The two mostly closely monitored stock-market bellwether indices in the world, the Dow Jones Industrial Average and Standard & Poor’s 500, are making fresh all-time highs, despite bouts of profit-taking. We have discussed in depth the reasons underpinning the current market rally in previous pieces. Just last week, we touched on the subject in an article entitled “Only a fool would call a market top”. In it, we highlighted that historically (going all the way back to 1930), empirical evidence indicates that stocks, in general, have without fail recovered from every downturn to trend higher over time. In other words, investors should always maintain a fully invested, diversified portfolio with a long-term investment horizon instead of trying to time the market.
Notably, prevailing market narratives show that more and more analysts and investors are rounding to the bull side of the bull-or-bear market debate — underscoring optimism for stocks in the short to medium term, despite acknowledging elevated risks. A case in point is that even as investors continue to rotate from tech to reopening stocks, growth to value, cyclicals to defensives, and back, stocks are all moving higher in lockstep. This improving market breadth is a positive signal for the underlying market resilience.
Larry Fink, CEO of BlackRock, the world’s largest money manager, was quoted in a recent CNBC interview as saying: “I am incredibly bullish on the markets.” And, according to a survey from the American Association of Individual Investors, 57% of investors hold a bullish outlook for stocks over the next six months.
Furthermore, bond yields have stabilised — after the steep but short-lived (at least for now) rise from historically low levels — fuelling renewed vigour in US stocks. The benchmark 10-year US Treasury yield is currently hovering around 1.6%, off its recent high of 1.78% at end-March.
One of the biggest drivers of the ongoing rally is liquidity and the US Federal Reserve’s commitment to maintaining its extremely loose monetary policy, including near-zero interest rates and quantitative easing (currently at US$120 billion, or S$159.5 billion, a month in bond purchases).
The Fed wants to keep the party going. In the words of the Fed chair, “I’m in a position to guarantee that the Fed will do everything we can to support the economy for as long as it takes to complete the recovery.” The central bank views this year’s expected rise in inflation as transitory and does not foresee any rate hike through 2023, based on its dot plot median estimates.
Stocks have rallied well ahead of the underlying economic recovery over the past year, but Main Street is set to rebound strongly this year. A case in point is that consumer spending on retail and food services rose sharply in March (see Chart 1). This is in line with the recovery in mobility trends for places like restaurants, museums, parks, cafés and shopping centres — as the vaccination rollout accelerates. In the US, nearly 40% of the population has received at least one dose of the Covid-19 vaccine (see Chart 2). In fact, the country is among the furthest along in terms of vaccination rollout in the world.
There is plenty of surplus cash on the sidelines, both from enforced savings over the past year and stimulus cheques. According to Moody’s Analytics, US households may have accumulated some US$2.6 trillion in excess savings as at end-March 2021 — the biggest chunk of its estimated global excess savings of US$5.4 trillion, which is equivalent to 6.5% of gross domestic product.
The savings rate in the US as a percentage of disposable income averaged 17.5% in the 12 months to February 2021, more than double the average of 7.4% in the preceding (pre-pandemic) 12-month period (see Chart 3).
Meanwhile, consumer credit card and short-term borrowing levels have fallen on the back of lower spending (such as on travel, entertainment, dining out and transportation to work) given movement restrictions during the pandemic. Some have used stimulus cheques to pay down debts (see Chart 4).
Put another way, the pandemic has resulted in the shifting of some household debt onto public balance sheets, as evidenced by ballooning budget deficits everywhere. The International Monetary Fund estimates that average public debt will reach 99% of GDP in 2021, due to unprecedented stimulus support to mitigate the impact of Covid-19 on economies.
In the short term, the risk of rising indebtedness is manageable, given the very low interest rates and debt servicing. It would evolve into a bigger problem if the stimulus money (such as for massive infrastructure spending) does not translate into higher GDP growth over the longer term, that is, if countries cannot outgrow their debts. But that is a story for another day.
To be sure, the excess savings are unevenly distributed, with the biggest share going to higher-income households, also people who tend to save more than they spend. We suspect the bulk of these excess savings have gone to investments, which is part of the reason why stocks and bonds have rallied.
With the reopening of the economy, Moody’s expects 20% of US excess savings will be spent in 2021 and another 20% in 2022. That will add 2.4% to annual GDP growth for both years, and create a positive ripple effect that will filter down to the broader economy.
Consumer confidence is gaining traction as the unemployment rate gradually declines. Employers are hiring, especially in the services sectors like hospitality, leisure and entertainment, on the expanding reopening (see Chart 5).
That said, the number of unemployed remains far higher than pre-pandemic levels, justifying the Fed’s stance on near-zero interest rates. This underscores the belief that the US economy is in a “Goldilocks moment” — neither too hot nor too cold.
Our longer-term fear is whether the uptick in inflation will be more enduring than the market now assumes. As we have written before, we know prices will rise in 2Q2021 to 3Q2021 compared with the lows in 2020 (at the height of the pandemic) — but as the Fed rightly points out, this is transitory. We are also seeing a high demand for workers amid high unemployment, and yet there are still many vacancies. This suggests that a segment of people are choosing not to work as they continue to live off government handouts and their savings. Perhaps some are still wary and will eventually re-enter the job market after vaccination. If the situation persists, it could push up wages and cause a more sustainable rise in price levels than currently factored into most projections.
What all these mean is that a diversified portfolio today should lean towards US stocks, which will likely outperform the rest of the world over the next six months. At some point, the relative outperformance of US stocks will likely reverse — and your portfolio composition should then change to reflect this — when the Fed must shrink its balance sheet to a sustainable level and normalise monetary policy, when the unemployment rate is lower and especially if longer-term inflation starts trending above its 2% target. We will explore this subject further when the time comes.
The Global Portfolio closed 0.3% higher for the week ended April 21, lifting total returns to 60.7% since inception. The portfolio remains nearly fully invested. We continue to outperform the MSCI World Net Return index, which is up 48% over the same period.
The big gainers for the week were Geely Automobile Holdings (+11.4%), Okta (+5.6%) and Ericsson (+4.8%) while Singapore Airlines (-8.8%), Alibaba Group Holding (-6.7%) and Bank of America Corp (-2.9%) topped the losers’ list.
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
