Insights: Investment Management

WuRevue Week Ending 4/16/2021

 

Top News:

04/12: Fed Chair Powell said “it’s unlikely that we would raise rates anything like this year.” Meanwhile, St. Louis Fed President Bullard added that any discussion of monetary tapering would be premature until 75% of US population is vaccinated (vs. 23% currently).  Despite such reassurance, investor appetite was restrained ahead of the kick-off of quarterly earnings season. In its attempt to curb monopolistic powers of internet behemoths, China sanctioned its largest e-commerce retailer a record $2.8B in fines.

 

04/13: Owing to higher gas prices, CPI rose at an annual rate of 2.6% in March, marking a fourth consecutive monthly increase.  US regulators halted the use of J&J’s single-shot vaccine, pending an impromptu review of blood clot complications in women.  China’s March trade data showed continuing recovery, even if some question that such momentum can be sustained.  Crude oil received a boost, after OPEC increased its 2021 global oil demand forecast.

 

04/14: US economy accelerated in early spring, along with upticks in pricing and supply constraints, according to the Fed’s latest survey of economic conditions.  Given inflationary fears, Powell relieved some uncertainties by intimating the central bank would taper asset purchases “well before the time we consider raising interest rates.”  In a major PR coup for cryptocurrencies as they seek wider acceptance as a store of value, the largest US crypto platform went public.

 

04/15: Treasury yields receded, despite a pair of positive economic reports propelling major US indices to fresh highs.  Retail sales enjoyed the second largest snapback in March, supported by an accelerating economy and stimulus payments.  In another welcome development, weekly unemployment claims fell to the lowest level since the pandemic’s onset. 

 

04/16: US housing market remained a key bright spot in March, as homebuilding surged to an almost 15-year high.  Despite China’s record annual GDP growth of 18.3% in the first quarter, there remain concerns over how much growth will decelerate for the remainder of this year.

 

 

Heard on the Street:

“With the vaccination drive fueling a reopening of high-contact sectors of the economy, businesses are rehiring workers laid off earlier in the downturn, and making fewer new layoffs too.”

— Bill Adams, senior economist at PNC Financial Services, as quoted by MarketWatch on 4/15/2021

 

“My current concerns are driven far less by economic factors than by the combination of valuations, leverage, and the potential for imbalanced order pressure. With regard to the economy, I do expect some “reopening” strength, but I also believe that this prospect has been extensively priced into valuations.”

— John Hussman, head of Hussman Funds, in his April commentary update on 4/11/2021

 

 

Longer Game:

Can machine learning and harnessing big data give AI an edge in investing?  Not likely (for now at least), according to one researcher, due to the constantly shifting and inherently “adversarial” nature of financial markets.

 

 

Bonus:

As an example of retail mania in illiquid stocks, David Einhorn of Greenlight Capital highlighted a single deli in New Jersey with a market cap close to $90MM, despite ringing up less than $40K in sales over the past two years.

 

 

Top News:

11/09: Investors pushed equity markets, notably non-tech issues, higher, following added clarity on a Biden victory and encouraging efficacy data from one leading vaccine candidate.  China’s exports, which rose 11.4% in October, may face headwinds, in light of fresh European lockdowns.

 

11/10: Vaccine-driven optimism was sustained when the FDA approved an antibody treatment for emergency use for the first time.  Meanwhile, unemployment figures in the U.K. (here) and France (here) rose as Europe’s Covid-induced jobs crisis deepened. 

 

11/11: Despite earlier warnings by experts, every state in the U.S. saw record increases in new coronavirus cases over the past week, with overall hospitalizations reaching the highest point of the pandemic. Constrained economic activities and weakening consumption prompted OPEC to cut its daily global oil demand forecast in 2020 by 10% below last year’s level.

 

11/12: Another week of slow but mostly steady improvement in the weekly jobless claims picture did nothing to bridge the entrenched partisan divide over the size of long-awaited fiscal relief by Congress.  Slack in the U.S. economy was evident in October as core inflation ticked lower to an annual rate of 1.6%.  On the pandemic front, a second mRNA late stage vaccine candidate reached a key milestone, while an advisor to President-elect Biden floated the idea of a nationwide lockdown after the country registered record case numbers six times in just eight days.

 

11/13: Preliminary consumer sentiment fell in the first half of November, dragged down by elections jitters and another wall of Covid-related worries.  However, investors took comfort in October’s Producer Price Index report as a sixth straight month of uptick allayed nagging fears of deflation.  In a move likely symbolic, the Administration banned Americans from investing in Chinese companies deemed to support China’s military. 

 

 

Heard on the Street:

“Now, along with the market’s sharp rise, investor expectations have also risen… on a net-basis, we expect the market to trade in a choppy fashion near-term and the strong gains to moderate… For those investors working excess cash into the market, we would continue to average in but look to be more aggressive on pullbacks.”

— Keith Lerner, chief market strategist at SunTrust Advisory Services, quoted by MarketWatch on 11/13/2020

 

“Indeed, we think that the US unemployment rate could fall quickly enough to warrant a rate hike from the Fed in 2023… Our call does rest on a vaccine being widely available by mid-2021, and another round of stimulus no later than Q1. But assuming we get both, there should be some better-than-expected news for the US…if we look past a gloomy winter.”

— Avery Shenfeld, chief economist of CIBC World Markets, highlighted by MarketWatch on 11/9/2020

 

 

Longer Game:

The EU has fired its initial salvo against Amazon for breach of antitrust rules, portending regulatory actions against other US big techs.  Similarly, reflecting the government’s growing concerns over the influence of digital platforms, including Alibaba and Tencent, China released a draft antitrust guideline to rein in internet-based monopolies.

 

 

Bonus:

In an interview, Secretary of State Mike Pompeo stated that Taiwan hasn’t been part of China. A few hours later, China finally congratulated Biden on winning the election. 

Top News:

11/02: Election jitters notwithstanding, investors cheered positive manufacturing data across China, Europe, and the U.S. in October.  U.K. became yet another European nation to re-impose a lockdown to stem rising infections.

 

11/03: Amid a dearth of major catalysts, investors appeared to have bid the U.S. stock markets higher on hopes of decisive elections results, even while some have argued against such optimism (here, here).

 

11/04: Investors appeared to have looked past the undecided presidential election, focusing, instead, on the unlikelihood of Democrats regaining the Senate, where one market bull was relieved “the [Biden] tax increase is off the table.”  Adding to market cheers was the U.S. services sector, which continued its recovery in October, albeit at the slowest pace since May. 

 

11/05: As Democrats inched closer to seizing the White House, protracted legal wrangling continued to unfold over vote tabulations.  As expected, the Fed stood pat in its monetary policy, with Chairman Powell adding that further congressional action on fiscal stimulus is “absolutely essential here.” This need is reflected in the latest jobless claims report, which showed that at least 21.5 million people were still receiving benefits in mid-October. U.S. reached record highs both in daily new Covid cases nationally and in hospitalization rates in numerous states.  In Europe, the BOE decided to further inject liquidity into its monetary system to avoid a double dip recession.

 

11/06: Stronger than expected job gains in October lowered the U.S. unemployment rate to 6.9%, while more than half of the jobs lost to the pandemic have yet to be regained amid resurgent Covid cases.

 

 

Heard on the Street:

“Even with this situation, with divided government, which should keep somewhat of a rein on massive growth in government debt, we still see this trajectory as being only one way. So we see real yields extremely low, we see debt still increasing at a fairly rapid pace, and, net net, we still see that being a fairly decent environment for gold investors.”

— Jim Smigiel, CIO at SEI Investments, quoted by MarketWatch on 11/6/2020

 

 

Longer Game:

Should you make 401(k) changes based upon election expectations? It’s ill advised to allow political hunches and emotions drive long-term investment decisions: not only are there no appreciable differences in outcomes under either a Democratic or Republican administration, the picture is decidedly mixed when control of Congress is added into the equation.

 

Regardless of the winners of this election cycle, Neil Howe, a scholar of demography, believes the U.S. is in the middle of a “Fourth Turning,” which may bring about a “secession crisis,” open conflict with China, and inflation.

 

 

Bonus:

Lest there be any doubt that the Fed is a key driver of the stock market, analysts at Société Générale estimated that quantitative easing contributed to 57% of the rise seen in the rate-sensitive NASDAQ index since 2009.

Top News:

10/26: Resurgent Covid infections across the U.S. and EU heightened concerns over an extended recovery process, particularly in view of the fiscal relief legislation mired in partisanship.

 

10/27: The U.S. Senate adjourned until Nov. 9, abandoning any additional endeavor for a pre-election fiscal deal.  Business spending continued to rebound as durable goods orders rose for a fifth consecutive month in September. Unexpectedly, one measure of consumer confidence in October dipped slightly, driven by “a softening in the short-term outlook for jobs.”

 

10/28: Absent any positive catalyst, U.S. stocks extended recent weakness as investors focused on the worrisome surge in new coronavirus cases in 29 states, and weighed the likelihood of contested election scenarios.

 

10/29: Better than expected U.S. 3Q GDP and weekly jobless claims reports notwithstanding, a full recovery to pre-pandemic levels remains elusive, especially in light of further Covid-induced disruptions.  To cushion some of the blows from lockdowns reimposed on the Continent, the ECB hinted at additional monetary stimulus by promising to “recalibrate its instruments, as appropriate, to respond to the unfolding situation.”

 

10/30: American consumer income and spending capped off a strong 3Q recovery in September, while a key inflation indicator came in at a mild 1.5%.  Given the rearview mirror nature of this data, however, investors questioned whether such momentum can be sustained, considering looming public health worries and political uncertainties.

 

 

Heard on the Street:

“The question now is whether another reminder of crashes past could emerge to create a psychological sense of the risk.  A further pickup in coronavirus cases, a chaotic or violent election or any number of other events could well shake people up… We may be at something of a crossroads.”

— Robert Shiller, Professor of Economics at Yale, in an op-ed on 10/23/2020

 

“If an election dispute drags on – perhaps into early next year – stock prices could fall by as much as 10%, government bond yields would decline (though they are already quite low), and the global flight to safety would push gold prices higher… investors should be preparing for the worst, not just on election day but in the weeks and months thereafter.”

— Nouriel Roubini, Professor of Economics at NYU, in an op-ed on 10/27/2020

 

 

Longer Game:

“Global investors tend to be very Western-centric.  A number of countries have done a much better job of dealing with the virus without inflating their budget deficits and printing money… There is a substantial economic divergence between East and West.  As investors, you shouldn’t let yourself be completely locked into the West.”

— Bob Prince, co-CIO of Bridgewater Associates, in a Bloomberg interview on 10/23/2020

 

 

Bonus:

Researchers from Imperial College London found that “the proportion of people with detectable antibodies is falling over time,” raising concerns over the durability of antibodies and leaving unanswered the question of reinfection. 

 

 

 

 

 

Top News:

8/03: U.S. manufacturing showed a second straight month of rebound in July, after cratering to a low in April. 

 

8/04: Indicative of the extraordinary support lent by central banks worldwide, both Bank of Japan and Reserve Bank of Australia telegraphed their continuing commitment to loose monetary policies.

 

8/05: U.S. and China will reportedly meet to assess the latter’s lack of compliance with the bilateral trade agreement reached in January.  Separately, the U.S. service sector witnessed two consecutive months of recovery in July.

 

8/06: In keeping its benchmark rate steady, the Bank of England cautioned, “Gross domestic product won’t rise to the level it was at the end of 2019 until the end of 2021.”  Meanwhile, dropping for the first time in three weeks, U.S. initial jobless claims slipped to the lowest level since the pandemic’s onset. 

 

8/07: Legal challenges are expected against the opaque U.S. banning of “any transactions” related to Tencent and TikTok.  A broader measure of unemployment known as the U6 suggested the “real” rate in the U.S. was 16.5% in July versus 18% in June.  Finally, Congress remains deadlocked on another much anticipated fiscal relief bill.

 

Heard on the Street:

“With the US and global economies in the midst of one of the deepest recessions and output gaps on record, most investors we speak with have dismissed our call for higher inflation risks…Congress is now in the driver’s seat when it comes to the money supply with its fiscal programs… This is potentially more inflationary than appreciated, which means that back-end rates can rise.”

— Morgan Stanley in a research note as quoted by CNBC on 8/04/2020

 

“Software is not only eating the world, it’s leading the market higher.  Covid has accelerated the momentum and the urgency behind digital transformation… The sector offers phenomenal growth, and right now, the Street is valuing that growth because you can’t find growth elsewhere.”

— Rick Sherlund of BofA Merrill Lynch on 8/04/2020

 

Longer Game:

What do falling cats have to do with investing or running a business?  Plenty, according to Morgan Housel of Collaborative Fund, who notes that “the most universal lesson of 2020 is the value of room for error.”

 

Is this time different? Do valuation levels still matter in the face of new highs in U.S. markets? Kailash Concepts cautions that “if the price paid relative to cash flows is no longer the primary bridge to valuation, capitalism has changed.”

 

Bonus:

In the race to develop a viable vaccine, analysts appear most optimistic on Novavax’s prospects, based upon preliminary neutralizing antibody activity and its more proven technology. 

 

‘Cuz they say two thousand zero zero party over,
oops out of time
So tonight I’m gonna party like it’s 1999

— Prince

 

Recently, considerable ink has been spilled on the explosion of new accounts at major online brokers during 1Q when the US stock market tanked.  One can be forgiven for a nagging sense of “déjà-vu,” however superficially reminiscent of the heyday of the ’90s dot-com bubble. 

 

This heightened interest from mom-and-pop investors has engendered unequivocal consternation among some veterans.  Given the market performance since the March low, it is not difficult to imagine whether their warning were blissfully ignored.  Indeed, unprecedented fiscal/monetary support anchoring investor sentiment and momentum/trend investing appears to have overridden stock valuation concerns and economic worries, for now at least.

 

Setting aside the documented difficulty (here, here) of achieving sustainable success in short-term trading, I believe a disciplined examination of the following should be done before committing to investments of any duration:

 

• What is the purpose? (e.g., speculative trading vs. longer-term funding plans)
• Why is the investment appropriate?
• How can risks be mitigated? If not, what are the implications of downside risks?
• What are the entry/exit points? (The intuitive “buy low/sell high” adage is but one permutation.)

 

Investing has always involved divining the future, itself riddled with variables.  Whereas previously the impact of such unknowns could be estimated within a reasonable framework of analysis, the current environment provides no easy answers.  So, before accepting a “hot” investment tip at a party next time, just pass the nuts instead.

 

Top News:

6/15: The US stock benchmark indices reversed earlier losses after the Federal Reserve, acting as a backstop, said an existing stimulus program will now include purchases of individual corporate bonds.

 

6/16: A smattering of positive treatment headlines in the Covid-19 fight (here, here & here), coupled with a bigger than expected turnaround in May retail sales, cheered investors.

 

6/17: Spikes in new coronavirus cases in select states and China brought reopening concerns to the fore.

 

6/18: Decelerating trends notwithstanding, both new and continuing jobless claims remain at persistently high levels as 29 million Americans claim benefits in all programs. Separately, Conference Board’s Leading Economic Index for May registered the first uptick since January.

 

6/19: Optimism regarding re-opening efforts was tested again as a resurgence in new Covid-19 cases in some states prompted a warning from the WHO.

 

Heard on the Street:

“The levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.  Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely… We are committed to using our full range of tools to support the economy in this challenging time.”

—  Fed Chairman Jerome Powell in semiannual testimony to Congress on 6/16/2020

 

“At the Federal Reserve, I expect our current stance of highly accommodative monetary policy to continue until the economy has largely recovered what’s been lost due to the virus… But monetary policy can’t help the U.S. economy reach its full potential on its own. We also need fiscal policymakers to commit to sustained investments in our economic future… Now let me be clear: I’m not just advocating for increased public spending and debt. The composition of spending is crucial. We need to focus on investments that leverage the talent of everyone and contribute to the economy’s long-term growth prospects.”

— Mary Daly, San Francisco Fed President in remarks to National Press Club on 6/15/2020

 

Longer Game:

Taking stock of the nation’s preoccupation with domestic woes, Richard Haass, president of the Council on Foreign Relations, argues the US can ill-afford to ignore percolating and recurring geopolitical and environmental issues with global implications.

 

Stephen Roach, ex-chairman of Morgan Stanley Asia, predicts a 35% depreciation of the US dollar, owing to its shrinking share of global trade and importance as a reserve currency.

 

Bonus:

As of 6/11/2020, a Banc of America Global Fund Manager Survey of 211 institutional investors reveals 78% of respondents believe the stock market to be “overvalued,” while 53% say the comeback from the March lows is a “bear market rally.”

Rashomon, an allegory about the fungibility of truth, is a favorite in the oeuvre of filmmaking legend, Akira Kurosawa.  As the S&P 500 rallies to within 6% of its all-time high, even while almost 21 million American remain unemployed, it is easy to view this apparent disconnect as if one were re-watching the Japanese epic. 

 

Unabashed bulls would have us believe that the market is a perfect discounting mechanism, to which economist Paul Samuelson once famously quipped, “The stock market has predicted nine of the last five recessions.”

 

Beyond uncertainty relating to the economy, public health, trade relations, not to mention the election later this year, I suspect there are other distortions in the market, including: 1) the “Fed put,” namely the belief that the central bank will prop up asset prices, as implied by its recent action; and, 2) investor psychology in the form of FOMO, which some might term “greed.”

 

Regardless of your positioning in the market, it bears remembering investors tend to overshoot both on the downside and the upside, as recent developments have reminded us yet again.  Complacency cannot be a luxury, especially now.

 

Top News:

6/01: While marking the third straight reading below 50.0%, indicating contraction, ISM’s Manufacturing Index climbed to 43.1% from an 11-year low of 41.5% in April

 

6/02: In an interview with JAMA, Dr. Anthony Fauci, who’s been hopeful of a vaccine by year-end, cautioned against excessive optimism on its “durability.”

 

6/03: Shrugging off continuing social strife, investors sustained the recent upward bias in US equities as service sector data bolstered hope that economic damage may be mostly done, for now.

 

6/04: Ahead of tomorrow’s jobs report, worse than expected continuing weekly unemployment claims suggest the pace of rehiring may not be as robust amidst a patchwork of reopening plans at local levels.

 

6/05: Defying market expectations by a wide margin, May’s payrolls report showed a surprising recovery of 2.5 million jobs, notably in the leisure and hospitality sector. 

 

 

Heard on the Street:

“Everyone can see and feel that this is different and can sense the bizarre nature of the market response: we are in the top 10% of historical price earnings ratio for the S&P on prior earnings and simultaneously are in the worst 10% of economic situations, arguably even the worst 1% … There are no certainties but there are probably still some better and safer themes. Caution and patience are likely to be two of them.”

— Jeremy Grantham, co-founder of GMO, as excerpted from the firm’s quarterly review

 

Bonus:

A May survey, albeit of limited sampling size, shows global CFOs are less than sanguine on 2020 business prospects.

Top News:

5/17: Fed Chair Powell sees economic recovery in 2H of 2020, despite temporary depression-like unemployment.

 

5/18: Encouraging preliminary statement by Moderna on its Phase 1 coronavirus vaccine trial lifts investor confidence, even as such optimism is questioned.

 

5/19: More than 2/3 of institutional investors remain unconvinced of current market rally.

 

5/20: The Fed’s April meeting minutes show deep concern for not just the current state of US economy but what lies ahead as well.

 

5/21: As of May 9^th, 25.1 million Americans filed continued unemployment claims, 2.5 million more than the week prior.

 

5/22: US-China tension escalates beyond trade and geopolitics as Congress seeks to limit Chinese companies’ access to US capital markets by threat of delisting them on exchanges.

 

Heard on the Street:

“We don’t love the risk-reward right now in the stock market… Only 15% in the S&P 500 is trading above its 200-day moving average. So, you’ve had a lot of investors crowd into a specific perceived area of safety in the market — large cap growth stocks.  Look at cyclicals. Look at small caps, banks, transports. All the areas that might indicate a more durable recovery in the economy. They’re all stuck below 2018 lows.”

–Bryn Mawr Trust’s Jeffrey Mills in a 5/15/2020 CNBC Interview

 

The Longer Game:

Ruptures within the US-China symbiotic relationship are feared to have lasting impact beyond the current election cycle and COVID pandemic.

 

 For Your Consideration:

It is understandable that investors should feel paralyzed as debate rages on about the market’s direction.  Without committing to any camp, one can consider two investment management techniques in the interim as part of the ongoing portfolio review. 

 

First, tax-loss harvesting in taxable accounts can help to use losses from stock sales to potentially offset gains and to even get a modest income tax deduction. 

 

Second, looking beyond the immediate horizon towards retirement, a Roth IRA conversion can make sense, especially if you are anticipating lower income this year and/or you expect income tax rates to be higher in retirement (e.g. as a result of the widening federal deficit stemming from stimulus spending). As these portfolio adjustments are fraught with tax consequences, a CPA or qualified advisor should be consulted.

 

Bonus:

Data kept by Kronos, which makes digital time-clocks that workers use to check in and out of work at some 30,000 companies across the U.S., suggest the pace of job recovery may be slower than hoped.