to de-risk, they sell and move prices lower. The sentiment of speculation or safety tops everything else that we can talk about. In 2021, the clear winner has been investors bidding prices higher for stocks. The alternative of earning next to nothing in money markets or savings accounts continues to be a catalyst. History shows that even that cannot alone act as a dam when valuations get so lofty that overall risk appetite changes. We have been trimming equity exposure lately and will keep a keen eye out for change…yeah, that’s the ticket.