Just a few things had investor attention in Q1, among them…
- The inauguration of President Biden
- A blowout earnings season
- The emergence of meme stocks and our introduction to an online trader nicknamed Roaring Kitty
- A near endless supply of new SPACs
- Incipient fears of higher interest rates and inflation
- Yet another COVID-relief bill to the tune $1.9 trillion or a little less than 9% of GDP
- Global M&A activity reached its highest level since 1980 and 10-year Treasury yields doubled
And a few things we’ll be watching for potential in Q2 and beyond…
- Faster-Than-Expected Vaccine Rollout – Return to Normalcy solves everything / we believe the best stimulus is an open economy. Furthermore, the Fed said that once the U.S. achieves 75% immunization, that they would consider beginning the tapering discussion. If we look at the current pace of vaccine distribution, we could see the U.S. hit this threshold number by mid-June.
- Better Economic Data – Economic data, which lags the stock market, hit rock-bottom last year, but we believe signs of a recovery have continued to appear, most notably with the recent Non-Farm Payroll and ISM data. Now that we have a fifth round of stimulus from Congress, especially within the unemployment area, and the potential for an infrastructure bill, we believe that we will continue to see increased consumer spending and job stabilization – both keys to getting out of this pandemic-induced recession.
- Better than Anticipated Earnings – Given the record amount of stimulus, and that S&P 500 earnings are only 13% below its peak, we believe earnings growth will continue to be a determining factor of success for corporate America, pending tax changes. Moving forward, we believe that if earnings growth in 2021 can surpass the multiple contraction that we could potentially see, since we are at 99th percentile multiple, positive future performance could occur.
- Health of the Consumer – We believe the aggregate consumer is flush with cash, and once pent-up demand can safely be unleashed, the U.S. economy is set to rip higher. While we know that the cruel nature of the pandemic has had an adverse financial impact on many (particularly those less fortunate), in aggregate, the consumer coffers are presently funded. U.S. bank deposits are up more that $3 trillion from a year ago, while credit card balances are down 12% over the past year.
- Variants Causing Another Shutdown – After a significant decline in COVID-19 cases in the U.S. earlier this year, variants of concern (VoCs) continue be a risk, as there have been strains, i.e., “P.1 Variant”, that are more contagious than the original strain.
- Possible Policy Errors Through Fiscal Tightening (Taxes) in 2022 – The lags associated with the long-term benefits of infrastructure spending are notoriously long and variable. Tax increases, on the other hand, tend to be retroactive and immediate. From a market perspective, the fear is that a fiscal drag sterilizes the positive impacts of reopening and already passed stimulus, leading to an economic environment more consistent with the period of secular stagnation after the GFC.
- Faster-than-Expected Inflation – The magnitude of the policy actions used to counteract deflation may, in the end, be hugely inflationary. Higher-than-expected inflation tends to be a major headwind to equity valuations. Right now, 5YR inflation breakeven figures are above the Fed’s 2% target. For markets how the Fed chooses to address inflation is as important as the inflation itself.
We’d love for you to flip through the full set of charts and context, linked here. Enjoy!
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