The S&P 500 was essentially flat on the week. It closed at 3934.83 last Friday and this afternoon it ended the week at 3,906.71. There was a lot of attention on Washington this week as the House Financial Services Committee conducted a hearing on the now infamous ‘Reddit Rebellion’ that shook the financial system severely, at least in terms of how capital was positioned. Was I the only one doing double takes trying to figure out whether Vlad Tenev was himself or ‘Roaring Kitty’ and vise versa? The coincidence in haircuts is one of those mysteries we’ll sadly likely never understand. Both probably are sick of hearing from the SEC. Our Washington Policy Expert, Tom Block, will discuss the hearing and its consequences or lack thereof. Hint, when House Financial Services Chairman Maxine Waters says something is ‘not political theater’ it might be best not to take her at face value.
The overall drop in markets wasn’t what we anticipated based on last week’s VIX drop but behind the mostly negative market moves this week there was significantly positive developments for the cyclically sensitive ‘Epicenter’ stocks that we have been recommending for coming on a year now. My colleague, Tom Lee, will discuss some of the intricacies of this past weeks market action. The Growth stocks that led during the dog days of the pandemic because of their massive resources and seeming invulnerability to economic devastation that occurred in other sectors of the economy had a pretty lousy week and dragged the indexes down due to their prodigious market caps.
We know there’s a lot of reasons to be fearful of the future, however, we must remember that is quite literally always the case. When you try to focus on the data alone there were some real positives this week. Retail numbers came in significantly higher than projected. Financials seem to be giving the ‘all clear’ signal as well.
Certainly, one of the things that spooked markets this week was a significant upward move in long-term interest rates. The US 10-YR made a post-pandemic high as did the 30-YR. Some market participants obviously have fears that inflation will get out of control and prompt preliminary corrective action from the Fed. The problem with this thesis is that Jay Powell keeps saying as loudly as he can, and as many places as he can, that the Federal Reserve is specifically aware of this risk and is taking great steps to mitigate it. He stressed over and over again that markets will get ample warning before rising rates are even considered. His messaging has been deliberately consistent and the guy just won’t miss an opportunity to ooze dovishness. If you’re looking for bad news from the Fed anytime soon, we think you’ll be disappointed.
Yes, debt levels are historically high compared to GDP but remember that Japan’s Central Bank’s experience proves that the size of the Fed’s balance sheet is manageable, if not ideal. Generally, it looks as the current rate environment makes the risk of the interest service on the Federal debt from crowding out private investment. We should all thank our lucky stars for this. Despite acrimony and division throughout our government and country we’d like to single out the financial authorities for pretty concerted, coordinated and effective action.
So, we think news out of Washington will largely be positive over the next week. This paired with the solid earnings and sales performance we’ve been seeing makes us reiterate our call that despite some potential over-extension in some corners of the market, generally the Value/Cyclical names we’ve primarily been recommending have been outperforming on earnings and sales. Check out the sales numbers. Four out of five cyclicals have beaten their consensus sales estimates by an average of 5.4%. Again, one of the key thrusts of our analysis in why you should buy these stocks is that they will be entering what will likely be the most robust economic recovery of our century with the bare-bones operating leverage that was necessarily achieved by surviving the pandemic. With the Fed not turning the music down anytime soon and healthcare data continuing to improve we don’t see a lot getting in the way of markets continuing to move higher. However, we can never predict the future all we can do for our subscribers is take the best information at hand and deduce the most probable outcomes. Despite all the distractions and the litany of reasons you thought markets should go down since the alarming revelation of a global pandemic that would cause unprecedented cessations in economic activity, markets have gone up. That fact, to us, is a more powerful assertion than any one human being can make.
While we normally recommend larger stocks, we think we found an exciting small-cap opportunity with an outsized history called Real Networks. You may be familiar with the name if you’ve followed Tech since the 1990s. Their CEO was referred to be Robert H Reid in Architects of the Web as the man who ‘broke the web’s sound barrier’. He’s pivoted his company away from the languishing digital media business toward a very exciting AI application to biometrics. We’re very happy to offer our subscribers coverage of a smaller cap name that isn’t covered extensively elsewhere.
Our Vice President of Digital Strategy, Leeor Shimron also wrote a fascinating piece on the first blockchain-enabled diamond commodity. Be sure to check both of these pieces out.
