Top strategist explains why short-term pullbacks should be seen as an opportunity not a threat
Economic reflation is only just beginning and any short-term pullbacks should be seen as an opportunity not a threat.
That’s the view of Philip Petursson, chief investment strategist of Manulife Investment Management's Capital Markets Strategy team, which recently reflected on the passing of the one-year anniversary of the equity bull market.
This time last year, the S&P 500 was hitting its low, down 35% from its peak on February 19. Initially viewed as a short-term inconvenience, the world was waking up to the seriousness of COVID-19 and the impact it might have. Sadly, of course, we are still dealing with its devastating effect, albeit with the optimism around the vaccine rollout.
From an investment perspective, the S&P 500 Index has soared back up 78%, on a total-return basis, from its low on March 23, 2020. This represented both its fastest bear market and one of its fastest recoveries in history.
Crucially, the market low was met with a crystal clear message from the Federal Open Market Committee (FOMC) that they were essentially “all-in” from a monetary policy perspective to support the economy with unlimited asset purchases and ultra-low short-term interest rates. And so began this bull market.
Petursson said: “The reflationary period of an economic cycle is typically the period immediately following the bottoming of the recession. It is defined as the expansion in the level of output of an economy by government stimulus, using either fiscal or monetary policy.
“While some may lament that the reflation trade in the equity markets may be over given the recent and rapid increases in commodity prices, stock markets and long-term bond yields, we would argue that the economic reflation has only just began. We believe that long bonds and equity markets reflect the normalization phase of the economic recovery and have more room to move higher.”
The Manulife team, in analyzing the market environment and fundamental data, see no signs of a risk of a double-dip recession. Manufacturing data is strong and there is little fear of an economic stall-out given the massive amounts of fiscal and monetary stimulus that still needs to work its way through the U.S. and global economies.
Petursson stressed how important it is to look at the underlying aspects of manufacturing such as backlog of orders, new orders, and inventory to see what is driving the direction of the overall index level. The backlog of orders index registered 64% in February, an increase of 4.3 percentage points from January, and is at its highest level in the history of the PMI.
He explained: “This high reading of backlogs should not be surprising considering the supply chain disruptions that have occurred as a result of Covid-induced lockdowns over the past year, China-US trade tensions and more recently, weather issues in Texas and clogged ports in California.
“The backlogs cover from lumber to semiconductors and just about everything in-between. For example, the shortage in semiconductors is forcing some companies such as Toyota, Honda and Samsung to halt auto production at some plants.”
Further complicating the supply chain is likely to be the strong increase in demand as consumers emerge from lockdown with excess savings and a desire to spend. While Americans have 250% more in savings as a percentage of disposable income vs. January 2020, the inventory-to-sales ratio, as measured by the Federal Reserve Bank of St. Louis, is near its all-time low last reached in 2011.
Petursson said: “This low ratio should lead to continued elevated levels of manufacturing, an improved economic environment and stronger corporate earnings growth as a result. Our team often uses the quote from Mark Twain, ‘history doesn’t repeat itself, but it often rhymes’.
“While the path to recovery may appear different, the destination is the same. Given the solid economic environment, we would caution investors against any knee jerk reactions to market movements and would embrace any short-term pullbacks as an opportunity, not a threat.”
