Weekly Market Guide - Butler Financial, LTD
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Weekly Market Guide

Review the latest portfolio strategy commentary from Mike Gibbs, managing director of Equity Portfolio & Technical Strategy.

Short-Term Summary

The remarkable rally in US equities continued over the past week, taking the past 50- day move up to 40%- the largest experienced since the 1930s. 25+% up-moves in 50 days are extremely rare with the other three times since 1940 coming out of recessionary bear markets in 2009, 1982, and 1975. In these other three periods, the S&P 500 then stalled for a 1-2 month period with a 6-7% pullback occurring within. We remind investors that it is a normal function of the market to often experience its sharpest gains, following its sharpest pullbacks. And it is also normal for the market to “cool off” or consolidate these sharp gains in the weeks to months ahead. While we believe the odds are high that the S&P 500 digests its gains in the short term, we also believe that a normal pullback should be used as a buying opportunity. Extremely sharp up-moves and overbought conditions are often also indicative of above average forward returns over the next 12 months.

The enormous fiscal and monetary stimulus (with more likely to come) continues to fuel the market and outweigh the current economic contraction. There has also been optimism on vaccines and therapeutics in recent weeks, along with a bottoming (and start to the recovery) of economic activity. Beneath the surface, the market has continued to broaden out with the cyclical sectors and small caps “catching up.” The pick up in economic activity and risk-on move came in conjunction with the US 10 year yield breaking out above the upper end of its recent range at 0.75%, as well as the US dollar making a sharp move lower. We believe the market is in the early stages of a bull market, and this improvement in risk-on positioning supports our view.

Fundamentally, low inflation and extremely low interest rates (and likelihood that they both stay lower for longer), make the S&P 500’s current P/E multiple of 21x much more realistic in our view. For example, the equity risk premium (difference in S&P 500 earnings yield and US 10 year bond yield) is still at 4% following the market’s rally. This remains over one standard deviation above the long term average, and the S&P 500 forward 3-year return has never been negative following a 4% or higher reading. Additionally, the S&P 500’s dividend yield (1.84%) remains over 1% above the US 10 year Treasury yield (0.80%), keeping it near its highest relative value of all-time. 93% of dividend-paying S&P 500 stocks have a higher dividend yield than the US 10 year Treasury yield.

In sum: The exceptionally strong market recovery is indicative of above average forward returns in our view, however we recommend patience and selectivity in the short term for new purchases. We would not be surprised to see the S&P 500 consolidate its sharp gains in the coming weeks and months, and would use pullbacks within that period to accumulate stocks more aggressively for the longer-term bull market opportunity that remains.

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This material is being provided for informational purposes only. Expressions of opinion are provided as of the date above and subject to change. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct.

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Index Definitions

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market.

The MSCI World All Cap Index captures large, mid, small and micro-cap representation across 23 Developed Markets (DM) countries. With 11,732 constituents, the index is comprehensive, covering approximately 99% of the free float-adjusted market capitalization in each country.

MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 21 developed nations.

MSCI Emerging Markets Index is designed to measure equity market performance in 23 emerging market countries. The index’s three largest industries are materials, energy, and banks.

Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions.

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