March 22, 2021

 

U.S. stocks finished the week about where they started with the S&P 500 dipping 0.4%. 
 
Supply chain issues continue to create supply and demand imbalances. In ‘normal’ years, cargo ships arrive on schedule about 70% of the time. In March of 2021, that number plummeted to 40%. Delays around the world are being driven by a rush to restock items, driving demand higher and creating logistical issues. Cargo vessel capacity is being pushed to its limit, and there is a shortage of sea containers available to move goods around the world. Rising freight rates are adding pressure to input costs, which is causing some companies to delay or even abandon expansion plans (more on this story below).
 
Fed minutes released this week caused a bit of a stir in equity markets on Wednesday, as some perceived early signs of ‘taper talk.’ In reality, there was very little new information to parse from the minutes, with the Fed indicating the risks to the outlook “were no longer as elevated as previous months” but reaffirming a maximally accommodative stance.
 
The European Union is showing signs of marked improvement, both from a pandemic standpoint and in the economic recovery. Daily confirmed new Covid-19 cases have fallen by two-thirds over the last month, and IHS Markit’s gauges of factory and service provider activity hit their highest levels in three years. The same readings for the U.K. showed the strongest activity since January 1998, when record-keeping first began. On the shoulders of a very successful vaccine campaign, Britain has seen its death rate fall 99% from its peak.
 
Here in the U.S., over 60% of American adults have received at least one vaccine shot, with the total share growing by approximately 2% per week. The share of Covid-positive tests fell below 3% (a first in at least a year), and the number of hospitalizations is hovering around an 11-month low.

 

 

Cryptocurrency Implosion

 

 

Cryptocurrencies endured a bruising week, with Bitcoin declining 29% and Ether falling 44%.
 
A string of bad news rattled the market for the week. In an about-face, Tesla reversed a decision to accept bitcoin as a form of payment, citing concerns over carbon emissions generated from producing bitcoin (as if this was breaking news).
 
The selling pressure intensified when China’s government pledged in a statement to “crack down on bitcoin mining and trading behavior,” in an effort to safeguard against growing financial risk. Since most bitcoin is mined in China, investors grew increasingly worried about regulatory headwinds building in the country, which could compromise bitcoin’s future. Again, this is not breaking news by any measure—regulatory pressures on cryptocurrency have been growing and will continue to grow in the future, shrouding the market in uncertainty for years to come.
 
A quick take this week from the Wall Street Journal’s Greg Ip offers another reason to be skeptical:
 
“Cryptocurrency has yet to make the world a better place. A truly consequential innovation is one that makes possible entirely new business models that touch the lives of millions. Every innovation has its dark side, but even with car accidents and internet scams, we’re clearly better off with cars and the internet. Cryptocurrency?  It's close to useless for day to day purchases but highly effective for extortion.”

 

 

Mixed Signals In The Labor Market

 

 

Last week, we wrote that if someone in America really wants a job they can find one. Views on the subject vary, often across political lines.

One on side, some believe the government’s $300/week supplemental unemployment benefit is crowding-out the private sector. On the other, the private sector is being blamed for offering too-low wages. Most agree that lack of child care and women out of the work force are significant factors. Whatever the true cause, the impact on small businesses is real.

Some states are taking action to end the federal supplemental benefits program. In total, 22 states have opted out, ending payments for gig-economy and other workers not covered by unemployment benefits.
 
A working paper from the Federal Reserve Bank of San Francisco contends the $300/week supplemental benefit is only reducing new hires by at most 3.5%. From the paper: "one straightforward way to think about that number is that each month in early 2021, about seven out of 28 unemployed individuals received job offers that they would normally accept, but one of the seven decides to decline the offer due to the availability of the extra $300 per week in UI payments."
 
In our view, both arguments are probably correct to a degree. The whole hubbub emerged just from a single month’s worth of data, which ultimately makes the issue more political than economic (at least for now).

 

 

Inflation & The Stock Market

 

 

We’ve always known inflation plays a role in stock returns, but what we learned this week is just how wide the dispersion of equity performance is during inflationary periods vs. disinflationary periods.

Gavekal Research crunched the numbers over the last 142 years, and found that the United States spent about half the time in inflationary regimes and half in deflationary regimes. Interestingly, all the excess returns from owning equities came during disinflationary periods. During inflationary periods, stocks did about as well as cash with more volatility.
 
Our thought bubble on this chart and Gavekal’s findings is not that stocks are automatically terrible during inflationary periods. But we do think it’s clear that a passive investing approach doesn't work well in inflationary periods. History shows buy-and-hold passive strategies have yielded muted returns with equity-like volatility, an outcome no investor wants.
 
If inflation proves sticky, a more discriminatory approach to stock selection is warranted. The type of equities that do best in inflationary environments are firms with significant market share, durable competitive advantages, and inelastic pricing power.  

 

 

How Stagflation Happens

 

 

With the pandemic risk fading into the backdrop, and the U.S. economy poised for a re-opening burst of activity, it’s difficult to imagine a stagflation outcome (high inflation, low growth). But we’re already starting to think about it and noticing early signs.
 
In previous editions of 5 Things We Learned This Week, we have detailed our views on catalysts for higher inflation. That’s one side of the equation.
 
The other side of the equation relates to the growth outlook. Here we have been noticing more stories about companies delaying expansion plans due to input cost pressures. This is basically the definition of what leads to stagflation.
 
For example, Sanderson Farms, the third-largest chicken producer in the U.S., announced this week that it is considering abandoning plans to build a new processing plan—even though demand for chicken meat is high and rising. With significantly higher costs for lumber, steel, and labor, the cost of construction to bring a new plant online may outweigh the benefits of additional production. That’s a problem.
 
On a broader scale, U.S. homebuilders are also feeling constraints due to higher costs for raw materials. Housing starts fell 9.5% from March to April, even as buyer demand remains at feverish all-time highs.

 

 

Americans Are Paying Down Debt

 

 

Despite many of the economic struggles endured in the months after the pandemic, American households appear to be in reasonably good financial shape. One anecdotal piece of evidence: U.S. consumers are paying down credit cards at a pace not seen in years.
 
According to Equifax, U.S. credit-card balances totaled $749 billion in March, which was down 14.5% from a year prior. Consumers were also using an average of 18% of their available credit, which was down from 21% the previous year and also marks the lowest level since 2009 (according to Equifax’s records). This is positive news for U.S. households.
 
Issuers like Capital One, Discover Financial, and Synchrony Financial are analyzing whether historically low credit card balances are a by-product of the pandemic (and the stimulus payments that came with it) or if improved debt management habits are becoming more permanent.
 
In the meantime, credit card issuers are stepping up their marketing efforts, sending out new offers and lowering the credit-worthiness thresholds to obtain new cards.

 

---

 

 

Making “Early Detection” More Accessible

 

Early detection is crucial to successful medical treatments and outcomes, and Google recently unveiled new artificial intelligence technology that can help.
 
Google’s “dermatology assist tool” is designed to help spot skin, hair, and nail conditions, which could enable patients to flag their doctors when something seems off. According to Google, there are over 10 billion searches every year for skin, hair, and nail issues.
 
Of course, Google’s tool is no substitute for medical care. But catching a symptom early can give doctors a much better chance of beating back or remedying a condition. With a smartphone and Google's AI technology, people can accurately and easily spot 288 skin conditions. Remember: early treatment = higher probabilities of getting better. 
 
Read more about Google's technology.
 

 

---

This material is not intended to be relied upon as a forecast, research or investment advice. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by Silverlight Asset Management LLC to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by Silverlight Asset Management LLC, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.​​