Hard to Be Bearish…Stay the Course

May 10, 2021
Hard to Be Bearish…Stay the Course

“Buy not on optimism, but on arithmetic.”

– Ben Graham

Can the economic and earnings data, as well as returns, get any better than this? So far this year, the metrics are simply a thing of beauty. On the heels of a payroll report that revealed almost 1 million new jobs were created in March, we just learned that real gross domestic product (GDP) growth in Q1 is estimated to be over 6% and nominal GDP growth over 10%. These are levels we haven’t seen in decades.

Further, the manufacturing activity survey index reading of 64.7 released in March by the Institute of Supply Management represents a 37-year high. Retail sales surged by 9.8% in March, and unemployment claims declined significantly to the lowest totals we’ve seen since the early days of the COVID-19 spread.1

We are truly in the midst of a V-shaped recovery from the shutdown inspired by the pandemic. Couple this robust data with successful and impressive vaccine distribution rates in the U.S., sustained accommodation of the Federal Reserve, and the record levels of fiscal stimulus, and one can appreciate solid reasons for the investor optimism we’ve seen in 2021. All of this has led to S&P 500 Index (S&P 500) returns just shy of 12% on a year-to-date basis, and April returns of over 5%.

Given this robust start to 2021 on the heels of S&P 500 returns of 31% in 2019 and 18% in 2020,2 folks are asking questions like, “Can the market continue to advance?” “Should I stay the course?” We think the best answer is: Yes! We draw on the wisdom of Ben Graham who encouraged students of the market to buy securities based not on optimism but on the arithmetic or on the facts. We agree with the iconic Mr. Graham and believe the current data we monitor in our research process calls for a stay-the-course strategy. It might be instinctive for many to think it appropriate to play the role of contrarian and sell stocks after the 80% plus rally we’ve experienced since the March 2020 low.3 Buy low, sell high…right?  Those are not our instincts. Just like one should not buy on optimism alone, one should not sell on optimism alone either but on “arithmetic.”

We maintain our positive view on the direction of the market based on the solid fundamentals, reasonable valuation levels, and very favorable technical price trends. In other words; the math.  None of the three levels of analysis we conduct suggest the market won’t move higher over the next twelve months. The typical signs one sees developing at market peaks are simply absent. We do think we could see a pause or corrective period before moving to higher levels in the next twelve months. This belief stems from the skepticism, or natural contrarian reflexes, that can develop after a period of nice returns. But, we do not see the elements of a sustained reversal in market direction.

Are We Taking Our 2021 Calendar Year-End 4150 Price Target Up for the S&P 500?

I am often asked if we are taking our S&P 500 price targets up now that it has hit 4180. In short, we are not. So, if we remain positive on stocks, why are we not taking the price target up for this calendar year? We will formally review this at mid-year. At that time, we will reassess what we expect the market to do in the ensuing 12 months (June 30, 2021 – June 30, 2022). We believe a 12-month horizon or longer is best to evaluate and set targets for the equity markets rather trying to make a specific call on a very short time frame, such as the next six months or less.

In terms of calendar 2021, we developed this 4150 price target in January 2021. This would equate to roughly a 13% total return for the year, including dividends. If the year were to end today, we would just about be on target and that’s not too shabby of a return for stock investors.

Regarding our high-level expectations for the balance of the year, we wouldn’t be surprised to see the market trade sideways through year-end given some of the headline “wall of worry” issues. The potential for the market to be choppy and flat through year-end is not a reason to sell stocks, though. We think these issues will be resolved to investors’ satisfaction and that we will move on to higher highs in 2022. This would be supported by continued healthy earnings and economic growth, and the likely reasonable levels on the interest rate and inflation front.

I would add that we don’t want to get too obsessed with year-end targets that are now only monthslong in nature. The calendar year is just a snapshot in time; investment results should be evaluated in the intermediate and longer term. Both 2019 and 2020 are great examples of years in which we were very bullish and remained so during moments of challenge. In fact, the market overshot our relatively robust base-case targets in those years. We see similarities to today. The positive fundamentals, valuation levels and technical price trends at that time, kept us invested when many were turning bearish. Our constructive message helped avoid the whiplash of selling early and missing the rallies that quickly ensued. We would be happy if we underestimated 2021 returns, but still maintained our stay-the-course message given this favorable backdrop.

Bottom line—short-term pauses or pullbacks are not cause to sell. We get negative when the facts and the data take us there, and we believe the downtrend could last for multiple months or quarters. That is far from our opinion today.

One final thought on price targets. The chart below shows that the S&P 500 historically has done best when the investment strategist targets for it are below the prevailing level of that benchmark. In fact, the historical data reflects that the market does better when strategists’ calls are conservative than when their targets are above the S&P 500. I share this in tongue-in-cheek fashion but am stating that just because we haven’t taken the target up yet is not a reason to turn negative.

S&P 500 vs. Sell Side Strategist Forecast

Source: Strategas Past performance is not a guarantee of future results.

Wall of Worry Items that May Inspire Choppy Market in the Second Half

In our view, there are two major items that might inspire the market to pause or to increase market volatility in the second half of 2022. First, rising inflation and interest rates. The second is potential tax hikes. We think both issues will be resolved in adequate fashion and result in the market advancing to higher highs next year. Yet, they could receive increasing media attention and investor angst for a bit as we move through the calendar year. The market seems to be trying to discern final outcomes or additional details around these two key issues, as are we.

On the inflation front, we embrace the Fed’s message and opinion that the price increases we are starting to see in major categories of goods and services are transitory and so-called base-effect price pressures. In other words, they largely represent price rebounds from the swift declines during peak COVID-19 spread and the associated economic shutdown. They are to be expected as one-time in nature as we transition to a full reopening of the economy. We do think inflation could accelerate to the 2.5% level this year, but that is still quite low on a historical basis. Such a level should be supportive of a continued positive trend in stock prices.

Regarding the Biden administration’s tax policies and related legislation that may come about in 2022, we are going to be reading more and more about this as we move through the year. This is certainly on our radar. It is premature to adjust our thinking about the market or to adjust investment strategy at this point based upon the information that is known at this time. And, the tight majority that the Democrats enjoy in Congress only makes the final outcome more difficult to predict. In terms of earnings-per-share impact on the S&P 500, we believe the earnings dilution is likely to be less than feared and that we will still see solid earnings growth in 2022. We will stay tuned, and the media attention on this topic should create additional market volatility, but this should not derail the ongoing bull market advance from continuing in 2022.


In a phrase, it is simply hard to be bearish when the fundamental drivers and technical price trends in the market are so positive while valuation is reasonable at these still low levels of interest rates. At prior market peaks, such as in March 2000, the 10-year Treasury rate was rising to the 6% level. That can choke an economy, and stock leadership was very narrow while the market alarmingly continued to advance.4 That’s not what we have here today. We have accelerating growth that should be sustained and transition from stimulus-induced growth to real growth as the economy fully reopens. Earnings reports and CEO earnings guidance is solid. Rates are low, and leadership is broad. We do expect a pause in the market and rising volatility in the face of some of these second half wall of worry issues that will be played out in the headlines, but we expect adequate resolution on these issues and further advancement in stocks as we move into 2022. Stay the course!


The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation. Individuals cannot invest directly in an index. Index returns do not include fees or expenses.

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