In a Nutshell: Time For An Overbought Market To Consolidate?

During this earnings season, many of my colleagues on Wall Street shared their opinions that the market’s momentum had been too good to believe. Many of their stock picks were up over 20 percent in terms of earnings momentum, earnings stability, earnings surprises, sales growth, margin expansion, cash flow and/or return on equity. It has been a phenomenal earnings season. Analyst earnings revisions were up over 22 percent year to date. This has been a major driver of stocks, but I believe the market is overdue for some consolidation.
 
I expect to see a positive rebound by April. In the market as well as the economy, year-over-year comparisons should be phenomenal this spring and summer. President Biden is still in his honeymoon phase. Most media are saving their major attacks for the governors of California and New York (over their COVID-19 mistakes and restrictions). Another reason that the stock market has continued to meander higher is that there is significant liquidity sloshing around. 
 
The stock market also seems to be climbing a “wall of worry.” Headlines tell us about what is going wrong. California’s rolling electricity blackouts from last year have now spread. Texas’ historic freeze last month stopped many wind turbines and caused widespread blackouts. Europe is also very cold, which has caused its wind turbines to also freeze up; many of their solar panels were covered by snow. Complicating matters: the sun has had no sunspots for several months. Many observers worry about a repeat of the phenomenon that caused a mini-ice age in Europe between 1645 and 1715. In a series of warning signs, the Thames River has frozen for the first time in 60 years. Athens, Greece was covered by snow last week—so much so that they had to suspend COVID-19 vaccinations. And over 72 percent of the U.S. had snow on the ground.
 
The truth of the matter is that the stock market has been over-bought for more than a month. It may now be time for Wall Street to consolidate its recent gains. In a brewing inflationary environment, growth stocks have traditionally been a great inflation hedge, so consolidation could just be the “pause that refreshes” before the next surge as we await the first-quarter announcement season, beginning mid-April. 
 
Struggling economies must now deal with power outages, extreme winter weather and COVID-19 restrictions. Confidence in green-energy solutions should be impacted by extreme weather (and not just in Texas and California). Due to extreme cold and power outages, I had expected that first quarter GDP estimates might have to be revised lower by economists in both Europe and the U.S. However, the Atlanta Fed is now estimating annualized first-quarter GDP growth at +9.5 percent, up from 4.5 percent in the previous week), even though Europe is slipping into a double-dip recession. How did this forecast revision happen?
 
In this Brave New World, retail sales can rise dramatically, even in bad weather, through online sales. The Commerce Department announced last week that retail sales rose 5.3 percent in January after declining for three straight months. Economists were expecting sales to rise just 1 percent. There is no doubt that the $600 debit cards the federal government sent out likely stimulated sales. As consumers continue to “nest,” spending on electronics and appliances rose 14.7 percent, furniture sales rose 12 percent, on-line sales rose 11 percent, and sporting goods (including gun sales) rose 8 percent. Smith & Wesson alone sold twice as many handguns and rifles than a year ago during its fiscal quarter ending Jan. 31. Sales at bars and restaurants rose 7 percent in January. This bodes well for a faster recovery. Excluding gas station and vehicle sales, retail sales rose 6 percent in January, raising hope for an ongoing impressive rebound!