S&P Ekes Out ATH and Rises for Third Consecutive Week
– S&P 500 closes at ATH of 4,247.44 up from 4,228.89 last week, third up week in a row
– Market took higher than expected inflation numbers in stride the 10-yr is only 1.454%
– Developments out of Washington highlight Tech Cold War between US and China
– We continue to believe that Energy has substantial upside and that FOMO is imminent
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The S&P 500 closed at 4,247.44 up from the 4,229.89 it closed at last Friday. Health care led the gains this week followed by Technology and Real Estate. The VIX closed well below $16. The big news this week was the market responding to hot inflation numbers in quite a measured way.
As far as rates go, we have been in a downtrend over the last little while. Oil held above $70 and closed the week at $70.82. The US 10-yr is only at 1.452% and does not appear to be sending a flashing warning on inflation. Some attribute this to a short squeeze in the bond market, but only time will tell.
The recent tame behavior of rates is a key driver in my colleague Tom Lee’s reversal on Tech and Financials. This interest rate upset has been non-consensus and we believe positions the market to still reach 4,400 before the halfway point of this year. The new juice in tech given by the rate reprieve should help propel the S&P to our mid-year target if our analysis is correct.
On Tuesday, we got another reminder that the Technology Cold War between the US and China is gaining importance and significance. Anything getting bi-partisan support should get your attention. The bill provides $52 billion to fund various aspects of semi-conductor design and manufacture.
Another aspect is re-routing rare earth supply chain; a vital market where China compares the lion’s share of production and is thought to be a potential fulcrum for the CCP for its retaliation as the CCP continues its quest to build leading-edge semi-conductor fab capacity. A key decision to block firm ASML2.05% from giving China or Chinese firms any of its leading-edge photolithography machines has stymied the progress a few generations behind what is possible for the foreseeable future.
Our candidate for Signal From Noise this week, Nvidia, is a perfect example of how the type of durable competitive advantages the large FAANG stocks have attained are also possible in the semi-conductor industry. The stock’s software advantage, GPU advantage and its advantage in the vital and advance artificial intelligence chips of tomorrow appear to be a sufficient moat to keep anyone from seriously competing against the firm in product lines it currently dominates.
In another curveball Friday, and please give us time to process this news for a fuller response, House lawmakers proposed a flurry of bipartisan legislation aimed at muzzling some of Big Tech’s most crucial sources of advantage and indeed gives the government authority to potentially break up firms like Amazon, Apple and Google.
One of the proposed bills, the ominously entitled Ending Platform Monopolies Act. While there are likely considerable and perhaps insurmountable hurdles to passage (we won’t know until Tom Block takes a close look), it is nonetheless an important sea change in thinking on anti-trust law applied to the twenty first century economic reality. It would remake Silicon Valley and Seattle Titans in an image quite different than today’s reality. Stay tuned.
Energy had a slower week relative to recently despite oil prices reaching multi-year highs. The Energy sector remains our favorite sector and we continue to see the divergence in the implied price of the sector compared to the historical correlation with the price of oil as a major opportunity for upside.
The Energy industry is not coming out of a down-cycle, it is coming out of a near-apocalypse. An industry prone to waste and profligacy in the good times has a Manichean and militant focus on efficiency and innovation with necessity fueling impressive strides forward. So, we think there’s a lot of upside left and we believe the leadership that has been overwhelming on a relative basis will continue throughout the year and probably beyond. Many oil companies are going to be free-cash flow generating machines if these elevated prices stick around, and some even if they don’t. The scale and scope of the cuts and the sheer force of will of a cornered industry – Energy is a cornered racoon, we bet it gets out.
You see, as we pointed out last week and an astute Bank of America Analyst pointed out this week, Energy is becoming a larger portion of available alpha as the sector reverts closer to its historic percentage of the total S&P 500. A few months ago, Energy was a paltry 2% of the S&P and that’s gone up significantly since then. Bank of America strategist Savita Subramanian said since the sector is expanding “Another big move in oil may be felt more acutely,” and estimated that “if energy doubled again (from the current 3%) and all other sectors save average returns, investors with no energy exposure would sacrifice a full 3 percentage points” or market-beating returns. This would be more than enough to obliterate the relative gains for active managers. Thus, this is why we see FOMO driving prices much higher than current levels.
