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The Markets in Q1 Reflect Broad Economic Expansion Ahead

The first quarter came to a close this week, leaving in its wake a fading narrative of runaway inflation that had served as media fodder the past two weeks. The results for Q1 confirm a significant shift in market leadership. The NASDAQ index, last year’s darling, trails both the S&P 500 and the DOW30 by more than half as the Cyclicals, issues that typically lead a broadening economic recovery, posted upper single digit returns for the quarter. We’ll provide more detail in our statement letter to clients later this month. Suffice it to say, those sectors that suffered most during the pandemic are finally having their day.

Grabbing the headlines this week was Wednesday’s announcement by the administration of a multi-trillion-dollar infrastructure package that would propel the economy forward from the bottom up. We’ll await the details of what looks like a plan to see the US government become the #1 customer and employer in America as it had during Roosevelt’s New Deal and Johnson’s Great Society. Both were aspirational designs that failed to account for the inherent redundancy and inefficiency of burgeoning government. Settling the bill for those endeavors through higher tax rates resulted in flat tax revenues and triggered a swing of the pendulum away from government as the primary engine of the economy. In the end, the broad expansion of the economy was hindered for a number of years. Maybe this time, it will be different.

As for the current stock market? Investors always welcome a showering of liquidity across the economic landscape. That’s what we’ve seen with another in a series of stimulus packages and what’s anticipated from the newly announced fiscal plan. The final version is unlikely to emerge from Congress before summer unless executed through the back door by the reconciliation process that would put an end to any further talk of bipartisanship. That would not go unnoticed by moderates and Centrists as the ’22 mid-term elections appear on the horizon.

There’s talk of another market bubble in our future. That would require that Herdthink and FOMO (Fear of Missing Out) drive investor behavior much like ’99 and ’08. That could happen if investors take a second bite of the apple offered by some former market-leading mega-caps that have corrected or declined into bear market territory. Seeing those stocks approach their old highs would send the averages soaring. That might prompt some investors to ignore fundamentals on a broader basis and be lured into “what’s moving up”. They’ve already done that with a few stocks this year. Add to that list crypto-currencies, NFTs (Non-fungible tokens), and SPACs (Special Purpose Acquisition Companies). Seeing that trend broaden would alert us to the heightened potential of a market bubble forming.

It’s too soon to weigh in on whether the revisions to current fiscal policy will be a dose of fiscal stimulus or tightening. The latter is a risk to expansion. We’ll await the final version that’s to be enacted and in effect as of January 2022. We’ll monitor conditions and keep you posted. Stay tuned.

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