Equity markets wave yellow flag

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Recent stock market headlines seem contrary to the real economy … or maybe they are predictions. Investors can choose opposing rationale and find justification in print virtually anywhere. Are investors focused on inflation, valuations, too much tech, too much debt or tax hikes? Can you sell your real estate for 10% over asking price? Should you buy crypto currency? Or will the economic growth and corporate earnings justify any investment?

Technology stocks were the place to be in 2020. Now they are pulling down portfolio returns, and the bulls have moved to financials and health care.¹ It is difficult to know if you have a green light or a red light to equity investing these days.

Several analysts suggest a yellow light may be more appropriate, meaning proceed with caution.² Financial planners will tell you never to proceed without a well-thought-out plan, especially in these uncertain times. Otherwise, you could end up with investor whiplash trying to keep ahead of the market fluctuations.

I see this economic predicament: The economy is growing; therefore, equities should be a good investment, right? Especially as bond yields are set to rise but still remain stubbornly low. But wait. What about current high stock valuations, aren’t I buying high? And what about the burgeoning federal deficit fueling growth, will that bring inflation?

The list of uncertainty goes on. Will there be an infrastructure deal and a tax increase yet this year? On the other hand, wouldn’t reopening the economy bring better growth and consumer spending? Perhaps all of the above are true which is why the Dr. Jekyll and Mr. Hyde stock market is getting the yellow light.

This is a strange time, where we thought the economic recovery from an unprecedented pandemic would be predictable. And who would have thought that inflation is coming from shortages such as not enough computer chips to build cars, and a housing shortage, rather than the flood of free money recently pumped into the economy.

There are some things that we do know and that could be a good place to start. Then you can build a strategy.

We believe equity ownership remains valuable, especially over long periods of time. We believe interest rates will not decrease again in this business cycle, but rather will start to increase. We know tax rates have been artificially low since the Bush tax cuts in 2001 and 2003. Sector rotation is alive and well with commodities up in price and technology lagging.¹

Yet the majority of corporate earnings beat expectations, and investment outlook for this equity cycle is strong. The Consumer Price Index (CPI) last month was the largest positive surprise on record. Bloomberg states that “nearly 60% of the month-over-month increase was comprised of just five components — used cars, rental cars, lodging, airfares and dining out — that are very much transient in nature.”

So, there is your answer. This is all part of the process of regaining economic footing. All of these things could very well be happening simultaneously, and it could still be a good time to invest. But not without a plan, and not without caution. It is important to heed the warnings and then invest where the risk is appropriate for your time frame.

1. Wall Street Jounral; 2. Blaine Rollins, CFA (Hamilton Lane)

Patricia Kummer has been a Certified Financial Planner professional and a fiduciary for over 35 years and is Managing Director for Mariner Wealth Advisors, an SEC Registered Investment Adviser. Please visit www.marinerwealthadvisors.com for more information or refer to the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). Securities offered through MSEC, LLC, Member FINRA & SIPC, 5700 W. 112th Suite 500, Overland Park, KS 66211.

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