One of the most anticipated new listings of the year, Coinbase, brought some fireworks with it. Was the first day of trading a success? It depends on how you want to look at it. The stock closed up 31% from its indicated price, however it was also down 15% from the opening trade and 24% off intraday highs. It was down yesterday too, its second day of trading. Technically, this was a direct listing, not an IPO. One critical difference with this type of offering is that there is no lock-up period. Typically, IPO’s lock-in original investors for 6-12 months before they can sell in the open market. That is not the case here. Original investors may already be liquidating massive gains.
Another question on investor’s minds relates to whether this recently created company is a sign of excess in the market. Coinbase is currently valued at $84B. It has been in business for only nine years. That is larger than any other exchange out there, some of which have been around for a century. They make the bulk of their money by charging 0.5% for transactions in Ethereum and Bitcoin. Many today are paying $0 to buy and sell stocks. There are multiple avenues of growth this company will expand into over time, and it will not just be a commission-based company. The long-term viability of Coinbase is certainly difficult to predict, but the fact that they can create an $84B company in such a short timeframe is quite positive for investors. This wouldn’t happen in a bad economy or if we weren’t in a bull market. Although a small sign of a bubble forming, this is when investors reap huge rewards. Of course, locking in gains along the way is paramount!
Back to the real world, economic data continues to impress. Recent $1,400 stimulus checks were sent out a month ago. Most studies point to half of that being saved while the rest is evenly split between paying down debt and spending. Retail sales for the month of March were up just shy of 10%, substantially higher than expected. Only a quarter of us received vaccines, yet Americans are out there spending hand over fist already. Next month should be just as good. Pent up demand is real and has staying power if one looks at consumer balance sheets which are in tremendous shape.
Jobless claims also came in much better than expected yesterday. With more and more businesses opening up, unemployment is going to keep trickling lower. The report also showed less people are being laid off. Stimulus checks give a very short-term boost to spending. Obtaining a real, full-time job has a much longer lasting effect. Pair new jobs with flush savings accounts and free money from the government, it is no wonder that markets are pricing in a rosy recovery.
Lastly, earnings reports keep showing solid beats and raises. This week saw many of the largest financial institutions come out with first quarter updates. Many are setting revenue and earnings records. We’re only one year out from the start of the global pandemic-induced shutdown. Recessions never act like this, and we’re just starting to see the positives.
However, even with all the great news, the S&P is only up 1% this week and the Dow Jones is fractionally positive. Still, we’re making new all-time highs and that’s always good. Growth and technology stocks are ripping higher as well after sitting out much of the 2021 rally.
Interest rates are actually down 14bps to 1.53% on the 10-year Treasury this week. Good, even great news, has already been priced in. Inflation scares from a few weeks ago are now being met with an expectation that the Fed will be forced to tighten the money spigot sooner rather than later which will crimp demand and likely slow inflationary pressures.
Frothy IPO’s, accelerating earnings, potential for full employment, rising inflation, and 20+ year highs in GDP are all ingredients for the punch bowl to be pulled by the Federal Reserve. First will be a tapering of bond purchases. Recent Fed comments point towards a tapering discussion when 75% of us are vaccinated. If current trends persist, we’ll get near that number in the summer. This will take out the largest buyer of bonds, which normally would lead one to believe rates would then rise.
Recent history may be a guide to what happens this time around. Rewind back to 2013 when the first “taper tantrum” hit markets. The Fed announced a plan to slow their Quantitative Easing program. Rates spiked higher by 125bps during the year, only to collapse by 170bps the following two years. Taking away the marginal buyer of excess bonds in the market caused rates to rise, but eventually those higher rates caused even more damage to the economy. Simply put, with all of this debt floating around we cannot afford to see significantly higher rates. Bond investors may be jumping the gun. The Fed has no intention of letting this get out of hand so early into the recovery. Rates are likely to keep trekking higher over the coming months but not explode to the point of crippling growth.
None of this means the bull market is over, not by any stretch. Markets don’t top until earnings do and we’re likely years away from that. Rather, the straight line advance may start to slow over the coming months. Some choppy back and forth movement is quite normal. Earnings will be solid for the rest of this year. Ditto for 2022, albeit at a slower pace than this year. Everyone knows this. Companies that can keep raising guidance for this year and next will be long lasting winners.
Stock markets perform quite well during a rising interest rate environment. Real caution comes when the yield curve is inverted, i.e. when Fed Funds are above 10-year Treasury yields. We are a long, long way from that happening. Going forward, instant gratification will be less common and individual stock picking will be more critical. Any dislocation created by great news pulling forward concerns about a tightening of monetary conditions is just another chance to purchase world-class operators at lower prices. With the S&P already up 11% this year, it is a good time to make sure you own the long-term leaders.
We have a sports theme today. Basketball legend, Kareem Abdul-Jabbar is 74. Patriots coach Bill Belichick is 69 and MMA star Gina Carano turns 39. TV actor and 80’s movie star Jon Cryer is now 56.
James Vogt, 610-260-2214