Epicenter Leads May Performance, Tech Has Losing Month
The S&P 500 closed at 4,204.11 which was roughly flat for the day but was up from 4,155.86 last Friday. This increase of 1.15% on the week is respectable but that mere fact does not reflect how utterly volatility collapsed. We’ve been speaking a lot about the rising levels of institutional capital on the sidelines. What do you think is going to happen to that capital, in terms of where it will go, if markets keep melting upward? Will it go to the put options that must be losing money? No, we don’t think so and we think it will likely go long and it will go into the cyclical/value names that we refer to as Epicenter stocks.
The NASDAQ had its first monthly loss in six. You might be thinking to yourself Sell In May And Go Away was right again. Except it wasn’t if you were invested in the Epicenter sectors of Energy, Financials, and Materials. In May, these sectors went up 5.7%, 4.8% and 5.1% respectively. The more cyclical areas of Technology like semi-conductors also performed well and even Sales Force had an unusual blow out day. Coincidentally, it is being used by many Epicenter businesses to go on a blitz to engage the pent-up demand of new and existing customers.
We don’t want to sound like a broken record but the scope and scale of this re-opening that should be hitting its full stride within a month or two is going to be dramatically concentrated in Epicenter sectors. As my colleague Tom Lee mentioned in one of his notes earlier this week, Jefferies analysts estimated that US consumers had saved $2.2 trillion over the course of the pandemic and that some of the pent-up demand could result in nearly half a decade of spending in the next 9 months. The approaching travel-mania (and we mean the simultaneous convergence of demand, not the price of travel stocks which we see as undervalued in many cases) will likely result in a bumper year for many of the recently streamlined businesses that likely eludes the bounds of what is possible with historically informed forecasts in many cases. Thus, we choose to focus on companies we think will have a simultaneous convergence of top and bottom-line tailwinds giving them an outsized ability to surprise on earnings. Travel demand is picking up both in airline travel and hotel bookings. Cruises are being permitted again and this will likely increase. Pay special attention to the many unique domestic locations we have access to in the United States that have everything the South Pacific and Caribbean have to offer without the need to cross borders. These should be immediate beneficiaries of the pent-up demand while COVID-19 progresses at a more uneven pace across the globe.
This is why we picked an old travel-centric stalwart to highlight in this week’s Signal From Noise column, American Express (AXP-0.62% ). If you didn’t check it out already give it a read here. Please also check out one of our newer Epicenter stock lists comprised of those names in the most ‘obliterated’ groups as a result of the economic consequences of the pandemic. You can access it here.
Travel is not the only thing that will likely be booming. Unlike the recovery following the Global Financial Crisis, CAPEX looks to undergo a once-in-a-generation boom across many industries. We must remember that this type of investment in new technologies products, business practices and people often produce some of the best strides offered by entrepreneurial capitalism. We think the positive effects of all this additional spending and the eventual efficiencies and technological advancements gained will help fuel what we see as a generational bull market cycle, of which we believe we are in pretty early innings. If you saw our Head of Global Portfolio Strategy, Brian Rauscher, present his 2H2021 outlook you saw that his quantitative indicators support this. If you didn’t see this great and well-attended event, please be sure to view the replay here.
Morgan Stanley analysts predict a “red-hot capex cycle” in which global investment climbs to 121% of pre-pandemic levels by the end of next year. CAPEX is rising at an impressive annual rate of 15% in the United States. The rate is almost three times as high for the big Technology companies. There will likely be a flurry of spending associated with the development of a domestic semi-conductor fabrication and production capacity. These plants now will set you back tens of billions of dollars.
Shortages and strange numbers continue to come in across the economy despite a tame jobs beat. The chip shortage has dramatically affected the auto industry which has reeled due to supply-chain shortages. The “pork-cycle” nature of boom and bust caused by regular over and undersupply is not just being seen in chips though. It is being seeing across many commodities and across diverse corners of the economy. The PCE number came in hotter than expected at 3.1% this morning. This is the Fed’s favorite inflation measure.
Pressure is certainly building on the Fed which we discuss in our last column below. If the Fed raises and accommodation is dialed back, then which stocks should benefit? Well, look at what the CFA Institute Survey said about which stocks would benefit in the event of tightening. So, there are many reasons to own Epicenter stocks including if you’re worried about some of the main potential risks that could derail the considerable progress markets have made since the pandemic roiled them over a year ago.
