Follow-ups and New Thoughts:
1) Everything revolves around interest rates. On June 1st the 10-year treasury rose from 1.58% to 1.61%, and stocks were mixed overall, with growth stocks faring the worst. Last week the 10-year fell from 1.65% to 1.58%, with growth beating value. That tells you all you need to know about what is moving the market on a daily basis. So, what changes this? A surprise in Friday’s Unemployment Report perhaps. Last month’s report was very weak, but many economists thought there were systemic anomalies that would be adjusted on the next report. We shall see. A second consecutive weak number would probably crush the strong recovery narrative, but it might also be what it takes to break the Congressional logjam in favor of a bigger budget plan.
Another thing to watch is the Federal Reserve meeting on June 16th. This may give us guidance as to whether the Fed has begun real discussions on eventually tapering their bond purchases. Similar talk roiled the stock market back in the fall of 2018.
2) June is the market’s worst month since 2000 in terms of average winning percentage[i]. More Junes have finished lower than higher. In the 20th Century, September was the worst month. Not a prediction, just an observation.
3) Today’s closing price of $29.54 was the lowest of the year for the Grayscale Bitcoin Trust. The same cannot be said for other cryptos such as Ethereum, nor can it be said for the stock of Coinbase (the crypto trading platform) or for BLOK, the largest ETF focused on the digital ecosystem. I’m not sure what this means, but I do find it interesting. Maybe it’s a reminder that distributed ledger technology is bigger than one particular cryptocurrency.
4) Environmental wins at oil companies made big news last week. A Dutch court ordered Royal Dutch Shell to sharply cut emissions by 2030. Also, proxy fights at Exxon and Chevron resulted in new directors in the former case and new proposals in the latter case, both aimed at greater climate friendliness. Expect these decisions to result in less drilling in the near future which should translate into higher prices for oil and gas. Energy stocks were terrible investments post 2008 because every uptick in prices was met by a big increase in production as firms sought to capitalize. Oil’s enemies may have finally forced the discipline that these companies could never manage on their own. I believe this is an area you want to over-weight right now.
5) May always brings the annual Strategic Investment Conference, put on by John Mauldin’s organization. The biggest debate revolved around how temporary the current surge in inflation was going to be. There were a lot of anecdotal evidence presented, but no consensus was reached. The biggest wildcard was wages, since most people agreed that in time supply would catch up to demand. Some decried “paying people not to work” while others felt labor’s newfound power was more than a transitory thing.
Liz Ann Sonders was troubled by extreme speculative behavior, saying “This is how market cycles end”.
David Rosenburg was skeptical of the idea of pent-up demand; “We spent like crazy in 2020”.
Two camps. One says economic growth will stall later this year, bringing us back into a deflationary environment where growth outperforms. The other says, yes, growth slows, but inflation does not. The latter scenario results in a modestly stagflationary environment where interest rate in-sensitive (think materials & energy but not utilities & telecoms) value stocks fare best. Both sides agree that a slowing economy later in the year hurts the dollar.
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