The S&P 500 Index and the Dow have managed to pierce overhead resistance. This week, both hit record highs. It seems only a matter of time before the NASDAQ will follow, but probably not before we have a minor pullback.
As of Friday morning, equities have managed to string together seven days of continuous gains. Do I hear eight?
That is a tall order, because stocks are now overextended by just about every measure I follow.
We could do with a minor pullback, or pause, before extending this rally higher.
Credit for the gains can be attributed to third quarter earnings results. The results have been much better than expected. The big fear was that supply chain disruptions and rising prices would crater corporate results.
Company managements are acknowledging that disruptions are hurting results, but despite them, business is still growing.
And at the same time, companies have been able (for the most part) to pass on rising prices to consumers and getting little-to-no pushback from the public thus far. Guidance is good, and if this goldilocks kind of environment lasts, it’s up, up and away.
And while fear of inflation does not seem to phase equity investors, it is another story over in the bond market. The benchmark U.S. 10-year bond yield is climbing, reaching its highest level in months at 1.67 percent.
The high this year so far has been about 1.76 percent and the bond vigilantes seem determined to keep selling bonds until we hit that level. The last time that occurred equities did fall by almost 5 percent. The question is what will happen this time around.
In the meantime, both yields and stock prices are heading in the same direction, which has been great if you own financials, but not so good if you are overweight technology. It is one reason why NASDAQ has yet to recover all their losses from the September-October declines.
The Democrats continue to behave like their own worst enemies, failing day after day to come to a compromise that would move President Biden’s “Build Back Better” legislation forward.
As it is, the proposed $3.5 trillion plan has been whittled down to somewhere between $1 trillion and $2 trillion. It appears that the corporate tax hike has also fallen by the wayside, although individual taxes are still on the table.
As I have counseled, readers should expect more delay and more compromise before some watered-down plan will finally be passed, hopefully this year.
My own explanation, however, on why investors and the markets have become more optimistic over the last two weeks is the pandemic. Every week over the last 18 months, I have been writing that the coronavirus was the overriding issue for the economy and the stock market. And yet, I realized over the weekend that I have not mentioned the coronavirus once in the last two weeks.
Does that mean the pandemic is over? No, not by a long shot, but I think we are over the hump barring some new and vaccine-resistant variant. Thanks to the government’s vaccination and booster efforts, we may be turning the corner, which could usher in a further spurt of growth in the economy.
As such, I believe we could see further gains in the stock market as the year progresses.
In the short, short-term, I am expecting a pullback in the markets as early as next week. On the S&P 500 Index I could see risk down to 4,450 or so, but 50 points at a minimum. That would be a dip to buy.
Bill Schmick is registered as an investment adviser representative of Onota Partners Inc. in the Berkshires.
He can be reached at 413-347-2401, or e-mail him at email@example.com.