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Sound Advice: June 16, 2021

Don't Expect Another Big Gain 

As has often been the case after the market has turned in an unusually broad advance, the gurus of Wall Street continue to build their cases for more of the same.  This most certainly is a replay of a recent film entitled Dumb and Dumber. 

Successful investors are best served by planning for the worst while hoping for the best.  That's especially so in the wake of a few years when almost every asset class delivered fine returns.  But a bet on a back-to-back bingo of this sort ignores the writing on the wall, which is anything but encouraging.

For starters, stock valuations are stretched.  To be sure, there are seers who find ways to look ahead and opine that when you look far enough ahead today's prices don't seem that high.  The problem with this approach is that Wall Streeters don't use binoculars.  For these folks, the future is a concept that views the next few quarters, not the next few years.  When seen that way, it's not very pretty. 

Let's start with the fact that corporate earnings have been on a sugar high, thanks initially to the 2017 tax cut and more recently to the infusion of “rescue” payments from Washington.  Add to that the pandemic, which put substantial constraints on consumer spending.  This produced a hefty level of savings already working their way back into the economy. 

For a short time, what we saw was a major bottom-line acceleration while overlooking the massive increase in the country's debt burden, which now stands north of $23 trillion.  Outstanding debt goes hand in hand with ongoing interest payments, which account for an increasing share of the federal government's annual expenses.  As interest costs go up, the funding available for other areas shrinks. When rates rise, the situation will get even worse. That may not happen soon, but it seems inevitable.

If and when Congress makes progress in moving toward reduced deficit spending, taxes will almost certainly move higher.  More likely than not, higher taxes will put the brakes on spending, both consumer and corporate.  This is not something to look forward to, nor a favorable wind for the investment markets.

While interest rates remain extremely low and spending continues to expand at a brisk rate, current conditions may continue.  But, as in the past, there will be bumps along the way. 

N. Russell Wayne, CFP®

Sound Asset Management Inc.

Weston, CT  06883

 

203-222-9370

www.soundasset.com

www.soundasset.blogspot.com

 

Questions?  Please contact me at nrwayne@soundasset.com

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