Party Like It’s 1999?: Q2 2021 Market Commentary

In February 1999, I made a bet with a friend employed at an internet startup that whatever five internet stocks he picked would be down in one year. I lost that bet. In 2005, I got in an argument with the same friend declaring real estate was clearly in a bubble. My friend, now a real estate agent, informed me that, “They’re not making more land and home prices have never gone down nationwide.”  I’m fortunate I didn’t make a wager that time as I would have lost that bet, too.

While I was eventually proven correct in both cases, I learned that trends and excesses can go on much longer than expected. As the economist John Maynard Keynes once said, “markets can remain irrational longer than you can remain solvent.”

What’s The Current Market Signaling?

Today, there are signs of excess:

• A slew of IPOs and companies going public via Special Purpose Acquisition Companies (SPACs) at lofty valuations;
• Speculation and extreme price appreciation in individual stocks that are not based on underlying company fundamentals;
• A significant run-up in the Goldman Sachs non-profitable tech index.[1]
• Elevated fundamental metrics like price-to-earnings ratios, which are perhaps most worrisome in our opinion, with the Cape-Shiller Price-to-Earnings Ratio at its highest level since 2000.[2]

Despite signs of excess and stretched valuations, we do not believe we are near a major market top, or that a serious stock market decline is imminent.

What Indicators Are We Watching?

Timely indicators like credit spreads continue to tighten, as measured by the U.S. Corp BBB – Treasury 10-Year Spread. In addition, the stock market rally remains broad-based as most stocks are at or near their recent highs, as measured by the percentage of S&P 500 stocks above their 200-day moving average.[3] These are not typically signs one sees near a market top.

In addition, we expect the U.S. economy, as measured by GDP growth, to be the highest it’s been in decades. If some macro research firm forecasts are accurate, it may be the highest economic growth since the 1950s![4] The combination of accelerating vaccinations, pent-up demand, and unprecedented amounts of monetary and fiscal stimulus may contribute to an exceptionally robust economy.

While there is no guarantee, the market typically does well when the economy is booming. In the post-World War II era, U.S. Real GDP growth has been higher than 6% eight times, and the S&P 500 Index was positive for six of the eight years or 75% of the time.[5]

Investors should also know that valuations can correct through price or time. We expect earnings to rebound this year, and if earnings growth exceeds price appreciation, markets will likely be “cheaper” at the end of the year than they are now.

What Portfolio Actions Should You Take?

In our opinion, this is not the time to be complacent with your investment asset allocation. We know from experience that what worked in the past may not work going forward. Reviewing your financial plan and aligning it with the proper allocation going forward is important to consider.

We recommend investors consider a globally diversified investment portfolio that includes more than U.S. large cap stocks and bonds. Some asset classes and parts of the market are only slightly higher than where they were years ago. The EuroStoxx 600 Index, which represents companies across the European region, passed its 2000 high and the S&P 500 Financials Index passed its 2008 high last quarter.[6]

We believe globally diversified portfolios are extremely well-suited for today’s market environment, as we feel asset classes other than U.S. large cap stocks are currently more attractive.

Partner With Your Wealth Advisor

If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of the Curi Capital team at 984-202-2800.

Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.

 Past performance is not a guarantee of future results. All investment strategies involve risk and have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and indexes do not reflect the deduction of the advisor’s fees or other trading expenses.

[1] Source: Bianco Research, LLC

[2] Source: https://www.multpl.com/shiller-pe

[3] Verrone, Christopher. Strategas. 3 March 21. “Momentum Rebalance Approaching… Important.”

[4] Lazar, Nancy. Cornerstone Macro. 3 January 21. “Consensus For GDP And Earnings Are Probably Too Low.”

[5] Source: Bloomberg Finance L.P.

[6] Source: Bloomberg Finance L.P.