June 2021 - From Inflation to Free Popcorn Bubble*
Last month was marked by volatile markets. The month started with negative returns across the board to finish with US tech companies’ stocks in the red while Chinese stocks strongly rebounded, and bond markets were flat.
Inflationary pressures remain the focus for now. According to Google, search interest for “inflation” is at an all-time high. It has also been largely discussed during the last companies’ earnings calls, especially the two main sources of inflation, that is the increase of supply costs (commodities, transportation, chip shortage etc.); and the increase in wages, due principally to the difficulty of finding workers. It seems that people currently receiving unemployment benefits till September are not in a rush to go back to work. As a result, in order to attract employees, many companies announced increases in salaries. With higher costs leading to increased prices, it does not look to us like inflation will be only transitory, as most of Fed and Treasury officials keep saying. Note, that the only phenomenon that could be temporary is the comparative economic data which compares current economic performance to last year’s performance. This is at best quasi-irrelevant as last year’s numbers obviously reflect an economy which was then shutdown.
While a rate hike is unlikely, the Fed could decide to reduce its bond purchases. Indeed, the release of the latest Fed meeting minutes, gave some hints that such a move could possibly be announced during the next meetings – but more likely in July or September than in June. In Europe, the ECB made it clear that no tapering would happen before they see further evidence of a full economic recovery.
May was also marked by progresses on the President’s massive infrastructure plan. Republicans made a $928 billion counteroffer to Biden’s $1.7 trillion original plan, proposing the use of existing funds for financing instead of a tax hike. A compromise must be negotiated and accepted by each side in order to pass the bill as soon as possible, as the Democrats wish to do.
On the ETFs side, ESG (Environmental, Social and Corporate Governance) ETFs, encountered more inflows than any other ETFs in Q1 and hit new records in term of size. In addition, the new Ultra Short Bonds ETF of Vanguard, launched in April, has already raised $730 million, indicating that some cash is seeking to be invested on the sidelines for the time being.
Also interesting was the rebalancing of some of BlackRock’s ETFs. The giant asset manager decided to reduce the concentration and the volatility of its clean energy ETFs by adding a component of “energy transition” stocks, making the thematic ETFs a bit more mainstream. Moreover, it heavily rebalanced its USA Momentum Factor ETF, by switching most of the tech exposure with value stocks, especially Financials that now account for 1/3 of the ETF. An interesting new weighting, that although based on the past six months momentum, gives a clear indication of the outlook according to prominent actors.
Finally, May saw the fall of Bitcoin and the comeback of frenzied trading. After the cryptocurrency more than doubled in value in only a few months, one-third of its value was erased following Chinese regulators’ announcements and Musk’s tweets, both against the digital coin. Also, AMC Entertainment stock that was paired with GameStop during the Reddit saga in January, made a comeback as traders’ favorite stock of the month: its shares were up more than 500% in one month only, based on nothing but meme-trendy-viral-trading.
The earnings season for the first quarter showed exceptional numbers and overall good guidance for the rest of the year. Since it is too early to price a rate hike, we continue to believe that, despite the current valuations, equity markets could be further supported. Having said that, everyone who follows the markets this year can feel the fragility and keep expecting the unexpected. In this context, we continue to reduce risk, to be prepared for an eventual sharp pull back.
As always, risk-management combined with rigorous sector and geographical diversification will remain key factors for investment performance.
You are more than welcome to contact us to discuss our investment views or financial markets generally.
* AMC decided to give free popcorn to meme stock investors.