By David Nelson, CFA CMT
Year to date we’ve seen several asset class battles as investors rushed from one side of the lifeboat to the other. Coming into the start of 2021 we picked up right where we left off. A pro-cyclical rally led by Energy, Financials, Materials and Small Cap stocks (IWM) have outpaced large caps since the November 9th vaccine announcement from Pfizer (PFE).
Last week FAANG had its revenge as investors flooded back into the popular large cap secular growth trade. The trigger for the excitement was last Tuesday’s outstanding report from streaming giant Netflix (NFLX). The following day wasn’t just big for Netflix as Alphabet (GOOGL), Facebook (FB), Apple (AAPL), Amazon (AMZN) and even Microsoft (MSFT) all joined in. Start of a new trend or a reversion to the mean? I suspect we’ll know soon enough with Apple (AAPL) and Facebook (FB) reporting this week followed next week by Alphabet (GOOGL) and Amazon (AMZN)
With the vaccine rollout still in its early stages setting the stage for much of the nation to go back to work I believe the pro-cyclical rally still has legs. Add the fact that we still have an accommodative Fed and a large fiscal stimulus package still on deck, the debate centers not on whether earnings will improve but whether or not it’s already reflected in equity prices.
The debate is still the same as it was six months ago. In a vacuum the market is expensive on almost any metric but in a world where the risk-free rate is zero along with a 10-year yield sitting just above 1% the case can be made to support higher equity prices. Are their pockets of valuation excess? You bet there are.
SPAC – Looks more like a compensation scheme than an investment vehicle
Goldman’s David Kostin mentions $16 Billion in IPOs Year to Date for SPAC (Special Purpose Acquisition Company) shares. This will be a subject for a full article, but SPACs look a lot more like an excessive compensation scheme than an investment vehicle. The usual suspects are all involved with familiar faces from Wall Street to the C suite. Realizing just how much money can be made celebrities and athletes are looking to grab a piece of the action. NBA legend Shaquille O’Neill will act as an advisor to technology, media and telecom focused Forest Road Acquisition.
FAANG Goes to Washington
Outside of the valuation argument the relative performance of secular growth stocks will act as a barometer on the health of the recovery. If mega-cap growth is leading at mid-year I suspect that current attempts to drive the economy will have failed. However the S&P still could be higher as the top 5 stocks by market cap represent 25% of the index. The Wall Street Journal reports that in 2020 both Facebook and Amazon led U.S. companies in federal lobbying expenditures. The hedge funds that poured money into FAANG last week believe those efforts will succeed.
The week ahead is heavy with both earnings and economic data. At 33x forward earnings Apple (AAPL) needs a strong report to support the over $2 Trillion of investor capital looking for good news. As it’s been for most companies more important than the headline number is the commentary on the call. What does the business model look like on the other side of a vaccine rollout?
Fed Chair Powell takes center stage Wednesday for the FOMC Rate Decision. While the Fed has all but guaranteed no action for as far as the eye can see you can bet with the recent rise in the long end of the curve along with rising commodity prices, he will be asked just how much inflation is the Fed willing to accept before being forced to defend the other half of their dual mandate?
*At the time of this article some funds managed by David were long AAPL, GOOGL, AMZN, NFLX and MSFT
