This has been a great year for stocks so far. Broad markets have soared despite some volatility in early 2021.
For example, the S&P 500 is up almost 11% year-to-date. It almost makes you forget that we’re still not done with a global pandemic.
This performance is stellar.
But recently we’ve started to hear that the party will end soon…
Why? Because, the theory goes, this growth was mostly powered by easy money and the Fed.
So, when the Fed stops printing money and supporting liquidity, market growth will come to a screeching halt.
Here at the Financial Star, we aim to enhance your life through education and investment knowledge. Very often, it means going against the crowd.
And this is one of those moments.
Put simply, the crowd is wrong.
Let me explain…
The World Is Recovering
Investors pay too much attention to the Fed and the smallest moves in interest rates.
They do so because they think that as soon as the Fed stops supporting the market, equity valuations will drop.
In other words, this is a timing game. A lot of people are watching the Fed to understand when to get out of the market.
Of course, this is not what they should be paying attention to.
First, timing the market is impossible. You simply can’t profit from a timing strategy consistently.
Second, there are more important things going on. Like the global post-Covid recovery.
Here’s an example. The earnings of the S&P 500 stocks are soaring. Over 2021 and 2022, they will likely grow by over one-half compared to 2020.
The Covid drop will be overshadowed by a rapid recovery. And that could support higher stock prices.
And we’re not talking only about the United States.
The world is quickly getting out of the Covid nightmare and returns to growth.
After a 3% contraction in 2020, we’ll likely see the global economy grow by 6% this year.
And this is not a temporary blip… which means that in 2022, the world will keep growing, even if at a slightly slower pace.
Economic growth also supports the stock market. After all, the stock market itself is made of companies selling goods to customers. So, the more economic activity there is, the better it is for stocks.
This is what’s critical here. As everybody else is focused on the smallest interest rate movements, there’s massive growth happening almost everywhere.
This recovery is way more important for long-term stock market growth.
There’s another factor at play, though…
Here’s How Much Is at Risk If the Fed Stops
A new UBS study shows how much investors could lose if the Fed stops its $1.4-trillion a year in quantitative easing spending…
Drumroll… 3%.
That’s right. If all the trillions of dollars the Fed is spending to support the market disappear, stocks could lose just 3%.
Keep in mind that it’s a model and a prediction, so take it with a grain of salt.
But… the risk isn’t as big as some think.
The market is growing, and it’s resilient.
There is one thing you need to keep in mind, though.
To Win the Game, Look at Growth and Profits
The market is spooked… and there could be volatility ahead.
This is natural. The market has never risen in a straight line. And it never will.
In 2020, the market went through wild swings. At some point, it was down over 30% year-to-date. But the correction ended, and by the end of the year, the market was up 15%.
Volatility is normal… in fact, without it, we wouldn’t even see this kind of return.
But you want to make sure that your portfolio delivers the gains you expect, whatever happens next. You need both protection and growth.
So, here’s the takeaway…
The market is stronger than the Fed, but you need to pay attention to the quality of the companies you hold.
The bigger and most established ones need to be profitable. Their earnings growth should support their prices over the past year or two.
In other words, on the conservative side of your portfolio, you should be looking for profits and solid balance sheets with a lot of cash and little to no debt.
Don’t forget about the “growth” side of your portfolio either…
Early-stage stocks like the ones we talk about here at The Financial Star need to be able to do two things successfully:
- access capital, and
- deliver on their milestones.
The ones that do that have a good chance of generating life-changing returns.
This is what you need to keep in mind as an investor.
Thank you for your loyal readership,
The Financial Star.
