Need to Know: Investors need faith in these 2 pillars to stay bullish on the S&P 500 and beat history, say strategists

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It has been a bad week for stocks, with the S&P 500 tumbling near 4% since Monday as investors panic about inflation—though a turnaround in Thursday trading remains a positive sign.

Is it possible for investors to stay bullish? Our call of the day, from strategists Nicholas Colas and Jessica Rabe of DataTrek Research, describes the historical precedent and two beliefs investors must hold to remain long on U.S. stocks.

The S&P 500
SPX,
+1.06%

only rarely sees a period of three years in a row with 10%-plus total annual returns, Colas and Rabe said. It has happened five times: amid World War II; around the Korean War; in the early-mid 1960s; during the 1995 to 1999 bull market; and once this millennium, from 2012 to 2014.

“This matters — a lot — just now because the S&P 500 is up 10.5% year-to-date and we’ve just had two back-to-back 10%-plus years,” the strategists said. “To buy or hold the S&P 500 right here you need to believe other investors believe there’s another 10% coming in the next 12-18 months.”

On the one hand, there is an easy macro story about how fiscal policy is beating back an existential threat — COVID-19 — similar to World War II, they said. On the other, it is a tough sell to believe markets will materially misprice corporate earnings power three years in a row, which happens so rarely.

“If you are tempted to reduce U.S. equity exposure right here, right now, history is certainly on your side,” the strategists said.

However, Colas and Rabe are still of the mind-set that earnings expectations will keep climbing, and companies will be able to beat elevated expectations. 

There are two pillars that this conviction lies on. One, that U.S. consumers’ ability and desire to spend is extremely high. And two, that companies have underappreciated earnings leverage. If both are true, Colas and Rabe said, investors will believe in a 10%-plus year in 2022, and the bull market will keep charging in 2021.

“That’s what you have to believe to stay long the S&P 500 here; no other explanation really works,” the strategists said.

The chart

Chart from Bespoke Investment Group via Irrelevant Investor blog

Wednesday’s inflation reading was a showstopper. The Core Consumer Price Index, which strips out the volatile influence of food and energy prices, rose 3% year-over-year in April and 0.9% from March — the biggest one-month jump since 1982.

Our chart of the day comes courtesy of Michael Batnick at the Irrelevant Investor financial blog, and it shows how certain areas of the economy are driving inflation more than others.

“The apparent surge in inflation in April is mostly a reflection of the economy’s reopening and the idiosyncrasies of the used-vehicle market,” explains Matthew C. Klein, the economics commentator at Barron’s. “Investors should discount inflation headlines and focus on what’s going on under the hood by examining the specific categories driving the changes in the price level.”

The buzz

Shares in Alphawave crashed as much as 24% after it floated in London to raise $1.2 billion. The chip developer’s initial public offering — a rare move to go public on the other side of the Atlantic — comes amid a push from the U.K. government to make London a tech listing hot spot to rival the likes of New York.

On the economic front, 473,000 Americans filed for unemployment last week, a pandemic low, beating expectations of 500,000 initial jobless claims. There were 3.66 million continuing jobless claims in the week of May 1. The producer price index rose 0.6% in April, the fastest rate of increase since 2009 and ahead of expectations of 0.3%.

The Colonial Pipeline has restarted operations, but it will take several days to return to normal. The largest fuel pipeline in the U.S. was shut down last Friday in a cyberattack.

Tesla
TSLA,
-3.63%

Chief Executive Elon Musk said the electric-car maker would stop accepting bitcoin as payment for cars due to the environmental damage from the use of fossil fuels for bitcoin mining. The price of bitcoin
BTCUSD,
-10.58%

tumbled as much as 14% before settling 8% lower, around $50,000.

Ohio will give away $1 million prizes and college scholarships as incentives for people to get vaccinated against COVID-19.

The co-creator of the cryptocurrency network ethereum
ETHUSD,
-9.44%
,
Vitalik Buterin, donated more than $1 billion to a relief fund to combat the COVID-19 outbreak in India.

The successor to “Bond King” Bill Gross at Janus Henderson is stepping down. Nick Maroutsos, the head of global bonds at the asset manager, will leave in October 2021 to take a career break.

The markets

U.S. stocks
SPX,
+1.06%

COMP,
+0.36%

moved higher after stock market futures were pointing down for much of the period before the open. Dow industrials
DJIA,
+1.23%

opened 37 points higher, after closing 681 points below on Wednesday to mark the worst three-day stretch since October 2020.

Equities were more mixed in Europe
SXXP,
-0.14%

UKX,
-0.59%

PX1,
+0.14%

DAX,
+0.33%
,
as some indexes played catch-up with the Wall Street selloff, while stocks across Asia fell
NIK,
-2.49%

HSI,
-1.81%

SHCOMP,
-0.96%
.

Random reads

Bucktooth bandits battle lumber prices in Canadian heist: Mounties traced a pile of stolen Saskatchewan lumber to…a beaver dam.

A flammable foible: “Do not fill plastic bags with gasoline,” U.S. officials warn the public, as fuel shortages bite.

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