Pro Perspectives 6/30/21

June 30, 2021

Today ends the month, and first half of the year.

We entered the year with what I called a set up for “a replay of the late 90s boom” for stocks and the economy. 

With that in mind, we’ve had a 14% gain in the S&P 500 for the first half of 2021.  That’s well above the long-term average appreciation of stocks, which is 8% per annum. 

So is this the exhaustion point for stocks — at least for the year? 

Unlikely.  Remember we have 30%+ growth in money supply over the past sixteen month.  That’s a lot of excess “money chasing too few assets.”  Add to that the fiscal and monetary stimulus continues to run full-throttle.  

This is akin to opening the spigot on a water hose and filling up a bunch of buckets.  Some buckets start to overflow, and that pushes money into buckets that have the capacity to accept water.  This is analogous to what happens to money (over) flowing into good assets, and then being pushed to lower quality assets.  Before you know it, all of the buckets are over flowing, while the water continues to flow.  

Of course, this is a recipe for inflation — likely rapid inflation.  But until the Fed first stops fueling it, starts chasing it, and then controls it, the asset boom will continue. 

With that in mind, keeping with my comparison to the late 90s boom, here’s how the first six-months and last six-months played out during that 90s boom period…

1995 first six months = +19%, last six months =+13%.
1996 first six months = +9%, last six months =+11%.
1997 first six months = +20%, last six months =+10%.
1998 first six months = +17%, last six months =+8%.
1999 first six months = +12%, last six months =+7%.

As you can see, a big second half followed a big first half, in all five years. 

What would drive this kind of performance for the remaining of 2021? Q2 data. 

In the next few weeks we will see Q2 earnings that will blow away the earnings from the same period a year ago (at the depths of the crisis and the extreme of the economic restrictions).  Not only will the earnings growth be huge, but the expectations bar has been set very low (despite the upward revisions).  That means huge positive earnings surprises are coming in July.

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