Stocks Extend to New All-Time Highs

By John Stewart, chief investment officer at Farmers Trust Co.
CANFIELD, Ohio — Despite plenty of things out there to worry about, major stock indexes shrugged off a mid-June pullback to break out to new all-time highs yet again this past week. In fact, the S&P 500 has made a total of 35 new highs so far this year.

With all the concern over an uptick in new strains of COVID including the so-called Delta variant, how is it possible that the stock market is so sanguine? The biggest reason is that corporate earnings estimates continue to get revised higher. In the past 3 months, second quarter profit estimates have risen more than 10% from expected growth of 48% to more than 59%.

Markets also typically love to climb a wall of worry. When there is something to worry about, investors keep some cash on the sidelines – that represents potential fuel for stock buying as some of those pessimists get converted to optimists. It’s when there is seemingly nothing to worry about that you should be the most worried – weird, huh? But that’s how it usually works.

In addition, recent economic progress has been good enough to keep those earnings estimates moving higher, but not so good as to worry investors that the Fed is going to take away the punch bowl too soon by tightening monetary policy.

Featured Insight:  Fixed Income is Still Important

  • With interest rates at ridiculously low levels, many investors are questioning whether it still makes sense to have any bonds or fixed income assets in their portfolios
  • The short answer – unless you’re quite young and/or have a very high tolerance for risk – is YES! One big reason is to ensure you have safety and liquidity in the event you need money when the market is in a downturn.  Would it have made sense to sell stocks in March of last year, during the onset of the COVID pandemic?
  • Also, there are plenty of ways to earn attractive total returns even when yields are low.  Treasury Inflation Protected Securities, or TIPS, have returned more than 6% during the past year despite very low interest rates.  Many foreign bonds are up in excess of 10% over the past 12 months as the decline in the dollar has resulted in higher prices for those assets.

Looking Ahead:  July Strong in Post-Election Years

  • July is historically a pretty good month for stocks during the usually dull summer months when trading activity dissipates a bit with many on vacation.
  • In fact, during a post-election year, July has averaged the strongest return for the S&P 500 of any other month since 1950, up 2.2% on average.
  • August and September are the months investors usually need to worry about, as they tend to be two of the weakest months of the year on average.
  • While I certainly wouldn’t advise rushing out to sell all your equities at the end of July, it could be an opportune time to rebalance your portfolio – that is, harvesting the gains in the asset classes you are overweight while adding to those you are underweight.

Copyright 2022 The Business Journal, Youngstown, Ohio.