Markets (and many citizens) celebrated the new administration being sworn in over the past few days. A sense of a return to normalcy, along with less erratic tweeting is welcomed news to many. Multi-national companies can expect a more disciplined approach to tariffs, border issues and relationship building. Allies in Europe, in particular, are excited to get back on the same page from a regulatory, climate and trade basis. Biden and his team will keep some pressure on China and foreign adversaries, but with more consensus building and a group-based approach as opposed to going it alone. One would expect an increase in old Cold War relations with Russia as well.
A tone for Unity of the Nation was the predominant message. Every President wants bipartisan support for their agenda. Our hope is that elected officials can stop the constant bickering and achieve something we hardly see in DC, compromise that benefits the majority and not just subsets. Biden has been able to accomplish working with both sides in the past, so here’s hoping he can do it again. It will start immediately with his $1.9T stimulus bill. We expect much of the bill to make its way through, but with cutbacks on the overall size. Most Republicans, and even some Democrats, are not in favor of another massive spending package after the $900B stimulus agreed to in December.
Administrative appointees made some news as well, leading with Biden’s Treasury nominee, Janet Yellen. Her recent speeches showed support for increased spending, noting, “the smartest thing we can do is act big.” She added that, near term, benefits outweigh any cost of a higher debt burden. With interest rates at all-time lows, it is hard to argue against this notion, but there has to be a limit somewhere.
She also looked forward to rebuilding the U.S. economy so that it benefits more workers and not just the top of the food chain. Simply put, the entire speech was geared towards more Government-sponsored spending, more checks going to citizens, more Covid relief, and a further increase in money supply. Most of the market likes this.
The only negative sidebar from her speeches would be related to Bitcoin. Suggestions that lawmakers curtail the use of cryptocurrencies, which are mainly used for illegal activities, put a stop to the recent rise in price. Bitcoin has taken it on the chin, down 10% yesterday and 17% since her comments.
Excessive money printing is one reason people prefer Bitcoin, which is in limited supply and seen as a stable store of wealth. The U.S. has enjoyed having the U.S. Dollar be the reserve currency of the world for more than half a century. Should that unravel, consequences may prove disastrous. With no regard for deficits over the past few decades, it is increasingly concerning for investors. The recent acceleration of stimulus measures in December, combined with Biden’s bill, while the developed world prints less money, has helped drive the dollar down 13% over the past year. There are ulterior motives to hold back the rise of private cryptocurrencies other than preventing illegal activities.
Other appointees are hinting at no tax hikes in the immediate future. Covid needs to pass us before many small businesses can reopen, not to mention the hospitality industry. There are millions of jobs still shut down from the pandemic. No one wants to crimp the recovery so early in the process by raising taxes. Any reassurance of this goes a long way to increase confidence in 2021 earnings expectations, and therefore higher stock prices. Worry about 2022 later.
Biden and his team had a lot of Executive Orders signed as well, reversing numerous Trump deals. One of the most impactful measures was revoking the Presidential permit for the Keystone XL oil pipeline. Obviously, we are moving towards a Green-friendly roadmap. What may not be obvious are the ancillary effects. It took many years and a lot of shale investments to get the U.S. off energy dependency from the Middle East. Closing pipelines, limiting drilling rights, and increasing regulatory hurdles are going to result in less U.S. production and likely higher prices. In an odd way, the Green approach may be bullish for Energy stocks and the Middle East which trade on supply / demand imbalances. Choke the supply and prices will rise. The quicker we can make Green energy a reality, the better from a cost standpoint.
On the economic front, 4th quarter earnings reports continue to roll in. Netflix proved to be a market mover after they handily beat estimates. FANG-related stocks have lagged the overall market for several months. Now, they are making a late charge to join the rally. Post Netflix’s earnings, every FANGMAN (Facebook#, Apple#, Netflix, Google#, Microsoft#, Amazon#, Nvidia) stock advanced at least 4% over the past two days. That is over $8T in equity value gaining another ~$350B+ in market cap…in just two trading sessions! That equates to 4 Colgates or 10 Prudentials. It is hard to fathom valuation levels for much of the mega-cap industry. As one might expect, when the mega caps lead, the average stock suffers. While the market-cap weighted S&P 500 was fractionally higher yesterday, the equal-weight index was down 0.5%.
Earnings updates ramp up next week, which will bring individual stock volatility. So far, quarterly reports have been coming in better than expected, but yield minimal stock price gains. The old adage still holds, “buy the rumor and sell the news.”
We also hope to hear from Johnson & Johnson# soon as their vaccine trial results are eager to be seen. With nearly 1 million people getting vaccinated daily, the pace is not as fast as many hoped, but is on the rise. JNJ’s vaccine is more traditional from a storage and distribution standpoint. It is also a one and done shot. Positive news here holds the potential to get us to herd immunity a lot faster.
Data so far also shows a peak in new daily Covid cases (down 30% in 10 days), hospitalizations (down 7% in a week) and percent of positive Covid-19 tests down from 13.7% two weeks ago to 9.6% today. Not great numbers, but a trend we expect to continue. Pair that with more stimulus, an accommodative Fed, flush savings accounts and pent-up demand, then we can all be united, face to face, just as our new President wants. The question remains, how much good news is priced in?
Food Network Chef Guy Fieri is 53 today. Actress Diane Lane turns 56. Philadelphia native and Will Smith friend DJ Jazzy Jeff is now 56.
James Vogt, 610-260-2214