It was a rough week in the markets. Investors were whipsawed throughout the week and finished down once again. I expect more of the same for investors this month.
However, I don’t expect stocks to go straight down, find a bottom and then rebound. This downdraft is occurring at about the same time that markets sold off last year, but I do not expect the kind of severe correction we suffered through then. Overall, I am anticipating a 10-15% decline as I mentioned last week. Actually, as of Friday (March 5, 2021) morning, we have suffered a 6.3% decline from the top on the S&P 500 Index futures contract. The pullback, by the way, is long overdue. I am hoping it will flush out some of the speculation and froth that were rising to dangerous levels among certain stocks.
The small backup in interest rates we have been experiencing in the last three weeks has been an excuse for a sell-off, in my opinion, but not a reason to fear the future. My evidence: we are on the cusp of an additional $1.9 trillion in fiscal stimulus, which may be passed by the Senate as early as this weekend. An even larger government spending program in infrastructure may also be in the offing in the coming months.
Of course, as I have been saying for a year, the key element to the future health and well-being of the economy, and the stock market, will be the country’s battle to vanquish the coronavirus. Right now, thanks to the vaccination and rapid distribution of the drugs by the present administration, that battle looks winnable in the months ahead.
But investors have not been waiting around for that to occur. A re-opening trade has been ongoing since the beginning of the year. Airlines, cruise lines, hotels, and casino stocks, among others, have all been gaining. That is an area where I would add some money in this pull back.
All my recommended natural resource plays have also been booming, led by energy. The bull market in commodities has a number of tailwinds that I believe will propel that sector even higher this year, but runaway inflation is not one of them. The present belief by a growing group of Wall Street analysts, namely that “inflation is here to stay so buy commodities” is too simple.
There is a big difference between expecting reflation (my opinion) and inflation, (or worse, hyperinflation). As global economies re-open, the demand for materials and other commodities should rise. If you throw in some supply chain issues and other pandemic-related conditions, sure, prices are going to rise, some substantially, but that is simply textbook economics. That doesn’t automatically translate into an inflationary problem as so many are predicting.
It has been so long since we have had any real inflation, that there are investors out there that have never seen inflation in their professional careers. If you throw in the two-thirds of professional investors and traders who have also never experienced a rising interest rate environment, you have the makings of a perfect storm of inexperience, ineptitude, and chaos. I believe that is what we are witnessing in today’s financial markets.
The Ides of March is actually on the 15th of this month and I expect to see a continuation of this chop fest at least until then, if not longer. The best declines are those that are sharp, short, straight down, and over before you know it. Unfortunately, I expect this correction to be different. There will be relief rallies like the pre-market 1 % gains in the markets on Friday mornings followed by sharper down days. This kind of action should keep us all biting our nails, and if you attempt to trade it, emotionally exhausted and stressed out. The time to take profits is in the past. Hopefully, you followed my advice last month and did just that, but it is still too early to employ those funds.
The good news is that once this month comes to a close, I expect stocks and the economy to explode in the third and fourth quarters. All we need do is get through this month.