RISING ACTIVITY & INCREASING STIMULUS
Financial market indicators have been well ahead of real-world events in forecasting the reopening of the global economy and strong economic growth. Global bond yields rose again last week with the US 10-year yield finishing at 1.57%. The chart below shows the relative performance of two stocks – Live Nation (the world’s leading live entertainment company) and Netflix (arguably the world’s leading home entertainment company). Despite the virtual shut down of live events across the globe, Live Nation has been outperforming Netflix since July of last year with a clear surge in relative outperformance since the announcement of the Pfizer vaccine in November.
CYCLICALLY ORIENTED ETFs
We are clearly no longer alone in pushing the investment merits of stocks and sectors that are tied to global economic recovery. An analysis of ETF flows in the US would reveal that inflows into cyclically oriented ETFs picked up as early as June of last year and, since the market bottom on March 23, 2020, have attracted by far the greatest share of investor inflows. Also of interest is that inflows into Technology ETFs appear to have remained relatively stable. Thus far, investors have not been selling their Tech holdings to invest into the cyclical theme but seem to be raising funds by lightening up on their more defensive holdings in the Staples, Healthcare, Utility and Telecom sectors.
The mirror image of this inflow surge into cyclical equities has been the outflow from sovereign fixed income ETFs. Investor interest in rising inflation has picked up and their corresponding willingness to search for inflation hedges (two charts below).
Commentators have been correct in noting that certain segments of the market are showing evidence of investor froth normally associated with the later cycles of a market advance. Capitalizing on robust risk appetite in a hot market environment, U.S. IPO activity has surged to historical records on an absolute basis. On a relative basis, IPO activity as a percent of the S&P 500 market cap is near the levels at previous market peaks in both 2000 and 2007. The almost $100bn in SPAC activity in 2020 outpaced 2019’s total deal value by more than seven times. Just two months into 2021, we have already seen more than $84 billion of SPAC deals so far, just 14% below the entire 2020 figure.
BUMPY EQUITY RIDE
Combined with stretched index level valuations and rising bond yields, we have little doubt that the equity ride will get bumpy. We continue to watch several leading indicators that should warn of any imminent collapse. However, the market continues to behave normally and with the glut of monetary and fiscal stimulus still present, it is difficult to forecast any meaningful pullback. The chart below shows the excess money supply in the US (money stock minus GDP growth). This excess cash is constantly looking for a home and while bond yields have risen, they are still not at the level that would provide real competition for equity returns.
A TRILLION HERE, A TRILLION THERE…
Furthermore, the US Senate passed Biden’s $1.9 trillion fiscal stimulus package this weekend. There are some tweaks to be agreed but the substance and certainty of the package is as good as done. The chart below highlights how quickly the US was to act at the depths of the pandemic crisis in March and April last year. In that period with unemployment rising above 15% and the economy on the verge of a total shut-down, the US government agreed on just shy of $2.5 trillion of stimulus. The $900 billion of stimulus agreed in December still has to be disbursed and now there is an additional $1.9 trillion behind that with talk already of an infrastructure bill later in the year. These sums are larger than the early efforts and unlike those, come at a time when unemployment is falling, and the economy is on the verge of a full reopening.