After a pretty lethargic January (the S&P 500 was down about 1%), stock indices have rocketed upward so far in February. The big news over the past few weeks has been the wild ride of some heavily-shorted stocks, although a lot of that activity seems to have settled down, for now.
While the S&P 500 index of large, US-based companies is doing well– up about 4.5% in 2021– smaller-company stocks are doing even better. The Russell 2000 index of small stocks is up over 16%. The emerging markets index is also continuing its outperformance and is up about 10% in 2021.
Interest rates have moved higher, and the 10-year US Treasury bond now yields about 1.16%, which is up from about 0.66% in August. That may not sound like much, but in terms of percentages, the yield has come close to doubling. When bond yields go higher, bond prices generally go lower, and we have seen that this year. Often, the best way to combat that is by owning short-term bonds, which tend not to be as interest-rate sensitive.
Oil and gas stocks have generally done well this year, as the price of oil has moved higher, which we have noticed at the gas pump. Stocks of financial companies are also doing well, as they tend to like a rising interest rate environment. On the other hand, utilities stocks and consumer staples stocks have underperformed, as they often do when interest rates rise. Of course, we’re only a month into 2021, so we’ll see if these trends continue to play out. It is my assumption that interest rates will push higher, which might make for tough conditions for bonds and utilities. I think it might be best to think of those areas as salmon swimming upstream—they can do it, but it won’t be easy.
My indicators show favorable conditions for most stocks now, but a pullback or two is likely. One thing that does bother me a bit is what appears to be a high level of excitement, bordering on greed, in the stock market. Not on all stocks, of course, but on a great many. It worries me when I see investors, or really speculators, chase stocks higher. This greed can go on for quite some time, as anyone who remembers Alan Greenspan’s “irrational exuberance” comments can attest. So, just because prices are high doesn’t mean they can’t go higher. I suggest not getting overextended in the high-flying stocks, though.
In summary, conditions remain supportive for higher stock prices, but don’t be surprised at a dip. They happen. If interest rates too much more, or if speculation becomes untenable, I may change my opinion about stock prices.
Other than my accountant friends, not many of us look forward to tax season, but it is upon us. Raymond James will start mailing 1099s in mid-February, but please keep in mind that your particular 1099 may not be ready at that time. In some cases, mutual fund companies are late getting tax information to us so that we can relay it to you. We absolutely want to get the 1099s out as soon as possible, but we have to make sure we get you the correct information. You should be receiving your personal copy of our 2021 Tax and Retirement Guide soon. If you hear anyone complaining about their taxes or considering retirement, just email or call me and I’ll send you a copy of the guide that you can send to them. Now’s a great time to plan for 2021 taxes (so that we can do something about them).
Lastly, our offices will be closed on Monday, February 15 in observance of Presidents’ Day. I hope you have a great February, and please don’t hesitate to contact us if you need us.