A Look to the September Stock Markets
Fed Chairman Powell – “When Doves Cry….Encore!”
Harnessing his inner “rock star” Prince, Fed Chairman Powell kept pumping out the billboard hits. Last week, the Fed announced the tapering of its $120 billion in monthly bond purchases later this year. At the same time making it clear that interest rate hikes would not immediately follow the bond purchase tapering. He also spent much of the speech pushing back on inflation concerns, providing data points that support the Fed’s position that elevated inflation is transitory in nature. Powell’s clear signaling and near-term avoidance of any sort of “taper tantrum” was cheered by markets with all three major stock indexes finishing the final full week of August in the green.
It’s clear “tapering is not tightening” as the Fed does not want derail the recovery by prematurely removing its simulative policy. Although the Fed’s announcement equates to easing off the gas pedal a little, their policies remain extremely dovish with the economy remaining in the fast lane to recovery in a little red corvette (lesser known Price reference).
What exactly is a Dove?
A dove is an economic policy advisor who promotes expansionary monetary policies which usually involve low-interest rates. Post financial crisis the use of quantitative easing measures including bond purchases have increased the dovish tools available to the Federal reserve to achieve goals such as low unemployment and keeping inflation low.
Metaverse – “Roads? Where we’re going, we don’t need roads.”
Last month billionaire cyborg and founder of Facebook Mark Zuckerberg gave us a peek into what the future of work from home will look like. They call it Horizon Workrooms, a new way for office workers to connect using virtual reality. The technology hopes to eventually replace the 2D monotonous worlds of Zoom and Microsoft teams. Utilizing Facebook’s Oculus virtual reality headset, you’re suddenly sitting at a conference table with other avatars (Cartoon versions of people).
“Metaverse” – the concept of a future iteration of the internet, made up of persistent, shared, 3D virtual spaces linked into a perceived virtual universe (Wikipedia)
It truly does blend the real and virtual worlds together creating a sense of space and an environment conducive to collaboration. Even through it’s still a Beta version, it’s clear to see where the future is going. Watching the demonstration brings back memories of the early days of the internet and all its untapped potential. Although Facebook says this isn’t the metaverse, it seems to me it’s only a matter of time and it’s probably a lot sooner then we all think. As investors we should all take note and contemplate the many opportunities these future technologies will provide.
Energy – “Don’t call it a comeback”
With the markets hitting all-time highs and dismal yields on bonds, it’s worth taking a peek at the ever disliked and dreaded energy sector. Having spent the first decade of my investment career working on Bay Street (Canada’s version of Wall Street, heavily weighted in commodities) there I witnessed first-hand the boom/bust oil cycle multiple times. Today, oil and gas companies seem to be emerging stronger from the unprecedented demand shock caused by COVID.
Firstly, and most importantly the WTI price has consistently hovered around $70 per barrel, which is extremely attractive and profitable pricing for big oil. This comes from a combination of an undersupply of oil and OPEC production cuts during the pandemic.
Secondly, people are realizing that a transition away from traditional energy sources is going to take a lot longer than expected. Currently, there is no flick of the switch alternative to oil which remains our primary source of energy globally.
Thirdly, for now it seems the worst is behind the industry. The oil and gas companies that survived the demand shock, falling commodity prices, write-downs and massive losses of 2020 are now better positioned, leaner and more financially disciplined then before. Not to mention oil is seen as a hedge to higher inflation.
Now that you’re convinced, what’s the best way to get exposure? For me it’s simple, I remind myself never to get to overconfident when it comes to traditional energy. So I like to have small weightings, while sticking to the big boys that pay juicy dividends and have higher quality balance sheets. Prime example, Exxon Mobil Crop which posts an attractive dividend yield of over 6%. Not bad considering the US 10 year offers a whopping 1.3%. I know oil is far from perfect and has many negatives associated with it, but it seems to me the market is pricing in all the bad news and very little of the cash flow positive good news.
The COVID Trade – “Bottom of the ninth with two outs, two strikes and Nolan Ryan on the mound”
Late last year I warned investors about the foreseeable end to the stay at home “COVID” trade. The month of August proved to be another leg down for the group even as concerns about the Delta variant linger. The posterchild for the group “Zoom” was down sharply after their Q2 earnings forecasts disappointed due to tough year-over-year comparisons as offices and live events began to return to normal. I normally don’t like to see any stocks fall, but I did get some satisfaction witnessing a small victory for fundamentals.
Clorox was a similar story missing top and bottom line estimates, which sent the stock sinking approx. 10% post earnings announcement. Following the news multiple analysts downgraded the stock, with some even double downgrades. As with most downgrades they normally come too late as investors had participated in the downward move in price.
There are many more examples, most providing much of the same outcome. This should act as a reminder that valuations eventually matter and buying names that are priced to perfection comes with considerable risk. In my opinion, the stay of home “COVID” stocks have much more correcting to come as the reopening continues to take shape.