January 15, 2021

Investing in Virtue

 The global markets fell back today after attempting to continue their push higher this week on the back of further distribution of the vaccine, the optimism of a big stimulus package and their impact on fundamental improvements in corporate balance sheets. But as more and more stocks, with little left to their value except some youthful sex appeal there is a separation of narratives of what are the market’s going to do going forward. The first is the fundamental analyst, ready to carefully give validation to companies in out of favor sectors such as Energy and Technology, particularly the older companies. The second are the technical analysts who see that market as overbought but not too overbought and still strong enough to withstand a modest pull back. This is the opinion I’m comfortable with and has been accommodative to my recent portfolio additions.

The view is in part also supported by economics, but not because they are especially negative. Drops in Retail Sales and job loss in last week’s Employment data and this week’s rise in jobless claims have noticeably clear sources of reason. Namely, pandemic related lockdowns have had an expected impact and the recent extended issuance of stimulus sourced unemployment checks could encourage many to rejoin the ranks of claimants. But not to diminish these events, there are a lot of global lockdowns occurring and travel bans as new variants of the pandemic are revealed. Hopefully, these will be met with a speed up of vaccine distribution when the post-election winners take their place in Washington, assuming they’re done with their other stuff. On a more optimistic note, still open is the fiery narrative surrounding the incoming inflation due to what is expected to be a surge in consumer spending after the passing of the next stimulus package. This week the Fed Chairperson assured that a sharp rise in inflation was at the moment “theoretical” and would not sway the Fed to increase interest rates in anticipation. 

Normal is in sight, but so little in the financial narrative covers the condition of the markets and instead focuses on the division tearing the country apart. Lucky for investors, the majority of Americans still share many consuming habits, it’s one reason I added Constellation Brands (STZ) to portfolios this week. 

And with so much slack in many of the global economies, opportunities are showing up. But that’s no reason to ignore the uncertainties. As the new administration assumes its place, the slender majorities in both houses that I’ve referred to previously, will likely limit most of the more dramatic policies expected. But tax policy is one that has the potential to change in some significant ways. In my opinion, these won’t be the first time taxes have gone up, and as the focus is generally on the highest incomes that’s generally not great for the economy, but historically has had less impact on the capital markets. Even the potential rise in corporate taxes, likely to remain well below the old 35% level might have less impact as many companies have cut back on shareholder rewards in favor of more internal expenditures, such as employees and their communities. Companies such as Salesforce (CRM) have led this movement since the beginning of the pandemic. All of this is open until the plan is made clear, and until then, only the ability of the new Senate and House to negotiate the outcome is the remaining uncertainty. I’m not altogether optimistic, but always open to be proven wrong.


January 7, 2021

Yes, It Happened, What Now for the Markets

One characteristic of this week’s prices action is the sharp declines being met with sharp rises of the broad indexes. Rather than the customary indications of sector changes, growth to value, secular to cyclical, instead the price action seems to focus today, what went down yesterday, Apple (AAPL), Nvidia (NVDA), should be bought today, and visa versa. This action is making research and analysis of global economic trends that much more important as one shouldn’t lose site of the fundamentals of a company. For companies, are sales steady, free cash available and gross margins increasing. Second is the technical condition of the broad indexes, which are high, but not yet overbought. This gives reason why the indexes are showing vigor while the rest of the country is in political chaos. Could something change the scenario, sure, we got a pandemic without any notice. But that’s why keeping cash outright or monetized through a blended ETF (SCHB) makes the job of watching and looking for opportunity that much easier.

Economic data is showing ISM Manufacturing moving above 60 (over 50 is a sign of expansion), jobless claims also dropped again. And with growing optimism for a fast route to the $2,000 stimulus check millions are waiting for, tomorrows unemployment data could be less exciting than expected, but not perhaps taken as a trend. And with national services showing increasing activity, improving the overall outlook, that there is expansion occurring should continue to have a positive effect on consumer data and non-manufacturing data to be release later in the month. And as greater attention to the need to speed up protocols for getting the public vaccinated, that will also improve overall optimism for the continued growth in the economy and likely the markets.

So, what’s driving the volatility as well? Why are so many irritated by big companies, just for being big? And what is the problem for aging analysts angry that companies such as Amazon (AMZN) and Salesforce (CRM), both which we own, refuse to give away their profits to shareholders when all they are doing is reinvesting their profits in the company, the product, the employees and to the surrounding community. What’s wrong with that? The struggle that faces the country’s political actors is as chaotic as anything else and protests are touching everyone emotionally from fear to humility. This leaving, in my opinion, the challenges to managing markets not that far removed from the challenges in life.

I prefer to be more pragmatic in the decisions I make, leaving speculative beliefs on the table. The external events that are central to daily dialogue are not helpful in providing the clear decisions that need to be made. So however problematic we try to project the violent events of the past few days toward irredeemable outcomes I’m counting on the potential for pragmatism to begin creeping into Washington. Still noisy, but the chambers have challenges too, majorities in both, but not controlling majorities, and that will require more attention to genuine bipartisan legislation. That could include stimulus aid, infrastructure capital allocation and, yes even the clear opening of renewables to the conversation as a genuine space to capitalize on, politically and economically. The last point is the markets are neither impervious to the current events nor blind to them and that’s my focus as we start the new year.

 

December 18, 2020

The Other Great Reset

The week began with the broad markets still strong despite overbought conditions and collective uncertainties, and that’s where things get interesting. For much of the year the socioeconomic conditions went from deeply recessive to not so deeply recessive. To bring us to this condition there was a lot of Fed activity and government money at the beginning of the pandemic. This was met with widespread consumer activity both on and off the internet. All which leaves us today with the resumption of unemployment, positive testing and a stingy government. But now comes the vaccine, and suddenly, the Fed announces its intention to keep interest rates low until 2023, and the houses of government seem genuinely interested in bringing a stimulus package before the end of the year. The kind of triple play that the markets love, to defend against a weak economy and keep it on track to win. But at what price?


Markets

Pretty optimistic perhaps, but in many respects the growth of the broad indexes has been reasonably even given the fluctuating cause and effect of the pandemics impact on the economy. The Nasdaq, and its big tech components had, and has, a place in our economy that has never been more widely confirmed. The S&P 500 had been held back due to sharp declines in the leisure and restaurant sector of the economy that is directly controlled at the consumers discretion. Once the vaccine was introduced by Pfizer (PFE) and another coming any day from Moderna (MRNA) the growing confidence that normal, new or otherwise, is closer at hand than it’s been all year. That’s the setting, and the investor commotion, namely the army of Pindudes trading the new IPO’s and other high-risk stocks, have created an atmosphere of concern that fundamentals are being ignored, or even being in their own atmosphere of great reset. The latter suggesting that today ‘s P/E of 30 is yesterday’s P/E of 20 times earnings. This remains to be further tested. For now, the economic conditions exist to see some light consolidation, to further work off the overbought technicals and enough cash watching eagerly on the sidelines, and fund purchases, otherwise referred to as window dressing, all enough to push the broad indexes, in my opinion, to trend higher into the year end.


Economics

The Fed wants to keep interest rates low, but those pesky bonds aren’t listening, and I’m not confident they will. Much of the Feds recent speech focused on rates rather than inflation, the focus of previous statements by the Fed Chair. This is most likely because of economic moderation, as seen in Retail Sales for November coming in at -1.1% and a stable but not declining number of unemployment claims. Both of which could also keep inflation in check for the foreseeable future. 


External Events

In the spirit of hope, the 900+ billion-dollar stimulus package should be coming in time for Christmas, but of course not without a lingering scent of disagreement. The vaccine will also continue to be met with a disconcerting media. In my opinion all of this creates a distraction, while the markets focus on companies with strong balance sheets and the potential to become giants in the broad changes that have taken place in the consumer economy. For now, if Washington gets their act together, the vaccine distribution speeds to expectations and interest rates behave, our collective patience will pay off.