Despite the start of a new year and the hope represented by a new presidential administration, 2021 hasn’t gone off to a great start — that is, if you get your talking points from the mainstream media. From the novel coronavirus pandemic to social unrest, we seem to be fracturing. Yet the S&P 500 continues to set new records, leading the benchmark SPDR S&P 500 ETF Trust (NYSEARCA:SPY) to a very solid 2% year-to-date gain.
But is this an example of Wall Street valuations not aligning with the troubles on Main Street or is there another explanation?
To be fair, I can understand why many investors are turning skeptical on this bull market. Prior to the December jobs report, analysts expected nonfarm payrolls to increase by 50,000. Instead, the economy shed 140,000 jobs, the first reversal in eight months since the coronavirus upended our lives.
Nevertheless, the impact to the S&P 500 has so far been limited — and no, it has nothing to do with dissociation from reality. Instead, the details of the jobs report suggest that we must pay attention to context before giving up on the rally. Primarily, the sector that suffered the most was leisure and hospitality, which lost 498,000 employment opportunities.
This isn’t to say that this segment of the economy doesn’t matter. We all play our parts. After all, 70% of GDP comprises consumer spending. Additionally, tourism also provides a major revenue source. But the main point is that other than the pandemic, there was no other negative catalyst to drive down the economy.
If there were, the S&P 500 wouldn’t have brushed off the jobs report. Because what many don’t focus on is the good stuff. Professional and business services employment increased by 161,000. Further, we saw notable gains in the retail trade and construction.
Put another way, you don’t want to jump off this bull just yet. In fact, the fun is just getting started.
The Resilience of the S&P 500 Has Precedence
Interestingly, several mainstream pundits have cited the possible lingering effect of the pandemic as the reason for investors to be cautious of the S&P 500. But this very headwind is also the reason why the market is strong — and will likely continue rising in strength throughout this year.
I’m confident in this assessment because we’ve seen this playbook before. The only difference now is that both fiscal and monetary policies are working together for the same goal: drive up confidence, which in turn will stimulate the economy, attracting investor capital along the way.
Indeed, the investment market is really the rational manifestation of rewards and incentives. For instance, the period between the 1960s to the early 1980s were characterized by rising interest rates. As you know, rising rates incentivizes savings. Therefore, we didn’t see as much growth in the S&P 500 because the risk/reward profile didn’t favor such exposure.
By the numbers, between the 1960s to 1980s, the 10-year Treasury (constant maturity rate) increased nearly 119%. Over the same period, the S&P 500 gained almost 137%.
However, it was a much different story from the 1980s onward. Between then through the 2010s decade, the benchmark interest rate declined by 77.3%. On the other hand, the S&P 500 ballooned by 886%. It’s a simple equation: if there’s an incentive to put money to work in the equities sector, people will do what is rational.
And that’s why I don’t view the present market rally as an unsustainable dynamic. People talk so much about the division. But what’s uniting us at this very moment is the general need for stimulus (I understand there’s debate about the specific numbers) to support the American people.
However, stimulus programs have a cost in that it basically cheapens money. To prevent absorbing this penalty, savvy investors are building wealth through equities. Again, this is a rational strategy, not a bubble.
Mainstream Will Pile in Too
There’s another misconception that the fat cats on Wall Street are the only ones benefitting from this crisis. That can’t be true though as many market newcomers piled into equities through popular trading apps like Robinhood. As well, a good portion of these rookies are in it for the long haul.
For those folks who have been fortunate to not be severely impacted by the coronavirus, future rounds of stimulus checks will likely be allocated to stocks. As I stated earlier, when there’s no incentive to stay in cash, people will choose viable paths to grow their money.
Additionally, those who desperately need their stimulus checks will eventually be in a position to grow their money as well. Evidence comes in the form of the delinquency rate on credit cards, which has dropped to all-time lows. This indicates a behavioral shift toward discretionary funds. Rather than being consumptive, Americans will probably be more accretive.
Over time, we could see more money move into equities, especially as some play catchup on their financial goals. This and other factors perfectly align with my overall thesis of the Roaring 2020s. Thus, the point stands — now is the time to be in the market, not out of it.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.
