Locally based CPA firm since 1956

The Dow finished the month of April with a 2.71% return bringing the year-to-date results to 10.68%. The NASDAQ returned 3.58% for the month helping it gain on the Dow with a year-to-date return setting at a respectable 8.55%. The S&P 500 finished the month with a solid 5.24% gain bringing its year-to-date return to 11.32%.

Most folks believe the stock market is a predictor of the economy but in the investing world we often quip that the stock market has predicted 9 of the past 5 recessions. While this quote is backed with data reflecting stock performance about 6 months ahead of economic swings, the point is that the stock market may attempt to reflect the economy in advance, yet it is incorrect as often as it is correct. There are many questions regarding stock market valuations and no doubt, by traditional measures such as the Price to Earnings ratio (P.E. ratio), the market is trading rich compared to historical valuations. Can this hold? The first quarter Gross Domestic Product (GDP) for the United States was reported +6.4% which is a big number and is expected to exceed that performance in the 2nd quarter. The largest positive contributions to the real GDP growth rate in Q1 were personal consumption, business fixed investment, and government purchases.  The weakest component, by far, was inventories which leads to concerns regarding inflation. After all, the chief drivers of inflation are supply and demand. The re-opening of the economy is unleashing pent up demand. One example of this is consumer spending on durable goods rose at a 41.4% annual rate, with purchases of motor vehicles and parts up at a 51.5% rate, despite supply-chain issues like a lack of semiconductors holding back supply. If the economy continues to grow at the current pace, then earnings can grow which could support the PE ratio valuations.

What can go wrong? The easy answer is ‘lots of things’ but currently we believe the biggest concern is inflation. There are many factors driving inflation and sometimes inflation is good for earnings and good for the stock market. Inflation is bad for the stock market when consumer prices rise faster than corporate earnings which means our invested dollar will not buy as much this month as it did last month therefore the stock valuations are not as meaningful.

Don’t fight the Fed, where is the Federal Reserve in all this? The Fed expects 2022 to have higher wage growth, higher taxes, and higher interest rates. At least that is what we discern by their recent statements. Markets do not believe the Fed when they say they will sit pat. The Fed will likely slow down buying bonds but has said repeatedly they will not raise rates and do not see a need for higher rates until 2023.

Another likely head wind for the markets is President Biden’s proposed tax increase plan. The devil is in the details, but we know that 90% of Americans spend 99% of their monthly income, while 10% of Americans spend 64% of their monthly income. As Biden tries to tax the wealthy and push those benefits to the less wealthy, there could be selling
pressure on assets to cover the increased taxation.

In a traditional 60/40 portfolio: higher interest rates hurt stock prices when the 10 Year U.S. Treasury reaches 4.5% (historical) but since the 2009 Financial Crisis the pain has begun to be felt at around 3.6% on the U.S. Treasury. If the Fed keeps the short rates anchored while the long rates (30 – year treasury) rises, the 10 year will likely move toward 2% from current 1.7% but remain well below the historical point of pain for equities.

May means Mother’s Day. In 1914, President Woodrow Wilson signed a bill designating the second Sunday in May as a legal holiday to be called “Mother’s Day”—dedicated “to the best mother in the world, your mother.” For the first few years, the day was observed as a legal holiday, but in absolute simplicity and reverence—church services were held in honor of all mothers, living and dead. Mother’s Day endures and evolves. Just as Mother’s Day was the creation of multiple women, the modern Mother’s Day celebrates the varied
roles of mothers today. Mother’s Day came about due the efforts primarily of three women.

• Anna M. Jarvis who wanted to memorialize her mother’s lifelong activism, her efforts caught the attention of the mayor of Philadelphia who proclaimed a local Mother’s Day in 1908. Her mother is mentioned here in #3.

• Julia Ward Howe who was a famous poet and reformer during the Civil War who authored “The Battle Hymn of the Republic”. Around 1870 Julia called for a “Mother’s Day for Peace”.

• Ann Reeves Jarvis, known as “Mother Jarvis”. Ann was a young Appalachian homemaker who taught Sunday school lessons. She also was a lifelong activist who, in the mid-1800s, had organized “Mothers’ Day Work Clubs” in West Virginia to combat unsanitary living conditions and teach young mothers how to safely care for their children.

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Have a question? Let me know! Email me at kcompton@wcmtexas.com.