Have Global Markets Moved Too High, Too Quickly?

Global stock markets moved modestly higher during the first quarter of 2021. It is no secret that stock markets have performed exceedingly well amidst unparalleled economic disruption due to COVID-19.

Although we recognize stock markets are forward looking, it is reasonable to question if markets have moved too high too quickly.

However, corporate results from the fourth quarter earnings season helped assuage concerns regarding the broader stock market.

In fact, more than 80% of companies within the S&P 500 beat analysts' expectations for the quarter - a healthy sign as we continue to work our way out of the current recession.

The size and scale of monetary and fiscal support from the Federal Reserve and Congress in response to the global pandemic has been unparalleled.

In March 2020, the federal funds rate was lowered to 0% at the earliest sign of economic distress. Coupled with an aggressive bond buying program, the Fed has provided ample liquidity to banks, businesses, and consumers.

At the same time, Congress quickly passed its first fiscal support package in response to COVID-19 known as The CARES Act, a $2.2 trillion stimulus bill.

More recently, additional legislation known as The American Rescue Plan of 2021 was also signed into law, ensuring an additional $1.9 trillion would be injected into the U.S. economy. Other countries around the world have also instituted their own accommodative economic policies.

There are certainly longer-term concerns regarding the amount of debt-financed spending we are witnessing. However, for the foreseeable future, we expect these policies to be extremely stimulative to the broader economy, and by extension - capital markets.

Millions of people across the world are being vaccinated for COVID-19. As we move closer every day to a more normal economy, we are seeing longer-term interest rates move higher as expectations for economic growth and inflation increase. Given that the Fed is doing everything in its power to manufacture inflation, we are not overly concerned about a broad-based rise in prices.

We believe some amount of inflation is almost inevitable given the amount of stimulus we are experiencing.

However, The Fed has ample capacity to subdue inflation if it becomes unwieldy in the short term.

If an allocation to bonds is appropriate given your individual goals, we are favoring shorter-term bonds due to the uncertainty around the future of interest rates globally. Inflationary periods can be a net positive for stock markets given that they typically coincide with a rapidly growing economy.

In fact, real GDP growth forecasts for the next two years are well above historical averages before they return to more normalized levels in 2023.

We are beginning to see signs that leadership across stock markets is beginning to broaden beyond technology related companies profiting directly from the pandemic and the stay-at-home/work-at-home environment.

However, speculation remains rampant in some areas of the stock market and we encourage investors to stay away from companies that have little to no sales or earnings to support their current stock prices.

Expectations for a global re-opening are causing interest rates to move higher, making it more difficult for investors to justify lofty stock prices with little fundamental underpinning.

Conversely, value/dividend-paying companies that trade at more reasonable valuation levels are beginning to perform well.

While we own many growth/tech stocks in client portfolios (assuming we can justify their stock prices), we believe it makes sense for our clients to have a mix of both growth and value stocks that are reasonably well diversified across various sectors of the economy.

We remain confident we can find great companies for our clients' portfolios regardless of what the market favors at a particular point in time. ¦

- Ian N. Breusch, CFA, is chief investment officer of Sanibel Captiva Trust Company.