S&P 500 Ends Week Flat, Friday Action Led By Small Caps

The market took a somewhat volatile and meandering path this week to close essentially flat. The S&P 500 closed at 4,180.17 which was ever so slightly down from the 4,185.47 it closed at last Friday which was an all-time-high. It looked like going into the close we might close at a third consecutive ATH on Friday in a row, but the tape ended just short. Thursday saw a good old fashioned Capital Gains scare that seemed to continue carrying over to crypto into Friday. You’ll be happy to hear our veteran Washington Policy Chief Tom Block discuss his reasoning on why he thinks you won’t be seeing that rate move anywhere anytime soon. The disproportionate power of moderates given the closely divided House and Senate is Wall Street’s friend in this case.

The Epicenter trade has stalled over the past weeks as case data went sideways, lockdowns in Europe reemerged, the deteriorating situation in India and in addition to all of this there has been a lot of talk that markets are ebullient and need a breather. We disagree. Some names have put up strong earnings and markets didn’t appear to react as strongly as one would think, prompting some to theorize that the unprecedented economic boom we think is coming has already peaked. The data, coming in from all across the economy would appear to reject the assertion that economic momentum has peaked. Beyond the numbers, there is a once in a lifetime desire to connect and gather and we think this coupled with the leanest companies from an operating leverage perspective in modern history is what engenders the higher alpha in Epicenter names.

There’s a lot of big earnings coming up next week. While we don’t doubt that many technology names will put up impressive earnings and that these businesses are great to own (see our Granny Shots for which ones we like best), we also don’t think that these guys have the same capacity to positively surprise consensus like the Epicenter names do. Take for instance the subject of our Signal From Noise this week, Harley-Davidson ( HOG 0.18% ). It put up earnings of $1.68 a share when the Street was expecting .90 cents and its management has slashed costs and boosted efficiencies. We hope you check out the article but even if you don’t we want to sear an image from the company’s earnings report into your memory.

S&P 500 Ends Week Flat, Friday Action Led By Small Caps
Source: Harley-Davidson Q1 Reports.

If you thought Epicenter was a good post-pandemic trade that has petered out and won’t be able to exceed pre-pandemic highs we have a pretty stark piece of evidence here that would contradict that line of thinking. If a company with as many secular headwinds as Harley can make such an impressive turnaround there are a lot of companies that might surprise investors too reliant on dated understanding of historical data and trends, that have often been altered, broken or significantly accelerated by the most significant exogenous event markets have faced since the Second World War.

Look at what Harley-Davidson did on Operating Income. This is a motorcycle manufacturing company that is known for the opposite of cost-efficiency. It also made very impressive progress on gross margins YoY, going from 29% to over 34%. There were a lot of other impressive earnings that showed similarly remarkable achievements by Epicenter management teams that significantly outperformed expectations; the thing is we think this is only the beginning.

Zooming out from the company level we are seeing diverse signs from all over the economy that momentum has not peaked at all but rather that it is building. Bank earnings were significantly propped up by them releasing Loan Loss Provisions, signaling that from a credit default perspective, they think the worst is behind us. JP Morgan found that travel and entertainment spending was up a stunning 50% from February to March. Fitch Ratings recently slashed its forecast for 2021 high yield bond defaults to a mere 2%, a recent low.

Even shopping malls, surely one of the worst affected pandemic casualties saw beginnings of a robust recovery; but surely not the peak of momentum. Placer.ai monitored the traffic in 50 major malls across the United States and found that traffic was up 86% YoY and down less than 25% from 2019 levels. These are the most promising levels since the pandemic began. Freight rates have reached their highest levels in a decade and the Empire Index (prices paid by manufacturers) just gave its highest reading since 2008. The boom is accelerating like a Six Flags roller coaster whether you are positioned for it or not.

Sure, there are headwinds and uncertainties. If you have a crypto portfolio the Biden capital gains tax rate sure reminded you of that. We know it was a volatile week for some crypto investments but that’s par for the course. Hear Dave Grider explain market action this week here.

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