Viva Las Vegas! Viva the Stock Market!

“Las Vegas is a city built on hopes, dreams, and a little bit of crazy.”– Michael McDonald

No truer words have been uttered about “Sin City,” and perhaps the same can be said for the current market environment. Investors hope and dream that stocks will continue to rally but feel a bit crazy for believing that is even possible when the spread of the Delta variant and rising inflation threaten to derail the bull market and the economic recovery.

Given the comparison between Las Vegas and the stock market, it was apropos that the 2021 AICPA ENGAGE Wealth Management conference in Las Vegas opened with a talk by Dr. David Kelly, JPMorgan’s Chief Global Strategist; titled “Investing in a Post-Pandemic World.” Here are some of the key takeaways.

• Pandemic: After a slowdown in the spread of COVID due to the vaccine rollout, the Delta variant is now causing a spike in cases, hospitalizations, and deaths, mostly among the unvaccinated population. As a result, vaccinations have picked up again, and the combination of vaccinated Americans and those that have knowingly or likely had COVID continues to push the US towards herd immunity.
• Fiscal Policy: Since March 2020, there has been an unprecedented amount of government stimulus to at first keep the US economy afloat and to now keep the economic recovery humming. Congress is working on a bi-partisan infrastructure bill that could add another $1 trillion+ of spending, about half of which is financed through the issuance of government debt.
• Economy: US GDP is surging as the pandemic recedes. The economy grew by 6.4% in the first quarter and another 9.4% in the second quarter. GDP growth for all of 2021 is expected to be 7.3% year-over-year. While unemployment has fallen significantly, there are still over 9 million job openings. Extended unemployment benefits, which will expire in all states by September 6, may have accounted for much of the labor shortage. Regular unemployment benefits plus the additional $600/week equate to a 40-hour week at $16/hour – higher than the wages offered for many of the unfilled jobs.
• Federal Reserve Policy: The Fed is expected to keep short-term interest rates near zero through 2023 despite upgrading its forecast for economic growth and inflation. However, the Fed will likely taper quantitative easing (bond buying) later this year. Inflation is above its historical average, although the uptick in inflation is largely transitory due to a combination of pent-up consumer demand and supply shortages.
• Investing Challenges: At a price-earnings ratio of 22.4x for the S&P 500, US stocks look expensive. However, the index’s valuation is driven by extremely expensive large technology companies (Apple, Amazon, Google, Microsoft, and Facebook), which due to their size, lift the overall valuation of the S&P 500. Smaller and more value-oriented companies are cheaper by comparison, as are international companies. With both short and longer-term interest rates still very low, bonds (especially US Treasuries, which we shifted direct exposure away from earlier this year) are expensive. And, if the Fed keeps rates too low for too long, there is risk of an asset bubble.

When looking at the current market environment, it may be easy to conclude that stocks cannot possibly go higher. However, history has shown that whenever the market hits a fresh high, additional highs are on the near horizon. Failure to remain invested or to put new money to work means missing out on the continued rally. And, being diversified reduces risk and makes investing less of a gamble. So, while playing the markets may at times feel like going to Las Vegas, keeping in mind that stocks are up far more often than they are down means investing is a far better bet than any casino can offer.