November 22, 2020

 

The S&P 500 finished this week a few ticks lower, down 0.7%.

It was a relatively quiet week on Wall Street. The market wobbled a bit on Friday as the federal government pulled some backstop emergency funding from the Federal Reserve, a rare break between the two institutions in their otherwise unified efforts to support the economic recovery.
 
Positive vaccine news continues to frame a positive medium-term outlook for the economic recovery. That explains the stock market's resilience to the recent spike in Covid cases. The S&P 500 is up 8.8% this month, on track for its best November since 1980. And unlike earlier in the year, this rally is broad-based. The Russell 2000 small-cap index is up 16% in the last 15 trading sessions. Meanwhile, value stocks are outperforming. While short-term pullbacks can occur anytime, bulls should be encouraged because these are the vital signs of a healthy bull market.   
 
We’re off next week for the holiday, but wish everyone a safe and restful time, hopefully with your family if that’s possible. In a challenging and by all accounts exhausting year, there’s still plenty to be thankful for.

 

 

It Feels Like Uncertainty Is Rising, But It May Actually Be Falling

 

 

Covid-19 narratives give the appearance of uncertainty on the rise, which would normally be a material negative for stocks. But the opposite may actually be true.
 
In February/March, basically no one in the medical, political, or economic community understood what the virus was, how it spread, or how it would impact society and the economy. Research from Canaccord Genuity reminds us that early uncertainty led to deterioration in the credit markets, and a severe tightening in financial conditions. There was little sense of how deep the recession might go, and a bear market arrived in record time.
 
Conditions look very different today. We know and understand more about the disease and everything that comes with it.
 
There appear to be two, perhaps three vaccines with over 90% efficacy rates, and we know the Federal Reserve’s mindset is not likely to shift away from being maximally accommodative. Canaccord notes that the differences between today and the spring can be seen in bond spreads: “the yield spread between Investment Grade and High Yield Debt to the 10-year U.S. Treasury yield has dropped to the best levels of the pandemic recovery,” and “The yield spread between the Moody’s BAA yield and the Barclay’s High Yield Corporate bond yield continues to decline like after the prior three post-recession recoveries.” Both suggest stable financial conditions.

From a public health standpoint, research on hospital outcomes during the pandemic is limited, but a recent study published suggests that better care has led to shorter hospital stays and a far lower mortality rate. Data from a large network of hospitals showed survival increasing 28% from April to September. We also know who the virus affects most, and there is a basic understanding of how to stay safe and prevent spread.
 
Uncertainties remain. But despite media narratives suggesting otherwise, we think there are far fewer uncertainties today than six months ago – a net positive for stocks.

 

 

Money Market Funds Have Surged – Where Will This Money Go?

 

 

The capital markets are cash-rich. Specifically, money has poured into money market funds, Americans have accumulated some $2 trillion in new savings deposits over the last 10 months, even though banks have lowered deposit rates to basically 0%. Total deposits at U.S. banks swelled to about $15.9 trillion, up from around $13.2 trillion at the start of 2020.
 
Every investor should be asking the question: Where will all this cash go?
 
We can’t say for sure, but odds are this “wall of liquidity” we’ve written about several times will slosh its way around capital markets and boost spending in 2021. It raises the case for optimism heading into the new year, and we will revisit this question when we profile portfolio themes in the future.

 

 

 

If Demographics are Destiny, India Looks More Bullish Than China

 

 

India and China have the largest country populations in the world, by far. Larger populations imply larger labor forces, which ultimately drive long-term economic growth projections.
 
One of the most significant demographic milestones in history is approaching fast: India’s population will exceed China’s. India is also moving more quickly to embrace an open, market-based economy, giving the country a relatively more attractive case for secular growth.
 
Meanwhile, China continues to turn-off investors. A public spat between Jack Ma – founder of Alibaba and Ant Financial – and the Chinese Communist government resulted in Ant Financial’s IPO being pulled from the market. We’re seeing time and again that building productive, market-driven, and responsive firms in a centrally planned economy is near-impossible. Ant Financial’s Wall Street whirlwind underscores these challenges. 

As a result of China's recent policy decisions, Silverlight has exited most of our Chinese equity positions.  

 

 

Tesla Joins The S&P 500 Index (Finally)

 

 

Tesla’s intrigue on Wall Street continues to widely outstrip the electric vehicle maker’s real-world appeal, which is really saying something. As the consumer market (briskly) tiptoes towards EVs, Tesla’s stock is up nearly +500% in under two years.
 
Tesla shot-up yet again this week, rising 13% pre-market on the announcement of the S&P 500 addition. Tesla demonstrated profit sustainability in the September quarter, but the stock’s meteoric rise appears more attributable to enthusiasm on the EV theme vs. company fundamentals.
 
The S&P 500 index is poised to become top-heavier with Tesla’s inclusion. As of June, the S&P 500’s top ten holdings accounted for 28% of the entire index’s total assets, which is already quite high. With Tesla, the number jumps to 34%.  

 

 

Honda’s Unlikely Marketing Partner: “E-Sports”

 

 

The new Honda Civic won’t be revealed at an auto show, or at some mega conference. The company decided a streaming app would be better.
 
In an effort to reach millennials and Gen Z’ers – who represent the coming tidal wave of consumers – brands are increasingly turning to social media and the digital realm for exposure. In Honda’s case, the rapidly growing e-sports (gaming) industry represents a niche market where no other automakers currently exist, and where Honda can be dominant.
 
Honda became the first auto brand to sponsor an e-sports team, and their plans to roll out the new Honda Civic on the streaming app Twitch underscores their commitment to marketing to a younger demographic. 67% of Twitch users are under 35, which is Honda’s core customer base.  

 

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"Software is cool."

 

In a segment sure to make you smile, NBA superstar Stephen Curry asks Bill Gates to step into the shoes of a junior software engineer interviewing for a job at Microsoft. Gates takes the exercise in stride, as if he’s literally a junior software engineer interviewing for a job at Microsoft.
 
Gates does remarkably well in the interview, obviously. But some of the key takeaways are his ability to keep answers concise, to always talk about how a person can go above and beyond in a job, to communicate passion for work without using the word “passion,” to frame a weakness in terms of an actual job you would not be good at, and to remind the interviewer that you’re a “learn-it-all,” not a “know-it-all.”
 
If you know someone looking to change jobs and find work during the economic recovery, this interview is worth sharing. It’s also just fun to watch.
 
Watch Stephen Curry Interview Bill Gates

 

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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.​​