THE SPRING LETTER
We are all in the gutter, but some of us are looking at the stars.”
— Oscar Wilde
Market Thoughts
Sometimes, with the stock market’s gyrations you can hear Taps echoing at the bottom, but they seldom ring a bell at the top. Some phenomena, redolent of the madness of crowds, are currently on display though: the insane short squeeze in stocks including GameStop, the flurry of SPAC and IPO issuance, Tesla’s $1 trillion market capitalization, bitcoin at $50,000 and the general craze for cryptocurrency (which has no legitimate purpose except tax avoidance or evasion). Current stock market irrational exuberance creates the environment for a correction but does not dictate its timing.
The year 2020 opened with a euphoric rush. Many stock market participants (one hesitates to call them investors), who had missed out on the startling gains in 2019, adopted a fear of missing out mentality. Complacency reigned. The party ended February 20. The ensuing carnage amounted to the swiftest, sharpest stock market correction on record. Value investors hesitantly bought only to be wounded by falling knives. The major US stock market indices may have put in a low March 26. (Followers of various indices will offer slightly different boundary dates.) Then a buying stampede ensued.
A hundred years after the misnamed Spanish flu pandemic of 1918-19, investors grappled with a similar phenomenon, with little sense of the magnitude or duration of the financial fallout from closing the “non-essential” sectors of most of the world’s economies. The cost of unpreparedness and a dilatory response by the Trump administration has proven gargantuan. The Biden administration offers greater financial relief and a political message consistent with the medical experts. But the population remains only half vaccinated.
Stocks returned to an approximation of fair prices in a hurry, but high growth technology stocks have temporarily galloped ahead of their medium-term business prospects. Investors have rotated out of energy and cyclically sensitive sectors and favored those essential businesses with pristine balance sheets or in the hunt for a Covid vaccine (Gilead Sciences, Pfizer).
In an effort to navigate the challenging equity markets, we emphasize the following sectors: consumer staples (Smucker’s, Nestle, Procter & Gamble); manufacturers (Boeing, ITW); medical equipment makers and pharmaceuticals (Bristol-Myers, Eli Lilly); entertainment (Comcast, Disney, Liberty Media); selected technology (Ansys, Google, Microsoft, nVidia,); financial services (Alleghany, Wells Fargo, White Mountains); and dividend plays like ProLogis (warehouses) and ONEOK Inc. (energy pipelines).
Economic Perspective
With nationwide vaccination underway, economic activity ramped up in the second quarter. GDP growth is likely to exceed 6%, a multidecade record. How many quarters of above trend economic growth we enjoy remains an open question. While employment levels have risen, weekly unemployment claims continue near pandemic peaks.
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Stephen K. Bache, CFA
BloombergBusinessweek, The Economist, New York Times, The Wall Street Journal, Alan Mikhail, God’s Shadow: Sultan Selim, His Ottoman Empire and the Making of the Modern World, (NY: 2020)
