Everything Rally Appears to Begin As Market Begins Seeing Through Headline Risks

Key Takeaways

• S&P 500 closed at 4,471.37 up significantly from the 4,391.34 last week. The start to earnings season has been strong.
• Retail numbers showed that Americans are ready to spend again, and this data is supportive of an element of our thesis that pent-up demand has been delayed, not destroyed.
• The VIX amazingly settled at $16.30. It was well over $25 less than a month ago.
• We remain medium-term bullish on equity markets and our team suggests that valuations are more reasonable than commentary would suggest.

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Well, thankfully there appears to be some policy to address the strained supply chains of the world. The Biden Administration ordered the nation’s major ports to remain open 24/7 to alleviate the extreme back-ups that are making acute supply-chain issues even worse. The administration did not offer a plan for the subsequent effect on supply chains involving beer and spirits which may be strained by the resulting celebration of longshoremen. That’s just a little joke. Despite this policy, the bottlenecks will still likely be exacerbated by the Holiday season. Step in the right direction though! Do you hear that? It is the silence of bears and naysayers as it becomes clear that the doomsday scenarios seeming less and less likely to derail a stock market that begun earnings season with a strong bang from the US large-cap banks. Our Head of Global Portfolio Strategy, Brian Rauscher suggested that the fears about this earnings season were overblown. While we may see some companies miss and blame supply-chain issues, overall, we think this season will continue its positive march.

There was some concern from the Disco-era inflationistas. However, we’d like to remind you of an insight that Our Head of Research, Tom Lee, pointed out during the dog days of the shutdown during the pandemic. While most people were speculating as to whether civilization would completely collapse, Mr. Lee suggested that the income losses from the nascent pandemic could actually end up being significantly less than during the Financial Crisis.

As you’ve probably come to learn, doubting Tom Lee’s sagacity can be quite expensive. In this case he was again proven correct. So, when you hear people saying the wage inflation is going to result in $100 loaves of bread remember that the fast pace of wage inflation is primarily occurring in the low-wage sectors. If lawyers, bankers and Doctors were experiencing these levels of inflation in their pay then we might purchase a disco ball. But alas, they are not so far.

The other thing about the lower-wage jobs is that a rise in these wages doesn’t necessarily make its way down to the consumer in every case. The less skilled nature of these jobs and the cost-cutting imperatives of management mean that sometimes, even though labor costs are rising at the wage level, efficiency and automation can help the company avoid the need to materially alter price. This of course doesn’t happen in every case, but we think the global economic currents associated with this virus may have even accelerated the considerable pre-COVID strides toward AI and automation.

It was almost becoming a consensus view that growth and earnings were going to be disappointing. The peppering of negativity that many investors hear from so many commentators talking out of both sides of their mouth can indeed be confusing. However, if you’ve been reading your (FSInsight/FSInsight) then you might have taken the commentary with a grain of salt.

There is an upcoming Fed meeting in November and given the extreme consternation around the beginning of the end of the accommodative monetary policy in US history, we still see several reasons to remain positive. However, taper tantrums do happen sometimes. We do believe Powell’s consistent and steady message over the past months has helped to prepare markets to put down the bottle, so to speak. Many longshoremen probably get it!

Even with the extraordinary levels of accommodative policy and expansion of monetary supply, it is worth wondering what the inflation numbers would look like in a more natural environment. Our bet is you likely haven’t heard the last from secular global deflationary sources like the price decreases caused by technological innovation.

We’ve heard a lot of smart folks think that the lion’s share of inflationary pressure can be explained by supply-chain issues. We had ultra-efficient supply chains for the onset of globalization and the unprecedented situation, as well as rising Sino-US tensions have shown the downside of such arrangements. Remember too, the supply chain strains create winners and strong companies that are enjoying unprecedented pricing power. See this weeks’ Signal From Noise on what we consider, without a doubt, one of the most important companies in the world.

We explore a bit of how self-interested parties can corrupt the public discourse with agenda-oriented narratives. Not in our world, right? Well, please be smart friends and know who you’re listening to. We can assure you that we, at least, just want to make you a better investor and hopefully make you some money as well. We have a crack research team that is building. Please keep an eye out in your inbox for Head of Quantitative Research Adam Gould’s new product. Also be sure to check out our newly resurgent Technical Strategy section, which has been receiving rave reviews and is headed up by Mark Newton. If you haven’t perused the new technical notes coming out from our team, please be sure to do so. They cover both the crypto and macro universes.

Also, if you didn’t notice you’ll probably see people start saying en masse that Bitcoin will finish the year around $100,000. Remember that we stuck with this thesis through thick and thin. If you haven’t already, consider upgrading to FSI Pro to access our premier crypto research.

Everyone, have a great weekend and we can’t thank you enough for your trust and engagement. We have filled up the bench with an all-star team and we’re excited to show you what we can do!