Remember how every month in 2021 started off hot and then saw a pullback and volatility occur by the second half of the month? Welcome to the second half of April.
After switching my calls on the SPDR S&P ETF (SPY) and the SPDR Dow Jones ETF (DIA) a week ago (Apr. 16), both have declined over 1% and are on track for their first losing weeks in more than a month.
Despite the month’s promising start with blowout jobs reports, stronger-than-expected earnings, the lowest jobless claims in months, and more, remember how I said to stay vigilant on inflation and potential tax hikes?
Well, the market on Thursday (Apr. 22) tanked thanks to rumblings that President Biden could hike the capital gains tax rate for those earning over $1 million. This isn’t just some ordinary tax hike either. Biden would essentially double the current tax rate of 20% to 39.6% for those wealthy investors and hike it as high as 43.4% for the richest of the rich.
Not to mention President Biden has been talking for weeks about hiking corporate taxes to 28%.
Tax the rich? Guess Mr. President has to fund his spending sprees somehow, no?
Although April historically has been the strongest month for stocks over the past 20 years, with the S&P 500 witnessing gains in 14 of the past 15 years, not everything is smooth sailing right now. Especially if you’re a SPAC or a speculative sector.
In fact, for the broader market, I’d even caution that we may be at or around a peak, with most of the good news priced in already. Despite what’s been a rough week, the Dow and S&P are still at historically high levels. According to Binky Chadha, Deutsche Bank’s chief U.S. equity strategist, we could see a significant pullback between 6% and 10% over the next three months because of potentially full valuations and inflation fears.
My goal for these updates is to educate you, give you ideas, and help you manage money like I did when pressing the buy and sell buttons for $600+ million in assets. I left that career to pursue one to help people who needed help instead of the ultra-high net worth.
With that said, to sum it up:
We could see more volatility and more muted gains than what we’ve come to know over the last year.
April is historically strong, but please monitor overvaluation, inflation, bond yields, and potential tax hikes. Be optimistic but realistic. A decline above ~20%, leading to a bear market, appears unlikely. Yet, we could eventually see a minor pullback by the summer, as Deutsche Bank said.
Hopefully, you find my insights enlightening. I welcome your thoughts and questions and wish you the best of luck.
Figure 1- S&P 500 Large Cap Index $SPX
On the one hand, according to Sanford C. Bernstein strategists, the S&P 500 index could double by the end of the decade and reach 8,000.
Historically, we could really be at a strong entry point for the long-term too. Over two weeks ago, we marked the first anniversary of this bull market. Historically, S&P 500 bull markets since 1957 on average resulted in price gains of 179% and lasted an average of 5.8 years.
Because the S&P 500 has risen just about 84.81% since March 23, 2020, if history tells us anything, we may just be getting started.
Furthermore, earnings season is off to a roaring start, with companies crushing estimates. There’s no reason to believe this will end either. Not to mention, it’s April, historically the strongest month for stocks.
On the other hand, despite this week’s minor pullback, the S&P 500 continues to hover around record highs as it approaches 4200 for the first time in its history. It’s also potentially historically overvalued. I’m more worried about valuations than I am excited about earnings.
Also, I’m not pleased about potential tax hikes for this frothy market.
I don’t see this as a buyable index at the moment. While it’s not quite as frothy as it was a week ago and more of a HOLD as of April 23, 2021, if it pops anymore, it could be more sellable. I’d prefer a deeper pullback.
HOLD. The S&P has skyrocketed to unprecedented levels and valuations, but strong earnings could give the index some momentum. For an ETF that attempts to directly correlate with the performance of the S&P 500, the S&P 500 SPDR ETF (SPY) is a great option.
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Matthew Levy, CFA
Stock Trading Strategist