Solid week for the equity markets as investors generally looked past rising yields, at least for now. Most indexes pushed higher with the exception of China and some other emerging market indexes. The Chinese government was actually reported to be a heavy buyer of stocks this week to try and prop things up.
As for rates, they have basically done a full round-trip, as you can see below. The 10-year yield closed at 1.64% on Friday, the highest level in a year.
The big news of the week was of course the passage of another coronavirus relief package (this one is the second largest fiscal stimulus package ever signed). The bill passed the House in a narrow 220 to 211 vote, with all but one Democrat voting in favor and every Republican voting against it. Key provisions of the $1.9tn bill include:
• Stimulus checks: Individuals making less than $75,000 and married couples making less than $150,000 will receive direct payments of $1,400 per person. The bill will also provide $1,400 per dependent.
• Unemployment benefit boost: The bill extends unemployment programs through early September, including the $300-per-week federal supplement provided in the last stimulus plan passed in December.
• Child tax credit: For 2021, the bill would temporarily expand the child tax credit, which is currently worth up to $2,000 per child younger than 17. Under the legislation, the tax credit would be as much as $3,600 for children up to age 5 and as much as $3,000 for children 6 to 17.
• Local government: It would provide $350 billion for states, local governments, territories and tribal governments, and it contains $130 billion for schools. It also includes funding for colleges and universities, transit agencies, housing aid, child care providers and food assistance.
• Small business: The bill contains funding to help businesses, including restaurants and live venues, and it includes a bailout for multi-employer pension plans that are financially troubled.
• Vaccine: The legislation includes $160 billion for vaccine and testing programs to help stop the virus’s spread and ultimately end the pandemic. The plan includes money to create a national vaccine distribution program that would offer free shots to all U.S. residents regardless of immigration status.
$1.9tn is a lot of money and will have a big impact on the global economy in the months to come. On Tuesday, the OECD upgraded its outlook for global growth. As the FT noted:
‘The Paris-based international organisation said it expected a stronger rebound from last year’s historic recession than it forecast in November, mainly because of the rapid rollout of Covid-19 vaccination programmes in many countries and the increase in US stimulus spending. The scale of the Biden plan will add about 1 percentage point to global economic growth in 2021, Laurence Boone, the OECD’s chief economist, told the Financial Times. As a result, the global economy will expand by 5.6 per cent this year, the OECD forecast on Tuesday, an upgrade of 1.4 percentage points from its November forecast (chart below).’
Apparently, there is more to come. There is much speculation about an infrastructure plan this summer. J.P. Morgan’s take echo’s that of many others:
‘The range on what could be tabled is large, from the $2trn Biden touted during the election campaign to the $4trn advocated by some Congressional Democrats. The more Biden leans on the simple majority reconciliation process, the larger the eventual package might be. The more Biden opts for bipartisanship – or the more centrist Democratic Senator like Manchin insist on cross-party buy-in – the smaller the package might be. It is notable that Biden, who served 36 years in the Senate, pursued the $1.9trn stimulus package via reconciliation, which put paid to the quaint notion that his background would incline him to reach across the aisle. On minor legislation, perhaps yes. On the signature legislation of his term, apparently not.’
Where’s the money coming from? The table below shows that the national debt now stands at over $28tn. It took 151 days to go from $27tn to $28tn. I suspect we will add another trillion in under 60 days this time around. $30tn by year’s end?
Watching Inflation Like a Hawk
Certain economic releases become the sole focus of attention depending on the time period. In 2007 it was the Case-Shiller Home Price Index. If home prices could go down that meant bad things for a lot of areas. In 2018 it was the unemployment rate – if the rate moved too low it would mean the Fed was about to tighten policy.
Today it’s inflation. Every month the consumer price index (CPI) report will take on an almost mythic status, a bit like the white or black smoke wafting from the chimney, signaling the election of a new pope.
The latest report wasn’t very exciting, but that didn’t stop investors from pushing interest rates higher because they think future reports will come in hot. February’s CPI rose by 0.1% month-over-month, a tenth below expectations. Sizable declines in some virus-sensitive categories—airfares fell another 5%—more than offset firmness in shelter, medical services, and recreation. Core inflation measured year-over-year came in at 1.3%, also below estimates and the lowest since June.
Future reports are guaranteed to be higher, not because there is necessarily inflation in the system, but simply due to math. The year-over-year measures are about to compare current rates to a particularly soft period of inflation last March, April, and May. As you can see from the red arrow below, the comps from last year took a sizable dip when COVID was raging.
So, the next few month’s reports will be hot – possibly showing inflation over 3%. It will be interesting to see how the markets react. Will investors shoot first (sell bonds) and ask question later?
The Fed almost certainly won’t view a blip higher as something to worry about. We hear from the Fed next week and we will see if they even address the recent increase in longer-term rates. The European Central Bank drew specific attention to it at their meeting this week and they were not amused – they promised more quantitative easing to cap the recent run up. It would be surprising for the Fed to take this stance, but the last year has been full of nothing but surprises.
Charts We Found Interesting
1. Vaccination progress by age group.
2. Our progress towards herd immunity.
3. Europe is struggling with the COVID strains.
4. During the tech bubble stocks selling at a price/sales ratio of 10X were poster child for irrational exuberance. The market cap of such stocks this time around is close to twice as large.
This brings to mind a quote from Scott McNealy, former CEO of Sun Microsystems, which traded at 10x revenue at one point in 1999 only to drop 95%:
‘At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes.’
5. How much does all the relief spending add up to for an average family. The Washington Post looked at a typical situation. It’s a big number if they are even close to being right.
6. BCA’s chart below shows the percent change in after tax income for both the recent stimulus bill and the 2017 Tax Cuts and Jobs Act.
7. I think I’m getting old – I don’t understand any of this. I don’t even understand what some of the words mean. Someone paid $69.3mm for computer art?
‘A piece of digital art sold for $69.3 million at Christie’s Thursday morning, a record amount money paid for a new but booming category of art called nonfungible tokens or NFTs. Everyday: The First 5,000 Days” by Beeple, a 41-year-old illustrator in Minnesota, was a collage of 5,000 images the artist made over as many days. Its eight-figure sale represents the latest height in a mounting frenzy for NFTs, a type of digital media built on the blockchain that has catapulted to mainstream attention—and demand—over the past two months. With 30 minutes to go in the Christie’s auction, “5,000 Days” hadn’t topped $15 million, but a flurry of last-minute bids sent its price skyrocketed. The $69.3 million price tag put on the piece is far more than market participants thought it could fetch even amid the surging interest in NFTs. It also vastly outstrips the previous record for a Beeple work: the $6.6 million paid last week for a 10-second video.’
7. Another thing I don’t understand – Tagalongs. West Virginia – Really??
Have a good weekend.
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