Stimmies

Stocks continued their impressive behavior of the previous few months, advancing 5.2% in April, and are now up an impressive 11.8% year to date, as measured by the S&P 500. According to Bespoke, the S&P 500 has posted 25 record closing highs this year, with records on nearly 1/3 of all trading days. The behavior of the market as a whole has been almost too good, lulling some investors into complacency. For the last 12 months, prices have marched steadily higher, empowering investors to take on ever more risk. This will change at some point, however, leading to an inevitable shakeout.

The market backdrop this year has fostered change that, in my opinion, reflects a cultural shift in the underlying fabric of the “markets.” $1400 stimulus checks, people working from home, social media and commission-free stock trading have leveled the playing field and invited many to invest in stocks who never before had access. On the opposite end of the wealth spectrum the SPAC fervor, where investors give over their money to a yet-to-be-identified company, erupted. This celebrity-sponsored mania is funneling volumes of money to companies that most likely would not be able to access the traditional IPO market.

From a more fundamental perspective, the underpinnings of the strong start to the year have been widely discussed. Fiscal stimulus has been unprecedented: Congress passed a $900 billion coronavirus relief program in December 2020, and the American Rescue Plan at $1.9 trillion in March this year. The effort is clearly to bridge the sweeping economic effects of the pandemic on millions of American. Interest rates remain at or near historic lows continuing to fuel business development and home buying. Global trade is rebounding with the easing of the trade backdrop and the diminishment of the impact of the virus.

There is a reasonable probability that the bottom-up economic stimulus now taking place will have both a dramatic and long-lasting effect on the future welfare of households across the U.S. This is the opposite of the supply-side dogma advancing since the days of Ronald Reagan: if you give a few people a lot of money, it’s good for everyone. I think some seeds of change have been sown that will lead us to a new path. This approach, a lifting of all boats, is just what we need to bolster a consumer-led economy, and critically align it with current spotlights on racial equality, true economic opportunity, education, and environmental awareness.

Closer to the bottom line, we have seen nothing short of stunning Q1 ’21 earnings reports. The FAANGMN (Facebook, Apple, Amazon, Google, Microsoft and Netflix) all posted remarkable earnings growth this quarter. Collectively, they make up well over 20% of the S&P 500’s total market capitalization. Their profit margins are at or near all-time highs, they are establishing new plants and investments in the U.S. and importantly, increasing both hiring and wages. They are thriving. My hope here is that their success is not more than some in Congress can stomach.

One trend we are seeing on earnings calls is the tendency for log jams in the logistics for many companies. The availability of some components, as varied as microchips, and wood, is also slowing production. My suspicion is that we do not face secular inflation, as is often cited. I think the benefits of the efficiencies and innovations realized during WFH and the pandemic shift lead to a fly-wheel acceleration of margins and earnings once these dislocations are resolved.

On the investment front, I think we need to patiently hold high quality growth stocks that are reasonably priced. Some cash reserves are useful here as I think we do see some volatility, and I think interest rates are on the rise. The coming wave of growth and higher earnings will support stock prices even with a higher rate backdrop. The breadth of the economic surge will prove to be deeply seeded across our society, reversing some of the inequity that has been promoted.

In my view, now is the moment to be attentive, but optimistic at the same time – cautiously bullish. If you would like to discuss further or review your accounts we are more than happy to catch up with you. Take good care.

Bruce Hotaling, CFA
Managing Partner