May 2021 Market Update
There has been an impressive rotation out of technology stocks and into industrial, basic materials, and financial stocks in 2021, and the first couple of weeks of May have seen that rotation continue. Basically, the stocks that outperformed in 2020 are underperforming in 2021, and vice versa. Of course, there are exceptions, but this trend has generally held true.
Further, the equal-weighted S&P 500 index is outperforming the market-cap weighted S&P 500 (that’s the one that is usually referenced), meaning that the average stock is outperforming the biggest stocks. In my mind, this is a positive, as it implies that there is a lot of strength underlying the market, and it also implies that the average investor, who may not be top-loaded in the biggest stocks, is having a good year.
This week it was reported that inflation jumped to 3%, which was well above estimates. Drastically influencing this monthly reading is the swift economic reopening accompanied by enormous stimulus and supply chain shortages (everything from microchips to gasoline… remember last year when we were hunting for toilet paper and hand sanitizer!). For example, used car prices were up an astounding 16.2% over the previous month, airline prices were up 10.2% and hotel prices rose 8.8%, which seem like unsustainably high numbers. For those reasons, you’ll hear economists describe inflation as “transitory,” meaning they think that these numbers can’t (and won’t) continue.
Nevertheless, this “inflation scare” is creating volatility in stocks, particularly the growth names (like technology). I believe this will result in a buying opportunity for equities on a potential pullback. However, it is hard to predict how far or long it will go. The market as a whole is not deeply oversold yet, but the overall trend remains bullish with plenty of potential support levels nearby.
We are carefully monitoring the impact of inflation and, while I think the odds are that it will pass through the economy in a short period of time, I can’t deny that there has been a lot of stimulus, which certainly has the potential to cause inflation. I’m watching the Federal Reserve’s actions, and if they start to reduce the amount of stimulus they are providing, it may be a warning sign for stocks. The bond market appears to be taking the inflation news in stride, as interest rates did not get back to the highs they were at in March. Bonds tend to be very inflation-sensitive, so the fact that yields did not surpass old highs is probably a good sign for stock prices.
I still favor technology, industrial, and financial sector stocks, and I would still overweight stocks in a portfolio and underweight bonds. I prefer US stocks to international ones, as well. While valuations are not cheap, it looks to me that economic fundamentals will catch up, providing the necessary support for stocks.
After a break from Required Minimum Distributions from IRAs last year, they must be taken in 2021. You have all year to do it, but I advise not waiting until December. There’s an old adage “sell in May and go away,” meaning that many times in the past, stocks had a short-term peak in May. In my mind, this has always made May seem like a logical time to take IRA distributions, as the IRA account may have hit its high-water mark for a few months. Of course, blanket recommendations don’t apply to everyone, and adages aren’t rules, but it’s worth considering. And don’t forget that you may be eligible to give your distribution directly to a charity, which has the potential to help you out on taxes. Check with your CPA on that, though, as we don’t provide tax advice.
Finally, Memorial Day is coming up soon, marking the unofficial start to Summer. More importantly, it is a day dedicated to honoring the Americans who have sacrificed their lives while serving in the military. The team at Signature Wealth thanks all who have served, and is especially grateful those who sacrificed so much for our country.
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
Past performance may not be indicative of future results. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not guarantee a profit nor protect against loss.
The foregoing is not a recommendation to buy or sell any individual security or any combination of securities.