Consumer Confidence Bouncing?
By Mitchell Anthony
April 9, 2021
The Equity and Commodity Markets roared ahead in the first quarter of 2021 as Covid concerns fell and consumer confidence bounced. Expectations for more fiscal stimulus was met by Congress’s approval of a 1.8 trillion stimulus package full of support for almost all of those in need and then some who are not. Despite an Economy that is not yet robust or demanding high quantities of raw materials, most commodities rallied strongly as suppliers were caught off guard as demand tilted up and capacity was minimized with many mills and processing plants offline. Optimism for a broad economic recovery developed in the quarter driving up stocks and putting downward pressure on Bonds. Real Estate continued to fly higher.
The Markets
Equities had another good start to the year. The first quarter was good for value names and deep cyclical names as Covid fears fell abruptly. Growth stocks mostly paused (Russell LC Growth – IWF +0.8%, and the Nasdaq 100 QQQ +1.7%) as the leadership fell, at least briefly, to Value oriented cyclical names. The S&P 500 gained 6.2%, MACM’s Dynamic growth Portfolio rose 4%, while the Russell Value Index – IWD gained + 10.8%. There was strong Leadership in Energy, Banks, and Experience oriented cyclicals (Airlines, Hotels, Casinos, and restaurants). Residential Real Estate continued to move higher gaining 11% in 2020 as measured by the Case Schiller Index. Most REITS were up 9% or more in Quarter. There was a modest rebound in Commercial Property but the leadership was in Apartment REITS. Fixed Income’s dramatic long run may have ended as confidence has bounced and investors positioned for a lasting recession gave up hope. Treasury yields rose over 100 basis points causing quant based institutional equity management firms to sell high PE stocks as DCF (discounted cash flow) calculations turned negative as rates rose. This hit the SIFI (Sexy Innovative Fractured Industries) names hard. PTON, PYPL, CRWD, ZOOM, etc all fell 25% or more as rates rose and the quant models blasted sell signals. Most Commodities had sharp moves higher because of Covid capacity problems. Lumber and Steel Mills were forced to shut down during Covid 19 and have been slow to return to full capacity. Grains have had capacity problems as well tied to Covid employment issues.
The Economy
Consumer Confidence Finally made a sharp turn upward after months of worry and hesitancy to think vaccination could be successful. However the US has been Vaccinating America at Warp speed and Herd Immunity is visible on the Horizon. Vaccine hesitancy has fallen into a steep decline. The Covid Case count has declined 80% from the winter spike and sits at 50k cases/day currently (Summer levels). Stimulus is abundant and all of those in need have solutions. A fully opened economy is on the horizon. US retail sales are at all-time highs and accelerating. Personal income is still very high due to ongoing stimulus and Personal Consumption is coming back with volatility.
Housing consumption is gaining strength. The industry has good tailwinds – money is cheap but rates have tilted higher, Strong consumer balance sheets are notable, and Covid 19 nesting is stimulating demand. There are some Headwinds that cannot be ignored – Low Inventory is driving significant price hikes, tight credit is limiting consumption, Aging Baby Boomers are net sellers, and the foreclosure moratorium is limiting inventory.
The Industrial Sector is rebounding as demand for durable goods has risen. 5G Construction is well underway and employing thousands. The renewable energy theme is also underway and entrenched. Demand continues to grow for Electrics, Solar, and Green fuels.
The Experience industry has begun a rebound that may be very strong. We have seen a mild recovery in: Flights, Restaurants, Hotels, and Entertainment. There is clearly pent up demand for Entertainment & Leisure that will last for several years. Consumers are equipped with Stimulus capital and rising confidence that will build momentum.
As expected inflationary forces are building. Lots of stimulus and low rates are building a scenario for possible inflation. The Fed does not believe current consumption themes are sustainable enough for demand-pull inflation to develop for any extended period of time, hence rates remain very accommodative. Gold investors are not believing much inflation lies on the horizon either as prices hit a wall months ago and many inflation hawks have thrown in the towel.
Global economic recovery conditions have become unbalanced. Europe is lagging America and Asia dramatically due to Vaccine issues. The Astra-Zeneca vaccine used exclusively in Europe has had blood clot problems and usage has been delayed as a result of the concerns. The vaccine has been ruled out for those under 30. India, Latin America, and Africa have problems as well. The vaccine is in short supply in many areas throughout these countries.
Economic Outlook
The robust recovery expected in America has begun already. Consumer experiences will lead the growth in demand. Housing and durable goods will be strong leaders as well. Technology demand will continue with work and do everything from home still alive. E-Commerce growth remains and consumers have only begun their transition to Web based shopping. Biden’s infrastructure plan (the American Jobs Plan) is on track to be passed without needing republican support. It will bring another 2 trillion of spending to the US Economy over the next 8 years if the democrats remain in office. The stimulus has some problems however as it is keeping service employees at home because they are not motivated to return to work where they are needed.
Market Outlook
Most Risk assets remain highly valued and will tilt higher. Stocks and real estate look the most favorable in the environment that lies ahead. Some Risk assets that are highly valued will tilt lower as long term recession hawks throw in the towel at least partially as they await evidence of the recovery becoming sustainable. This would mean further downside in Treasuries and High quality debt. Commodities that have run up because of Covid capacity problems and incrementally higher demand would seem to have limited upside and may well have overshot where real demand will settle in at by substantial margins. Steel, Aluminum, copper as well as most meats and Grains are vulnerable to new capacity coming on and kicking prices lower. Commodities that are only experiencing supply constraints are the most vulnerable to significant price declines such as grains and meat.
Leadership in Equities will likely change. Consumer experience cyclicals ability to build sustainable momentum from the Covid recovery demand spike that lies ahead is difficult to forecast. It is unclear whether the world will have to stay entrenched at home with work and play as Covid fears play out. The FAANG, housing, and Industrials sectors will lead. The FAANG with go again as great earnings ignite new purchases and the SIFI and Cyclical areas become over-owned. Industrial will go as Infrastructure and housing experience nice improvement in long term demand.
We remain optimistic.