A Look to the June Stock Markets
Volatility – “Awake from its slumber”
At first glance May initially appeared to falsely confirm the stereotypical adage of “Sell in May and go away”, with markets selling off in the early weeks. Which is just my luck, as I had just sent off my last newsletter preaching how ridiculous an investment strategy that was to follow. Fortunately for me and investors the markets came to the rescue and rallied into the backend of month vindicating my gospel.
Although overall the big three indices ended the month of May “flattish” (DOW +1.93%, S&P500 0.55% and NASDAQ -1.53%), it was far from dull. Markets weathered a 4%+ pullback and a spike in the VIX (used to measure the level of fear in markets) not seen since the beginning of the year. The worry in the markets continues to be the same, mini-inflation panic attacks and the potential of Fed tightening. Even though the month shook us back to attention, the overall storyline continued to stay intact. Reopening, reopening and more reopening. Don’t let a little volatility fool you, the reopening trade is far from over and will continue to have legs.
Data: Do you pronounce it “Day-Ta” or “Dah-Ta”? Who cares because the numbers are looking good!
The data keeps rolling in and it’s hard to ignore the positive trajectory. When it comes to interpreting economic data its best not to over emphasize any particular single data point, but instead look for trends over multiple data points. The trend across multiple economic readings are shouting out “We are back in business” or at least we intend to be in the months ahead. Here’s a few of the highly followed economic indices;
Gross Domestic Product (GDP) is a comprehensive measure of a country’s economic activity. Simply put the value of all goods and services produced in any given country’s economy. First-quarter U.S. GDP was 6.4% (annualized), which is a huge number considering the size of the US economy. Projections for the second-quarter are even higher at over 10%. The last time the US economy grew at such a pace was directly following the 1981-1982 recession, when GDP measured in at 7.9% in 1983.
Purchasing Managers Index (PMI) is a measure of the prevailing direction of economic trends in manufacturing. A reading above 50 represents an economic expansion and conversely a reading below 50 represents a contraction. Most recently the Chicago PMI had a reading of 75.2 in May, blowing out analyst expectations of 68. This was the second largest reading ever and the index dates back to 1967.
Consumer Confidence Index (CCI) is a measure of how optimistic or pessimistic consumers are regarding their expected financial situation reminded reality steady in May following four straight months of gains. This follows the back to back sharp increases in both March and April, driven by the continued reopening of the economy and government stimulus.
Valuations matter…the sequel
Back in January I wrote about stretched valuations in high flying tech names and even singled out Elon Musk and Telsa writing that “Chasing Tesla at these levels is a risky game”. Since that time Telsa stock has gone from approx. $800 to $600, with plenty of volatility in between. Potentially higher interest rates effect these types of high multiple stocks the most. Even a modest increase in rates impacts discount rates and therefore cash flow assumptions for these high growth names. It’s not to say that I’m not a fan of Tesla’s products, it’s the stock price I find less desirable. Which is a great lesson for investors to remember, not all great companies are great stocks and vice versa. I speculate that many investors buying fallen high flyers at these levels are most likely trying to catch a falling knife.
Bonds – You can put lipstick on a pig, but it’s still a pig
Bonds just aren’t what they use to be and it’s making building portfolio that much more difficult. The typical bond isn’t attractive no matter what angle you try to look at it. Firstly, bonds are inversely correlated to interest rates and we all know the consensus on where those are headed. Secondly credit spreads, they’re tighter than a pair of pants after thanksgiving dinner. Lastly yields, which are measly at best, especially given the amount of potential interest/credit risks that are imbedded. This is all good news if you’re a seller of bonds or if you’re holding cash, as the opportunity cost is limited in a low yield environment. Luckily for investors the investment universe is broader than just stocks and bonds, so use this dilemma to think outside the box and incorporate some alternatives. For instance, NCB is launching a Tourism Response Impact Fund (TRIP) to take advantage of the opportunities that exist in the hard hit tourism sector. With a target yield in the high single digits, this is just one of many examples of outside the box thinking.
Alessandro Sax, CFA
NCB Capital Markets Cayman Ltd.
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