Conditions Are Perfect For An Extraordinary Third Quarter Stock Market
Forbes Jun 30, 2021
Here comes the third quarter stock market, and it promises to be a winner. There is an exceptional coalescence of forces that are beginning to drive the U.S. economy and the U.S. stock market.
The third quarter's strong foundation will be built in July and August
The coming July/August company earnings reports and economic releases for the 2nd quarter 2021 will reveal a desirable growth pattern for both the 1st half of 2021 and a full year that no longer includes the ugly Covid-shutdown 2nd quarter of 2020.
Fortifying that information will be the busy summer activity observations that are already visible, thereby firming up the second half 2021 growth expectations.
All this information puts the stock market on a solid foundation.
[Worried that the stock market is overvalued? It's not. In fact, it may be undervalued. Read " An Issue Holding Back Investors: The Erroneous Belief That The Stock Market Is Overvalued"]
Now to the areas that could boost growth and optimism significantly…
The third quarter's key month: September
In good times (like now), the stock market can get a real boost beginning on the day after Labor Day (September 7 in 2021). Wall Streeters return from their vacations, forget summer and turn their eyes to 2022. This year, that focus shift could produce good news.
Throughout the past months, the growth outlook has remained optimistic for 2022. On September 7, that new year will seem close.
Beyond growth forecasts, there are potential trends that can ramp up stock market interest considerably
Here are the trends:
A buoyancy of spirit and a willingness to spend in all areas of the economy: governments, businesses, organizations and consumers
For businesses, a move from the we're-all-in-this-together pandemic reaction to an individual strategy-based competitive operation
We're already beginning to see the activity associated with that shift: Management changes, capital spending, restructuring, spinoffs, breakups, mergers, acquisitions, vertical integration to control supply and distribution chains plus horizontal integration to expand company strengths into new areas.
On the finance/capital market side, Wall Street will be busy aiding those that want to accomplish the activities above. Then there are the IPOs that will range from newly public companies (often from venture capital funds) to formerly public, longstanding companies currently held by private investors/funds. A lively stock market is just the environment that makes IPOs successful.
As to that lively stock market, it is just the thing to raise investor interest in stocks. Interestingly, the catalyst for returning conservative investors to the stock market may be the younger generations' interest in stocks. Well, that and a rising market that stops being seen as risky.
A unique boost comes from the U.S. generally being ahead in the global pandemic recovery race. It is helping give U.S. companies a head start
A final driver has been described as a negative: Shortages – of resources, parts, labor and shipping. However, almost all demand can be filled by an alternate supplier, product substitution or simply waiting – that is, transferring the economic activity to the next period. Therefore, view those shortages as causing deferred demand fulfillment – not as a total loss. And that means the negative effect on the second quarter's economy and business activity should be a positive boost in the third quarter.
The bottom line: A rising, optimistic -even exciting- stock market could occur in the third quarter
So many positive economy and stock market signs, with sound catalysts and drivers. As companies report their earnings, economic releases come out and Wall Streeters return in earnest on September 7, this stock market could be at a significantly higher level by quarter's end – maybe even with the Dow Jones Industrial Average above 40,000.
THEN YOU HAVE THIS Markets Insider Jul. 10, 2021, 08:45 AM
The S&P 500 could drop sharply in the 3rd quarter as the '5 P's' pressure markets, Bank of America says
The first half of the year has brought good news for many assets, but the rally could use a "breather," BofA analyst write.
The five P's - pandemic, price, positioning, policy, and profits - are set to weigh on markets in the third quarter.
Stocks may also fall preemptively, as investor jitters make lower Q4 profits show up in Q3 share prices.
Sign up here for our daily newsletter, 10 Things Before the Opening Bell.
Bank of America is anticipating a preemptive slowdown in the third quarter as investors fearing the "five P's" pull back across asset classes, analysts wrote in a note.
The first half of the year has brought good news for many assets, but the "Wall St boom/bubble" could use a "breather," BofA's analysts wrote.
In their view, the five P's - pandemic, price, positioning, policy, and profits - look set to weigh on credit, stock, and commodity returns in Q3, partially in expectation of weaker company earnings relative to growth in the fourth quarter.
Pandemic
With Covid cases around the world ticking up due in part to the Delta variant, BofA expects growth and earnings expectations for this year and next to fall. That could lead to downward pressure on asset prices.
Price
The latest Covid wave comes as asset pricing is already robust, with the S&P 500 price-to-earnings ratio at dot-com bubble levels. Commodities and housing are also at or nearing historic valuations. US spreads between risk-free and junk bonds are exceptionally tight, as junk bond yields fell below inflation on Friday. (Prices rise when yields fall.)
Positioning
The analysts pointed to survey data showing fund managers pouring money into "late cycle" assets - those best suited for inflation and weak growth. In Q3, they see the S&P 500 falling below 4,000, a drop of roughly 8% from current levels, led by flagging tech stocks, which many investors (wrongly, in their view) see as a good defensive option.
Policy
Inflation across the developed world will force monetary and fiscal authorities to ease up on stimulus measures in the coming quarter. Moreover, prospects for Joe Biden's proposed $1.7 trillion infrastructure package have dimmed as the administration now pursues a slimmed down bipartisan deal.
China is still a "wild card" in terms of policy, the BofA analysts wrote, but the central bank seems wary of overheating the country's fragile financial sector.
Profits
Between potential future Covid restrictions, supply shortages, and likely growth deceleration, corporate profits are poised to feel the pinch in the second half of the year. Stocks may also fall preemptively, as investor jitters make lower Q4 profits show up in Q3 share prices.
? Ts ? Well my BAC sure has taken a little hit the last two/three weeks
AI
