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Week of February 22, 2021 Thumbnail

Week of February 22, 2021

 Greetings,

We hope this update finds you well as we look forward to warmer weather across the country and especially to our friends in Texas who have endured great hardship and loss.

  • Valuation Still Matters:   Last week was a reminder of how much interest rates can rattle markets.  If you take a simple perpetual dividend discount model for a $100 stock yielding 1.5% and increase the discount rate from 1.5% to just 2%, that asset is in theory worth only $75.  Conversely at a 1% discount rate the stock price increases to $150- a reminder of the sensitivity of stocks to interest rate changes, which we saw last week.  But this example is a simple perpetual model with constant  dividend growth and does not apply to the more complex multi stage models that incorporate multi stage dividend and earnings growth.   It is more an example of the magnitude of change in price holding all else equal.  In fact, over history, stocks have gone up in price in the face of interest rate increases over 70% of the time.  Why?  Interest rate increases are often the result of a strengthening economy and strong corporate earnings.  Rates still matter and so does valuation.
  • Small stocks are on a tear this year.  Just take a look at the Russell 2000 in the attached update--+14.8%!
  • GDP estimates continue to be revised upward with Q1 estimates now above 7% even before the effects of another stimulus package are factored in.  This amid surging retail sales, housing, and strong manufacturing numbers.
  • Earnings:  Earnings season is winding down and the numbers were generally strong and well above consensus.  We said at the beginning of earnings season that we are entering a "show me" market where lofty valuations will need to be supported by underlying earnings performance.   So far so good.  

A more comprehensive summary of last week is linked below including up to date return numbers for the markets.

As always, please do not hesitate to contact us on any questions or concerns you might have, or to schedule a meeting to catch-up and review your portfolio and financial plan.

John J Klobusicky, CFA, CAIA, Managing Partner


Market Insights - February 19, 2021

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