July 15, 2020

Tax Saving Cash

Truly little is discussed in the typical narrative of the rally in stocks that’s taking place to the consternation of the experts and that’s the impact of tax related cash on the broader markets. There are estimates that some 100 million Americans are covered by defined contribution accounts that includes IRA’s, SEP’s and a range of other qualified accounts. This represents an amount of capital that makes its way into the capital markets and both generally follow an upward curve as one gets closer to tax day, which coincidentally, is today. So what about tomorrow?

The overall tone of the markets is one that shows the Dow Jones Index and the S&P Index attempting to catch up with the NASDAQ Index. However, catching up is unlikely as both the aforementioned indexes remain in negative territory for the year. It’s my opinion that once they go positive, the result might be less thrilling as might be suggested in the narrative. For starters, the push this week has been in the travel industry stocks, cruise lines, airlines and hotels are once again finding their way into the minds of overly optimistic investors. That is if one believes the buyers are actual investors, which I don’t. I believe the buying is exclusive to Hedge Funds and our lovable Pindudes both of whom are inclined to sell as quickly as they are to buy, which by definition is the actions of speculators. Additional activity in some of the more recently favored names has been finding companies such as Amazon (AMZN) and Nvidia (NVDA) losing some of their steam. That’s not surprising given their recent run to historic new highs, but the decline is less speculation of those companies losing value in the face of a coming vaccine, but more from profit taking in  front of investor tax filing in addition to carful tax planning in front of the upcoming elections. For now our holdings in technology are accompanied by strong faith in the consumer and the changing landscape for work and lifestyle. And if the correction picks up any speed, the opportunities should be compelling.

The overall economic picture is showing improvement although the numbers are not easily attributed to the historical norm because of the depth of the recessionary levels it rose from. Beginning with last weeks continued rise in the ISM Manufacturing Index to 57.1 (over 50 signals expansion) and this weeks rise in Industrial Production is more of the bounce from depressed levels. But these indicators are an interesting part of the ongoing narrative to repatriate manufacturers from China that could have a measurable impact on the manufacturing sector of the economy, now only 12% of total GDP. And with the rise in European growth the current decline in the US dollar versus the Euro could give a nice push to those incoming companies. We’ll have to see, since the pandemic still keeps more economic activity on alert. On the inflation front, Producer Prices are still trending below historic levels, but this week’s release of the Consumer Price Index (CPI), coming in at 0.6% reflected the consumers path to reopening.  Lastly, the Fed has been quiet in the press, but I’m confident they are behind the current debate on a second stimulus package. Even past Chairperson, Ben Bernanke weighed in on the need to keep state coffers fluid as they cope with substantial pressures on their municipal obligations.

External Events
The debate over whether to reopen or not, to send kid to school, or to even wear mask, or not, have driven the political landscape to no noticeable effect on the capital markets, either here or Europe and Asia. Overall, besides the cash that rests on the sidelines, there is uncertainty. But the uncertainty seems less uncertain to me, as one needs only to see how deep the recessionary features of the economy are, it’s not implausible to arrive at the consideration that there is only one way for the economy to go, and that’s higher. So too will the markets, and while I still prefer to weigh the potential, and the benefits, of occasional corrections, my outlook remains constructive.

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