Markets Shake Off Growth Scare Thursday and Close at ATHs
Summary
– S&P 500 closes at another all-time high of 4,369.55, up from 4,352.34 last week. The DJIA closed slightly below the 52 week high it hit in May, and the Nasdaq sat similarly.
– The path to all-time highs was marked by volatility and a major “growth-scare” on Thursday that saw the 10-YR Treasury briefly trade below its 200-day moving average.
– While there are many genuine risks to the market, we suspect that yesterday may have been the height of the Growth fears, and the market could be well-positioned for a leg-up.
– Equity markets are robust from several standpoints. 1H2021 saw more equity inflows than the previous 20 years.
The S&P 500 finished the week very strong after a scary and meandering path that saw the resurgence of significant growth fears, probably mainly due to the continuing rise of the Delta variant and the overall slow pace of vaccinations outside of the US, UK, and Israel. Thursday was a scary day, and a few weeks ago, you didn’t have many people thinking that they would see the 10-YR around a buck and a quarter, but that’s what happened. Perhaps the only consistent thing to expect in this topsy turvy world is the unexpected.
In a sign of confidence from a critical Epicenter bellwether, Carnival Corporation, the company went back to the market to buy back as much of half of the $4 billion in emergency funding notes it issued during the scary early days of the pandemic. Essentially, Carnival is making a statement of massive confidence in the future (and the strength of its balance sheet) by offering to pay investors up to 114 cents on the dollar to consenting noteholders. Other big displays of confidence like United Airlines making the biggest ever purchase of commercial airliners suggest that the travel recovery is building momentum. The CEO of Hilton also noted that summer bookings are about 10% above their 2019 levels.
The question is, if this crisis couldn’t kill a company like Carnival, then what can? The company successfully faced a literal worst-case scenario that led many to wonder if it could recover from the reputational damage, let alone its dire financial straights. A year and change ago, many mainstream market analysts were forecasting the near-certain bankruptcy of the industry. They were discussing who on Earth would buy cruise ships and other unique assets. Well, as my colleague Tom Lee said, these companies are essentially unkillable
The Fed minutes were released this week, and they gave more color on what the FOMC is thinking. The realizations from the Fed minutes seem to confirm something that Brian Rauscher said weeks ago, which is that the market misinterpreted the words of the Feds, and of course, the dot plot, to mean that the agency had turned hawkish when it had not. Indeed, there is a hawkish minority, but as we also pointed out in last week’s Fed Watch, the body’s unique governance decidedly favors the majority. Interestingly, the Fed’s minutes imply that they are close to their inflation target and not abandoning the new AIT framework. This means more and more focus regarding tapering will come down to the labor market, which is undergoing once-in-a-generation changes due to the pandemic.
A survey of hospitality workers finds that one-third will not consider returning to the industry regardless of any pay increase. The labor situation is much more complicated than just folks not wanting to return due to government largesse, as tempting and neat as this explanation may be. It appears that many people took the ample contemplation time afforded them over the pandemic to reconsider the most profitable way to apply their personal productive capacity. Venture funding is at an all-time high, and we think an underestimated, and powerful driver of positive economic momentum will be the awakening of American entrepreneurialism.
The all-hands mentality that helped so many of our favored Epicenter companies through what has undoubtedly been their darkest winter seems to have paid off. In some cases, companies with excellent products that help customers and providers could even completely revolutionize or modernize their business models in ways that probably wouldn’t have been possible without the extreme gravity of the pandemic and its economic consequences.
We know that many of the Epicenter sectors have taken a beating lately. Of course, if you started purchasing Epicenter stocks when Tom Lee first told you to, then the recent losses have been a drop in the bucket. We are very optimistic about what the likely change in the direction of rates means for Epicenter. We suspect they will respond very favorably to the renewed realization that we are approaching a period of economic growth that puts what we’ve witnessed for most of our lives in the dust.
We hope you all had a wonderful Independence Day and savored some of the human connection that we seem to have to have taken for granted. It’s great to see things normalizing, and we may have a bumpy month in July, but the future is bright for stocks. That record inflow could be seen as a warning signal, or on the other hand, it could be seen as a massive generational shift to stocks that we have been predicting.
