Major averages were slightly lower yesterday but came with a lot of underlying back and forth action. Changes are happening across the investment landscape. A combination of a recovery from the pandemic, a new political regime, massive money printing and the flipping of the calendar creates a recipe for new leadership from an economic perspective. Case in point as one looks at the FANGMAN stocks. Outside of Google#, none of them are making new highs. Over the past five months, most of them are down over 10%, while the S&P is up 10%. None of this erases the massive outperformance gained over the past decade. Nor does it mean these stocks can’t participate later.
However, fundamentals are changing along with market alternatives. Increases in PE ratios from predictable earnings streams were expected when rates collapsed last year. It is quite possible we’ve seen the generational lows for yields. That means earnings need to carry the mega-cap growth group. Analysts are already expecting 20% – 40% earnings expansion in 2021. Now these behemoths need to beat those lofty goals. Even then, there is no guarantee the stocks will move higher.
Alternatives have been coming to the fore. Banks, oils, commodities, retailers, autos, travel-related and several industrial company stocks are up substantially this year. Over 25% in many cases in just 2 weeks. The S&P is only fractionally higher. That basket of winners is pretty broad based but hinges on a few key things: higher interest rates, money printing, reopening of the economy, pent-up demand and even more money printing. Cyclicals assuredly benefit during this phenomenon.
Yesterday’s diverse market action was in anticipation of Biden’s Covid Relief Plan released last night, which is titled the American Rescue Plan. More stimulus, or at least the expectation for more, helped the Energy sector bounce ~3% yesterday. Biotechs, on the hope for more research funding, advanced 1.5%. Industrial and Financial sector ETF’s were up nearly 1% as long-term interest rates rose. The Dow Jones Transportation Average was up 1.1% as well. The rest of the market was generally down. All 7 FANGMAN stocks closed lower. This type of action where mega caps decline could keep the “averages” flat while the “average stock” gains ground. One might call it a stock pickers market now.
This new stimulus measure comes after nearly $7T in fiscal and monetary stimulus was enacted in 2020. Several Federal Reserve members spoke this week, which was capped off by Chairman Bernanke’s Zoom call with Princeton University on Thursday. Each one of them stressed the continuation of bond purchases (no taper tantrum yet). More astonishing were comments that inflation may need to run above 2% for a full year before any tightening measures are instituted. We are about to learn if there is any limit to money printing in real life.
What is in Biden’s $1.9 trillion Covid relief agenda? Glad you asked:
• Direct payments of $1,400 to most Americans, which brings the total up to $2,000 including the December payment. This is a number even Trump wanted but did not get through the Republican controlled Senate.
• Increase federal minimum wage to $15/hour and increase unemployment benefits to $400/week through the end of September. The December plan was for $300/week and ends in March. Increasing the minimum wage will take 60 Senate votes, so this is unlikely to stick.
• Extend eviction and foreclosure protection to September, along with $25B additional rental assistance on top of the $25B approved in December.
• Emergency paid leave for Americans who are out of work due to Covid in their homes.
• $350B in state and local government aid. It remains to be seen if moderates will go for that number, so this may get pared down.
• $15B in grants for small businesses, and a plan to leverage $35B in existing funds into $175B for loans for small businesses. It has become abundantly clear that businesses don’t need more debt. They need to be opened and allowed to have customers. Even Governor Cuomo is now noting we need to get businesses open or there will be none left. Grants make sense.
• $50B towards Covid testing.
• $20B towards Covid vaccine programs.
• $170B in aid to schools.
• $20B in relief to transit agencies to help workers and avoid service cuts.
• $20B in direct support for Indian Tribal governments.
• Increase child tax credit to $3,000/child.
Biden wants bipartisan support, but that seems unlikely even at half the price tag. The bulk of this will still get through the Democratic controlled House and Senate. Some features will be altered, lowered or eliminated, but the total package should be around $1.5T at most. Deficit hawks have little control over much of the plan. The tally for hawks during 2021 in round numbers is a $2.6T deficit from regular operations, $900B stimulus passed in December and this ~$1.5T from the new American Rescue Plan. Add it all up, you get a ~$5T deficit. We also have $7T in debt maturing this year. Good thing the Fed is buying a lot of this or rates would really take off.
This is the first stage of Biden’s immediate focus as he starts Year 1 of his Presidency. Yet another package is forthcoming in the next few weeks which will address infrastructure, creating jobs, combating climate change, advancing racial equity and possibly student debt relief. Estimates are in the $2T range for that bill as well.
We’ll see what moderates like Senators Manchin, Sinema and Tester think about this current bill as they hold the key to getting 50 votes in any partisan manner. This trio is similar to Trump’s dealings with Murkowski and Collins the past few years. When you are a Senator from a middle-of-the-road state with independent voters, sticking to party lines proves difficult if you want to remain in power. Manchin, Sinema and Tester are keys to much of what can happen over the next two years.
Futures are slightly negative post the release. How this bill gets paid for is a concern. Growth will help some. Many expect higher taxes which is certainly a negative for earnings.
The other concern is ancillary effects. Money supply is inflationary by nature. How much so is an open question. In 2020, every major central bank was printing money. That is not destructive to the U.S. Dollar’s reserve currency status. However, unlimited printing while other countries show discipline is worrisome. Not today, but further down the road.
A slew of bank earnings come this morning while the bulk of our favorite stocks report Q4 numbers over the coming weeks. Forward looking guidance, if there is any, is critical for further stock gains.
Football star Drew Brees (who takes on another “old” star Tom Brady this weekend) is 42. Martin Luther King Jr. was born on this day in 1929. Stock and bond markets will be closed on Monday in the U.S. as the nation honors him.
James Vogt, 610-260-2214