Another month, another gain for stocks. This time riding the back of international stocks both large and small, the value of a fully diversified equity portfolio rose more than 1%, lifting the year-to-date increase to nearly 12%. Admittedly with a less little less forward momentum than from a month ago, the bull market that began in March a year ago carries onward.

The underlying strength was where a secular bull would want it to be.

Domestically, bank stocks outperformed. Industrial stocks outperformed. Energy stocks, materials stocks, transportation stocks – all higher. Commodity prices were strong. These are all tied to the ongoing realization of a stronger and stronger economic environment, both here at home and globally as well.

The relative value of the dollar weakened, about 1.5% versus a basket of actively traded foreign currencies. This is not, absolutely not, an indication of U.S. weakness but rather of strength, because a stronger U.S. pulls the rest of the world along with it, at least eventually. Even though our growth rate is higher than those from overseas, the ‘on the margin’ relative growth-versus-expectations augurs more-better for our global trading partners, hence the relative currency strength versus the dollar. This is all very, very classic.

In fact, if the dollar were to undergo a sustainable period of relative strength, I would seriously question the sustainability of the economic expansion. By far, by way far, the broadest and deepest of all markets is that for currencies. It dwarfs the global bond markets, which in turn dwarfs the global stock markets, never mind the relatively infinitesimal global commodity markets. I am a big believer in the inordinate wisdom of markets as compared with the extremely limited comprehension powers of even the most highly trained human brains. So, if the currency markets are in gear and the equity markets are in gear and the commodity markets are in gear, then it would be folly to stand opposed and be anything other than bullish.

What about the bond markets?

Note that I didn’t include the bond markets in that last comment as also being ‘in gear’, which in this case would be, at least on the surface, witnessing steadily higher interest rates as the demand for money for increasing economic activity forces its price, i.e., its rate of interest, higher as well. That didn’t happen in May. If anything, rates nipped a little lower. But on deeper reflection, I think this itself is sending a very powerful message too, and maybe the most powerful message from all the markets. Let me explain.

Anybody who pays more than a scintilla of attention to the ongoing economic news would no doubt have noted the barrage of Wall Street (as well as out-of-power political) angst over potential incipient inflation. The most extreme punditry likened one or two May data series back to the massive bout of stagflation* from the late ‘70’s, when indeed a conflux of poorly conceived monetary and fiscal policies plowed right into strained demographic and labor market conditions. We have none of those conditions in place now, in fact quite the opposite. But for those with bearish agendas, that was beside the point. As I noted a month ago, never underestimate Wall Street’s capability to ‘turn on itself and its immediate past optimism’ with perceived or even real angst over even the most transitory of concerns.

But, at least for May, if there really was anything to the bearish inflation-driven case, interest rates wouldn’t have gone sideways-to lower. They would have gone higher, and this further tells me that the inflation component** of interest rates is very much under control. Yes, at some point there will be ‘inflation that matters’ and indeed the Federal Reserve will lean against it, perhaps creating a ‘bearish that matters’ pause in the ongoing bull. But, also as noted a month ago, I don’t see that until maybe mid’23.

“Sell in May and Go Away”

There’s an old ditty on Wall Street that goes ‘Sell in May and Go Away’, noting the tendency for stocks to be strongest in the November-thru-April months with relative (emphasis on the word ‘relative’) weakness in the summer and fall...and in my now almost forty years on Wall Street, I can’t disagree with the general premise. Under most normalized economic, and frankly political, circumstances, the roar of economic acceleration from late Q1 and thru all of Q2 takes a well-deserved breath in the summer. Wall Street, along with Washington D.C. and across of all America’s Main Streets, reboots and refreshes for the inexorable and highly welcome late Q3 and Q4 (into the holidays) rush.

What’s in store for the remainder of 2021?

But will 2021 be ‘normal’, whatever that means? On an economic and political level, I submit not. There will be major progress made on all fronts as we re-open and as Washington moves itself, kicking and screaming, towards major infrastructure legislation. Q2 earnings to be reported in July should be massive and I’m sure I’ll be writing about these in the next two Updates. There will no doubt be lots of noise from the variety of peanut galleries that surround our economic lives and one or two might even cause a market blip of some modest consequence. Indeed, the 12% year-to-date gain for stocks (87% since the bear market bottom 14 months ago) has not left a lot of near-term margin for error.

But, also as I wrote a month ago, if we do get a bump of some kind in stock prices, we are highly likely to embrace it as an opportunity to add to client equity portfolios. We’re still in no hurry and, with our already current over-weight position, we are quite content to cheer stock prices on if and as they continue higher.

*stagflation – a brutal combination of inflation and a stagnating economy. No doubt this cost President Carter even the remotest chance of winning re-election in 1980.

**interest rates are made up of the so-called ‘term premium’, i.e., the natural rate of interest, plus an inflationary add-on. Both always exist but in highly variable and hard-to-measure quantities.