by Jason Norris, CFA
Executive Vice President, Equity Research and Portfolio Management

Summer in the City

The Dog Days of Summer are here! In addition to the record heat waves expected to bombard the West Coast this weekend, we also await what typically occurs around this same time: equity market volatility and below average returns. It would make sense, then, if you remembered the adage, “sell in May and go away” and thought to act. However, we would not recommend trading stocks based on the calendar. When you look at the chart below, investors historically achieve positive returns over any three-month period.

We also expect additional “churning” in the equity markets after coming off such a strong previous year. The S&P 500 is up over 93 percent the first 15 months after the March 2020 bottom. When looking back at the 2009 Global Financial Crisis, stocks exhibited a strong short-term rally off the March bottoms well, delivering returns close to 70 percent. After the first year, though, equity investors took some time to digest the next phase. The chart below highlights the similarities between the most recent rally in stocks, and the returns after the global financial crisis as well as the early 1980s recession.

Summertime Blues?

The first year “snapbacks” are typically very swift. Although after a year or so, investors are looking for the next catalyst, which usually results in some market “digestion.” But the main difference between 2009 and now is the amount of stimulus in the system. This fiscal and monetary stimulus is a major tailwind for equity investors, which was different than what investors saw over a decade ago. While the increasing government debt and potential tax increases are headwinds, we believe the tailwinds of stimulus more than offset these issues. These tailwinds are highlighted in corporate earnings as seen in the chart below showing corporate profit growth for the S&P 500.

While 2021 is looking to be a great year for earnings growth, we also anticipate a deceleration due to potential corporate tax increases. If passed, this tax package might lead to a 2-to-5 percent reduction in earnings to the current 2022 growth estimate of 34 percent. However, we believe there will still be healthy growth, which keeps us positive on the equity markets. Despite the heat, it will be alright, and we hope you stay cool this weekend.

Week in Review and Our Takeaways:

Inflation fears have subsided for now as long-term interest rates remain relatively low around 1.5 percent
As global economies open up, corporate earnings should remain healthy which is a positive for equities

Disclosures