Hello friends, welcome to the June Market Outlook. Let’s dive in as we have a lot to go over. Presently, it is our opinion that the market’s downside risk outweighs the upside reward. There are signs everywhere that point to a fractured market or at least the late stages of the rally- breadth, volume, lack of new highs while the market indices are at new highs. Speculation has run amok; AMC is the most recent example. Now, that doesn’t say that we see the market fading or reversing. In fact, outside of inflation fears and unforeseen geopolitical events, there’s very little that will derail the current run higher in stock prices. We merely want to provoke thought. We feel that investors, now more than ever, need to understand what they own, at what price they own it at and the level of risk they could potentially face with any new purchases. The S&P has doubled since the March lows, most investors are unaware of that fact. The parabolic move has already occurred. That doesn’t mean momentum ceases, we still have serious amounts of liquidity thanks to monetary and fiscal policy. But we do believe we are in a topping process. As a reminder, tops are a process where bottoms are more of an event. To quote Doug Kass “buying here is like drinking contaminated water.” We share that concerned view.
So where do we go from here? We expect the market to run into some troublesome waters this month. Last week, we received data that looked like stagflation, higher prices with limited growth. That sent the 10-year yield back to 1.63, and stocks to head to the lows of the day, completing a near 40 point reversal. This week as yields fell, stocks rallied. That’s the new normal. Any rise in yields will be troublesome for stocks, especially growth stocks. Our base expectation was fulfilled with the monthly job number once again disappointing, and we expect very inflationary readings in the Consumer Price Index and the Producer Price Index. Potentially reaching 8%. We expect these results to send the 10-year yield back toward 1.65, and potentially get up to 1.75 later this summer. Following a spike in real yields, we expect a calm summer for the markets. Outside of the Jackson Hole symposium in August, we see very little, outside unforeseen geopolitical events that will shake up the market. The economy will continue to be in re-open mode. As we move on from summer and enter fall/end of the year, we foresee a significant pickup in volatility. Inflation will remain a problem and last longer than our monetary policy makers expect. At that point, we may be talking about the Federal Reserve having to taper their bond buying program which we believe would cause the market to pullback.
As we mentioned, the market returned to peak speculation, closer to gambling we saw back in January and February this year. The lunacy in GameStop has now been overtaken by ludicrous appreciation of AMC. At its peak market cap ($33 billion), AMC had a higher market value than over half the companies in the S&P 500, a 70x increase from where it started the year. The fundamental comparison with companies like State Street (STT) is nothing short of astounding. This type of behavior reinforces the thought that we’re late in the cycle and in a topping process.
One thing most investors are unaware of is The Federal Reserve is set to start unloading shares of exchange-traded fund holdings that it accumulated during the pandemic. As of last Wednesday, the Fed’s plan is to begin selling its positions in corporate debt over the remainder of the 2021 year. Per Bloomberg, “Portfolio sales will be gradual and orderly, and will aim to minimize the potential for any adverse impact on market functioning by taking into account daily liquidity and trading conditions for exchange-traded funds and corporate bonds,” the Federal Reserve stated. We don’t expect any fireworks, but it will be interesting to see how the market absorbs the supply.
Last but not least, we’re still very bullish, on some assets but our scope has narrowed given prices and where we believe the world is heading. Here’s what we like: Consumer staples, Dividend growth, companies with strong cash flows, commodity producers, energy, financials, precious metals, miners, MLP’s, Asian bonds, Asian stocks, Japanese stocks, and private credit. There’s always a bull market somewhere, but please stay vigilant and safe. And be mindful of what’s in your portfolios!
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