Small companies in the United States mark the beginning of a sharp recovery, with a supercycle behind the time holding shares. As the stock cycle continues, the central bank must not forget the delayed reaction of the economy to changes in monetary policy. And more on the new pearls of the week.

Markets are still high: Peter Oppenheimer, the bank’s chief strategist, told Bloomberg that the data coming from the U.S. economy was mostly good and, in his opinion, there would be a strong recovery in the United States. It will be similar in the entire world economy, including Europe, which can catch up with the United States in the field of vaccination. And stocks will benefit from this growth in the coming months.

But how much good news is already reflected in stock market prices? The strategist responded that markets were initially helped by economic stimulus, and now he expects both the economic recovery and the growth of business profits to be stronger than currently expected. This should allow for further growth of the markets, however it should not be as sharp as last year. It will therefore be driven by a change in expectations and, to some extent, a decline in stock market risk premiums.

When will markets start thinking about the developments of 2022? Oppenheimer responded to this question by saying that the US economy will continue to trend next year, which means growth should be even faster. Therefore, the economy should not slow down the markets next year, but, according to the strategist, their revenues will fall and a significant cycle will take place below the surface. Overall, the choice of stocks and sectors will gain importance.

Regarding this cycle, the strategist said there will be more and more choices. Over the past decade, it has particularly preferred growth stocks, which now have a sense of rotation towards revolving stocks and more recently value stocks. According to the strategist, some small businesses may be more interesting, especially those doing business in services, thus making more profit as the economy opens up. This should reflect a sharp increase in consumption supported by strong housing balances.

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When asked about bubbles, the strategist replied that the last centuries point to some common features of the bubble multiplication period. In his opinion, we do not currently see many such characteristics, at most in certain market segments. We must not forget that we are still operating in a low cost environment. So, when ratings were high, for example, during the internet bubble, and the dividend yield was only 1%, the long-term government bond yield was 6.5%. Now the yield is very low and this should be taken into account when looking at the current high estimates, which are not exaggerated in this view. According to the strategist, real rates will continue to benefit stocks, and changes in central bank policy will not be a barrier to them.

Sharp acceleration: The following chart shows the sales growth of small American companies. At the end of last year, they slowly, back up in January, as the bank’s analysts write, “they are now actively accelerating”:


Source: Twitter

What’s next? What showed the big gains in US stocks last year? Investment management’s Andrew Slimon thinks there are two main things. First, markets are growing every time the US Federal Reserve increases its liquidity supply. Second, markets are always looking forward and will begin to grow before it is generally clear that the economy is facing improvement. That is why it is sometimes very difficult to understand that stocks are rising in the midst of a recession. Now this issue is relevant again because the markets already reflect the expected recovery, and the question is “what’s next”.

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So is it time to put more money into your investment portfolio and reduce the weight of stocks? In this context, Slimon noted that after the rapid growth of stocks since 2020, it is natural for consolidation to take place. On the other hand, according to the strategist, we are in the second year of the new bull market, and history shows that the second year is generally good for stocks, but volatile. “Consolidation and volatility can be expected, but I think the stock markets will be favorable by the end of this year,” the strategist said.

Slimon considers that we are not yet close to where value stocks have lost their appeal because many of them are historically cheap. These, for the most part, include financial topics. There may come a time when development topics will work better again, but according to the strategist, history shows that the rally in value is not over yet. In addition, central bank chairman Powell said he would do nothing until the labor market situation improved significantly. That means the economy will grow sharply and the eco-cycle will be favorable for stocks.

At the beginning of the last century: According to the following chart, investors held shares for an average of 1-2 years at the beginning of the last century. From the early 1930s, this period began to last considerably, and from the 1940s it was generally more than ten years. Another turning point occurred in the early 1960s, when the trend of reducing average holding hours began. Currently, we are approaching the standard again from the beginning of the last century, the average holding period is about two years:

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The holding period is two years
Source: Twitter

Don’t forget about delays: Bond yields may take a break now, but there will be a “massive increase in demand” in the economy caused by employment growth. Companies will raise prices, we have strong inflation and rising prices, which will raise rates. This was stated by Richard Fisher, President of the Dallas Federal Reserve for CNBC. According to him, Europe is lagging behind and the United States is the best in the field of vaccination. This should be reflected in the flow of capital, which should move more to the United States, thus preventing rates from rising. On the other hand, the US government will run a high deficit, which will raise rates.

Will high inflation be temporary? Fisher responded that companies, as always, would try to increase their margins and raise prices. Especially if their costs increase. The central bank now believes that high inflation is only a temporary phenomenon, but Fisher says monetary policy is being delayed in the real economy. While inflation is not a temporary phenomenon, it will be reflected if the central bank eventually tries to reduce it. Fisher added, “I now understand the central bank’s leadership, but there are risks involved.

Largest on the market: In 1955, it accounted for almost 10% of the total U.S. market capitalization. Its term ended in the mid-1970s, when it took the position of the largest company, with its share of total capital reaching a maximum of 7%. In the first half of the 1990s, it captured the baton with a share of about 3%. She briefly replaced him in the first place, and then finally. Its role is now in the mid-1970s:

IBM Apple Capital Value Market
Source: Twitter

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