Trend Positive But Near Term Outlook Murky

Stocks opened higher this morning, led by consumer discretionary & energy sectors. At the moment, the Dow is up 38 points and the S&P 500 is up .5%. Healthcare and real estate are down in early trading. Higher commodity prices and, as I noted yesterday, strong corporate earnings announcements are lending some optimism to the stock market. WTI crude oil is back up to $67.30/barrel, copper is up another .8% and gold is flat. The bond market is trading a bit lower. The iShares 20+ Year Treasury Bond ETF (TLT) is down .5% today and 5% on the year. The iShares Investment Grade Corporate Bond ETF (LQD) is down .1% today and 2% this year.

This morning CNBC highlighted a recent market trend that is making it tough for investors to develop an outlook for the remainder of the year. The broad market—as measured by the S&P 500—seems “directionless” at times, or at least without the strong overall trend we saw during the second half of 2020. This new phase of the post-Covid rally can be characterized by a slow grind higher. But looking under the hood reveals significant volatility and changing leadership among the sectors that make up the index. For example, the energy and financial sectors shot up 30% and 40%, respectively, during the first five months of 2021. But since then, those groups are flat to down 7%. During the first quarter, commentators and analysts tried to convince us that the technology sector was dead money and indeed it did nothing but tread water through mid-May. But since then tech is up 16%. For traders chasing these sector moves, the risk of portfolio whiplash is high. CNBC says, “…the market has shifted allegiances and sporadically punished one dimensional unconditional loyalty to one theme or style, whether it’s reopening, reclosing, small cap, mid cap, or mega cap.” In other words, chasing performance in a specific sector or theme is dangerous. In this kind of market the prescription is clear – diversify and “own companies that will thrive over the next two to three years because of their dominant position in a growing market.”

Bloomberg News points out that there’s “little consensus…about where the S&P 500 is headed in the next four months. Even forecasters within the same firm have different predictions.” Looking at year-end S&P 500 price targets from major Wall Street firms, there is a 1,000 point gap between the most bullish and most bearish forecasters. That’s a 22% gap! This is a perfect example of why short-term trading can be very risky. Four months is a short investment horizon and given the rapid sector & thematic changes noted above it’s impossible to predict outcomes.

Medtronic (MDT) reported better than expected quarterly results and the stock is up 4%. Revenue soared 23% from year ago levels. Medtronic stands to benefit from the return to more normal levels of elective hospital procedures. And while management noted a modest negative impact due to Covid-19 Delta variant, “for the most part, Covid is, we think, behind us. May was better than April, June better than May, July better than June.”