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PWM Weekly Observations

April 10, 2021

Are Soaring Growth Estimates Already Priced In?

April 10, 2021|in Investments /by westcottadmin
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  • GDP Growth is expected to soar based on vaccination progress, consumer recovery and an easy comparison with last year.
  • With a fresh run of stimulus checks delivered, or about to be delivered, and pandemic fatigue rampant, it isn’t hard to imagine at least a mini-boom over the next several quarters, leading to improved earnings and higher stock prices.
  • However, there are risks: 1) emergence of a new, dangerous variant; 2) a Fed that pulls back on monetary accommodation too soon, 3) higher interest rates, and 4) the stock market, a discounting mechanism, may have already factored the mini boom into prices.

It may not be the roaring 20’s again, but it sure looks like a roaring 2021. The combination of vaccine progress, massive stimulus, and a very easy comparison to the disastrous COVID economic impact makes GDP forecasts that are well above the pre-pandemic trendline an easy call. However, that doesn’t imply there is no risk to that forecast. Although U.S. vaccination progress is very good, it is less so in Europe and virtually non-existent in the third world. That matters because the longer this virus is roaming free, the better the chance that a variant finds its way around the vaccines. The simple fact is that the more COVID cases there are, the more variants there will be. There is simply no way to forecast if, or when, a more dangerous variant might appear, but the faster we get vaccines to the entire world, the better off we will be.

The Fed pulling back monetary policy too quickly seems implausible given the rhetoric emanating from the institution. The Fed appears fully committed to ‘lower for longer’ as it focuses on avoiding deflation at the risk of inflation, so we don’t see this as a viable risk, however, the bond market may have other ideas. We have seen hints of the bond vigilantes returning and demanding higher rates in response to the growth outlook strengthening and an open invitation for the return of inflation from the Fed. If the bond vigilantes return in earnest, that could force the Fed into a very serious hand of poker with the bond market and force the Fed to do something it has not done since WWII – Yield Curve Control. There are massive deficits to finance and with each day, it seems there are new programs proposed with little money available to pay for them. The Fed’s challenge will be to issue substantially more debt into the market than they ever have, while keeping rates down. That is a tall order. If they can’t keep rates down, that is a real risk to economic growth and the stock market.

The idea of a rapid recovery as vaccines take hold is certainly not novel. Turn on the financial media for a few minutes and it is hard to avoid a segment discussing the coming recovery boom. It’s quite easy to get caught up in ‘recovery stocks’ but the question will be whether these stocks already reflect the recovery. There is no easy way to measure that, but we can provide some anecdotal evidence. We picked out 8 recovery stocks in various sectors and looked at the charts from January 2019 to see which of them have had the stock price recover back to their respective pre-pandemic levels. Of the eight we chose, all but one (Carnival Cruise Lines) has returned to their pre-pandemic level.

The eight we chose were: Marriott and Carnival Cruise Lines (Hospitality), Southwest (Airlines), Wynn Resorts (Gaming), Darden Restaurants and Cracker Barrel (Restaurants), Walt Disney (Entertainment), and Macy’s (Retail).

Of the eight we chose, only one has failed to clearly reach all pre-pandemic levels (Carnival Cruise Lines). Wynn and Macy’s have effectively returned to pre-pandemic levels and the remainder are well above the pre-pandemic level. These companies were among the most impacted by the pandemic and their respective recoveries clearly give credence to the idea that recovery has already been baked into stocks.

In our view, that implies that for stocks to continue meaningfully higher we must increasing believe that economic growth (i.e., GDP) in the post-recovery period is going to be higher than the pre pandemic trendline. Nominal GDP growth has been in a decline since roughly 1980 and was hovering between 2.5% and 5% for most of the last 10 years. (See chart below.) That implies that we need GDP growth to head back toward 5% and higher. Certainly, growth expectations for this year are well above that range, but the real question is what to expect in 2022 and 2023, as the surge effect of the end of the pandemic wanes. That should begin to become clearer as the year progresses.

On a near term basis, the market gets its first test next week when first quarter earnings reports begin. As shown in the cart below, courtesy of Yardeni Research, even at the depth of the pandemic, earnings estimates for 2021 were already beginning to rise. It’s now time for those projections to become reality.

It’s also clear from the chart that Q1 is just the beginning with sequential earnings increases expected through the year. How well (or poorly) earnings hit the mark should go a long way to defining just how well (or poorly) the stock market will perform in 2021.

The stock market is a discounting mechanism, meaning that it reflects all available information, including everything known up until now, as well as the potential future events. For now, the expected future for earnings is rosy and that is evident in stock prices. When unexpected developments occur, the market discounts this new information very rapidly. For now, expectations are high, and we will begin to see if those expectations can be met beginning next week.

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What We’re Reading

Why Shortages of a $1 Chip Sparked a Global Economic Crisis

Breakingviews – Path out of global tax combat is slowly emerging

U.S. plays down expectations for Vienna Iran nuclear talks

U.S. Senate Banking chair presses Wall Street banks on Archegos ties

U.S. weekly jobless claims rise again, but labor market recovery gaining steam

Mapping the World’s Key Maritime Choke Points

New York’s wealthiest look for exits as state readies hefty tax increase

Moderna vaccine antibodies last at least 6 months

Researchers identify five new cases of ‘double mutant’ Covid variant in California

Global air and trucking demand is exceeding capacity (2 min video)

Bitcoin Evolves From Tulips Into A Geopolitical Weapon As US Warned Again

$2.1 Billion for Undocumented Workers Signals New York’s Progressive Shift

Markets This Week

It was a ‘Back to the Future’ week as technology and growth came roaring back at the expense recovery stocks, although there was a small reversal of that trend on Friday. Gold bounced and commodities were slightly weaker on weak energy prices while the bond market was uncharacteristically quiet. XLE, the EnergySector ETF, was rocked by more than 4% for the week, yet remains the best performing sector for the year, slightly ahead of the Homebuilders, who had another good week.

The table above is an analysis of the weekly and year to date returns of various markets/sectors that we follow (More RED = worse performing markets/sectors; More GREEN = best performing markets/sectors). Source: IEX Trading & PWM Research.

Retirement Planning:

Let’s Update Discussions Around Retirement Planning

The world has changed quite a bit — yet there hasn’t been a corresponding shift in the retirement planning conversation or its considerations.

Tax Planning:

New York’s wealthiest look for exits as state readies hefty tax increase

The budget passed by state lawmakers and headed to Gov. Cuomo’s desk would likely have New York City’s executives end up with combined local and state personal income tax rates that are higher than for wealthy California residents.

Health:

New Variants of Coronavirus: What You Should Know

The new variants raise questions: Are people more at risk for getting sick? Will the COVID-19 vaccines still work?

Entrepreneur:

10 Simple Ways to Improve Your People Skills

Much of your success in life hinges on your ability to understand and interact with people.

Disclosures

Palumbo Wealth Management (PWM) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where PWM and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.palumbowm.com.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

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A Letter from Our Founder, Philip G. Palumbo

“It’s not hard to make decisions when you know what your values are.”

— Roy E. Disney

My immigrant father and US-born mother taught me one key discipline that has positively informed my life: a strong work ethic. A person’s work ethic is a set of values based on the ideals of discipline and hard work.

I was encouraged to work at a very young age. When most 13-year-olds came home from school to spend time with their friends, I became a 3-season athlete, worked at a restaurant, and did homework until late in the evening. I employed this same process during college while playing Division 1 lacrosse.

When I step back and think how challenging all of that was, I realize it was the foundation for the wealth management career I began 20 years ago. The value of a strong work ethic has enabled me to deeply understand my clients who are preparing to retire, or are already retired. Having worked hard to build their wealth over decades, not losing their money is their crucial objective. As a wealth manager, it is imperative for me and my team to create and constantly adjust and reinforce a strong process to achieve three critical goals for our clients:

  • First, PROTECT your money
  • Second, GROW your money and provide you with a return that will assist you in achieving your life’s goals
  • Third, ensure that we TRANSFER your wealth to your heirs in the way you wish and help the next generation to carry on your legacy

After countless hours of research, it was apparent that the independent Registered Investment Advisor (RIA) is the clear service model that will enable us to serve our clients as their personal chief financial officer and accomplish our three critical objectives. We can do this by serving you on the best and purest platform that the financial services industry has to offer.

I believe the RIA model is the future of the wealth management industry and more in line with our core values. As an RIA, we have a fiduciary duty to our clients, which is among the highest standards of care in the American legal system. The RIA platform enhances our access to research, state-of-the-art technology, and the best products and services that the wealth management industry has to offer.

Most importantly, our clients can have peace of mind knowing that BNY Mellon | Pershing is safekeeping their assets. BNY Mellon | Pershing is an indirect, wholly owned subsidiary of BNY Mellon Corporation and it serves the foremost wealth managers, RIAs, family offices and investment advisors around the world. BNY Mellon has $35.8 trillion in assets under custody and/or administration and $1.9 trillion in assets under management. As one of the world’s oldest financial institutions, BNY Mellon’s strength dates back to its founding by Alexander Hamilton in 1784.

In the end, the decision to become an RIA reflects our mission to serve our clients to the very best of our abilities. At Palumbo Wealth Management, we are a client-first, full-service, private wealth management boutique firm offering one of the strongest and most secure asset management platform of services available. We take our fiduciary responsibility very seriously and by “PARTNERING TO DELIVER STRENGTH,” we can best serve our clients’ wealth management needs.

Sincerely,

Philip G. Palumbo
CEO and Founder