The S&P 500's steady climb higher was interrupted last week, reversing course to fall nearly 2%. The biggest weekly drop since February.
The Federal Reserve acted as the catalyst for this latest bout of volatility. Last Wednesday, the FED issued a revised outlook, signalling that interest rates are set to increase sooner than previously projected due to higher inflation forecasts.
While this FED adjustment resulted in a momentary pull back, market participants quickly reverted to their default setting of unwavering optimism, with the market hitting new all-time highs just five days later.
While unrelenting positivity is enough to sustain the current investing eutopia, history suggests that volatility will return at some point in the future. So instead of basking in the glory of your unrealized gains, use these periods of low volatility to prepare. Diversify, take profits on certain stocks that have notably appreciated and implement some downside protection.
Has the rotation into 'Value' run its course?
So-called value stocks, expected to benefit from the economic recovery, have outperformed in 2021, but this rotation trade has been out of favour in recent weeks.
Growth stocks, including the major tech names like Apple and Microsoft, have rallied since the Fed announced a slightly more aggressive stance on future rate hikes last week. The S&P growth index has added almost 2% since the announcement, compared with a drop of nearly 2% in the value index.
With the S&P Value index up 13% year-to-date, much of the re-opening trade has arguably been priced in the market. With that said, specific sectors such as energy and financials may still have room to run.
Cryptos pulled back once again as China continues its clampdown on miners and the Crypto space as a whole. The recent volatility has wiped out all of bitcoins 2021 profits, with Bitcoin briefly falling below 30,000 a coin. The cryptocurrency has now lost more than 50% from its mid-April highs of almost $65,000.
Commodities like copper slumped last week while Lumber recorded its worst week in history, falling 18%. Higher commodity prices have played a pivotal role in the recent inflation jump. This pullback in commodity prices suggests that the supply chain bottlenecks may be clearing in certain sectors of the economy. From a global perspective, the 're-opening' is still in its infancy, but these price adjustments suggest the inflation we are currently experiencing is, in fact, transient in nature.
How long can it last?
Equity Wobble US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday. Since then, a string […]
US stock markets extended their recovery following a sharp sell-off at the start of the week. Mounting concerns over the spread of the Delta variant and its ability to interrupt a strong reopening and economic recovery resulted in the worst day for global stocks in some months on Monday.
Since then, a string of upbeat earnings reports and some aggressive ‘buying the dip’ strategies revived market optimism.
Double Your Money
The S&P 500 has now doubled in value in just 15 months following the March 2020 Pullback: The second fastest double in history, second only to the 1932 reversal after the infamous 80%+ crash of the great depression.
It is worth noting that the cumulative earnings for companies within the S&P 500 is set to double over the same period.
The market hasn’t doubled for no reason despite what some market heretics proclaim.
A Closer Look
After a brief respite due to strong market rotation dynamics, the narrow breadth of the S&P 500 is back in focus. The S&P 500 is up 4% since June 3, but ~80% of that move can be attributed to just the largest five stocks. This concentration in returns is one to watch as narrowing breadth is a sign of internal weakness and can sometimes precede pullback periods.
As we focus on the second half of the year, investors will undoubtedly be haunted by fleeting bouts of uncertainty. Echoes of ‘this surely can’t last forever’ screech louder and louder as markets continue to notch up all-time highs. This uncertainty and doubt is an inherent part of the human condition that even the most steadfast investor must grapple with.
Lately, market participants are constantly worrying about, well, everything. Their concerns range from inflation and the Delta variant to tech regulation and tensions with China. None of these fears are irrational, but they are part and parcel of any investment. While all these concerns could negatively impact markets over the near term, there is no reward without risk, and historically, it hasn’t paid to be a pessimist.
While the outlook is broadly positive, uncertainties remain, as mentioned above. Economic statistics have been consistently positive in recent times, but this positive news stream is now simply functioning to maintain the current levels of market exuberance.
As we advance, it won’t be enough to say that businesses are recovering, and earnings are increasing. The market will need to hear about a stable recovery and more robust future earnings to come. As a result, market participants will be far more sensitive to any negative news, fuelling the fragility and volatility in the most exposed sectors of the market.
My overarching view is that economic recovery will persist, and upside remains, fuelled by higher earnings, fiscal stimulus, and low interest rates. With that said, pullbacks and market rotations are likely, and any deviation away from this base case scenario will create a painful environment for those holding the most speculative names.
As always, caution and patience are the order of the day.
For investing tips, go to www.theislandinvestor.com.
Tips to manage your home in the heatwave
By Ted Healy of DNG TED HEALY Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home. With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and […]
By Ted Healy of DNG TED HEALY
Our recent spell of good weather is certainly welcome but it does lead to some practical problems in the home.
With the mercury rising to 30 degrees in some areas and night time temperatures ‘dropping’ to only 19 degrees, we find ourselves doing everything in our power to try and stay cool.
With weather advisory warnings in place for high temperatures, we have all found our homes are heating up!
While we are quite happy to fork out our well-earned Euro for that foreign trip to the sun to bake in the Mediterranean heat, we now find ourselves in the unusual position of the good weather visiting us for a change!
While it is easy to enjoy the sunshine from the swimming pool in Portugal or the beach in Spain it is a different story when walking into your hot house at home.
Unfortunately, the large majority of us don’t have the luxury of air-conditioned homes as much of the new building technologies we have experienced revolve around heating our homes. We now find ourselves looking for ways to cool them down!
While the natural reaction is to open the windows, it is recommended to keep windows, blinds and curtains closed as this will keep the hot air out. If opening them, make sure to do so at opposite ends of the house to create an airflow throughout.
To circulate cool air inside, fill up some bowls with water and ice and place them in different areas of the house – in front of a fan works best if you have one.
Another simple but effective option is to cook outside. Use the BBQ as the oven generates heat inside the house.
Trying to get to sleep at night can be particularly difficult in soaring temperatures. Here is a novel tip to help you catch those z’s; consider freezing your bedcovers before going to bed!
It may sound daft but give it a try; strip the sheets, place in a bag and pop them in the freezer. When it is time to hit the pillow, simply put them back on and they will be nice and cool!
Also, try taking a cold shower before bed.
Any halogen light bulbs in the house will also create additional heat, so consider replacing with LED lights.
Open the attic hatch to keep the house as ventilated as possible, allowing heat to escape through the roof.
And finally turn off any appliances, like the TV, when not in use. Electrical appliances can give off a surprising quantity of heat, particularly while charging.
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