Searching for Goldilocks

  • While we are currently at peak growth, there is no consensus about where we go from here. The bulls are getting bearish and vice versa.
  • There is fear of growing too fast and incurring the wrath of the Fed with higher interest rates, which would pressure stocks. Likewise, there is fear of growing too slow due to Delta. Rates would stay low, but again, stocks would likely be pressured.
  • The Goldilocks scenario is enough growth to keep the Fed from being too aggressive, but also enough to keep earnings on a solidly upward track.

As independent advisors, we are able to access economic research from a wide variety of sources and this week really highlighted the confusion of the market seers. There is a massive tug of war between the growth we have been experiencing and the prospect of growing downward pressure on that growth due to tougher comparisons from last year, not to mention the spread of the Delta variant.

Morgan Stanley, in their report titled “Something has to Give”, Chief U.S. Equity Strategist Michael Wilson lays out a very concise summary of the peak growth/mid-cycle transition narrative and advises caution.

  • The COVID-19 recession was deep, but it was swift, ending only two months after it started, according to the National Bureau of Economic Research. Massive monetary stimulus (from the Fed) and fiscal stimulus (from Congress) largely offset the economic loss and rapid vaccine development enabled a rapid return to growth. Likewise, the stock market also rebounded in record time. An economic cycle that normally takes years was compressed into a few months.
  • The second quarter delivered peak growth because the economy sunk so low in Q2 last year. From here, growth will slow down due to tougher comparisons with a year ago. Economists call this the ‘midcycle transition’ and it is usually characterized by:
    1. Economic and earnings growth peaks with slower growth going forward.
    2. Equity markets narrow, meaning the broad indexes rely on fewer and fewer stocks to maintain momentum.
    3. Leadership moves away from early cycle companies, like homebuilders, semiconductors, retailers and transports.
  • The last step, which we have yet to reach, is the Federal Reserve tightening monetary policy, implying that interest rates rise and equity valuations fall.
  • Wilson’s conclusion is that interest rates at current levels are not compatible with a booming economy and earnings growth. Something has to give, and the equity market is likely to discount it soon via lower valuations and he recommends a more conservative approach.

By contrast, the previously cautious David Kostin of Goldman Sachs turned more bullish and upgraded his year-end price target for the S&P 500 index from 4400 to 4700, one of the highest estimates on the Street.

Kostin has previously been a bear on interest rates (i.e., expected rates to move higher) but the recent decline in rates has changed his mind with a base assumption that the 10-year treasury rate gradually increases to 1.6% at year-end (vs. 1.29% as this is written and his prior 1.9% forecast).

Kostin also raised his 2021 and 2022 earnings forecasts for the S&P 500. The 2021 estimate increased 7% to $207 from $193 and the 2022 estimate climbed 5% from $202 to $212. The implication is that he now believes in continued earnings momentum and therefore higher stock prices. He is clearly in the ‘growth continues’ camp.

From our point of view, we think President Biden got it right when he said this is a pandemic of the unvaccinated. The problem is that the bulk of our supply chains are in Asia and unvaccinated. China has recently initiated the most stringent lockdowns since the start of the COVID crisis and initial anecdotal evidence of a slowing Chinese economy is appearing. Thailand, Vietnam and Japan are also experiencing upticks in infections. The risk is that these infection trends hold and create additional supply chain disruptions. That could not only put a crimp on economic growth, it could also push inflation higher, despite the infection progress we have made in the U.S.

Despite the seemingly inexorable move upward in markets, it’s a confusing time for investors. Valuations are high, there is plenty that can ‘go wrong’ and plenty that can ‘go right’. Rather than bet as traders would, we suggest that sticking with the plan is the right approach.


What We’re Reading

U.S. plans to give extra COVID-19 shots to at-risk Americans

Senate to try to finish $1 trillion infrastructure bill on Saturday

Jobs report will cause big shift in stock market leaders

Big Tech stocks lag following Friday’s strong jobs report – Here’s why (3 Min Video)

Just-in-Time Manufacturing? Not With Rickety U.S. Infrastructure

Yesterday’s Wars Didn’t Prepare the Pentagon for Tomorrow’s China

Israeli scientist says COVID-19 could be treated for under $1/day

Visualizing the 4,000 Year History of Global Power

Biden seeks to make half of new U.S. auto fleet electric by 2030

Toyota warns rivals’ gasoline engine phase-out goals must overcome challenges



Retirement Planning:

Deciding between a traditional or a Roth 401(k)? Here’s what to consider

The main, and most well-known, difference between a traditional 401(k) and a Roth 401(k) is the time at which your money is taxed, but there are other factors to consider as well.

Estate Planning:

Estate planning for rising interest rates

In a rising interest rate environment, you may want to lock in lower interest rates now while preparing to capitalize on higher interest rates in the future.

Tax Planning:

12 Ways to Save on Taxes Through Life’s Transitions

There are ways to save on your taxes through life’s transitions. Here are 12 tax tips to help you save through major life events.


Want to Create a Great Employee Environment?

Organizations need to think about how they’re going to make the new office attractive, engaging and a place where their employees want to return.


Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at
Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forwardlooking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

, , , , , , , ,

Articles, General News, Weekly Commentary

By: Adam