By: Linda S. Parenti, CFA | Chief Investment Strategist
Month-to-date, February’s stock market performance has certainly been making up for January’s disappointing end. There are several reasons for the equity market’s overall optimism, all of which point toward better days ahead for the economy.
One reason is the expectation that additional fiscal relief will be forthcoming. While the ending aid package may not total the $1.9 trillion initially proposed from the Biden Administration, most analysts expect that some level of additional support will be provided to help those individuals, small businesses, and local governments still struggling due to the pandemic.
Of course, there is also the ongoing commitment from the Federal Reserve to keep monetary policy accommodative. Reiterating that they are willing to tolerate a higher level of inflation that many expect will follow, even if it should rise above their target rate for a time. In a sense, placing their mandate to keep prices stable temporarily behind their other goal of maximizing employment. This is something that Wall Street will be watching closely. Higher than target inflation would normally be a sign of an overheated economy. This would typically dictate a tightening of monetary policy by, among other tools, increasing interest rates to slow growth. It would be hard to claim the economy is currently running too hot, but I expect the Fed will need to keep on repeating itself in the coming months to continue reassuring markets.
The recent statistics on the pandemic are also cause for hope. New cases, hospitalizations, and deaths have been declining steadily across the country, while vaccination trends are accelerating. Although a full reopening of our economy is still months away, there seems to be a light at the end of the tunnel.
Lastly, we are nearing the end of the current earnings season with 85% of the S&P 500 companies having announced their fourth quarter 2020 results. For a second quarter in a row, actual earnings have been coming in significantly better than expected, validating the recent climb in stock prices. During the shutdowns last year, many companies went silent regarding their revenue and earnings expectations. So, it is worth noting that a growing number of companies are once again comfortable offering guidance on what they expect to earn in future quarters. This has led analysts to increase forward earnings expectations. Rising estimates are important, and if the positive trend of revisions continues, this could allow further room to the upside in equity valuations.
Linda S. Parenti, CFA
Chief Investment Strategist
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