New Year, new prez, so...
What you need to know in 5 minutes - Jan 25, 2021
New Year, New WTM! Thanks to your feedback, we’ve created a new structure to get you up to speed on what’s driving the market and what’s an investor to do about it.
Additionally, you can now access our full list of investment ideas shared in the weekly update (including all past ideas) in the curious investor section. We hope you enjoy the new format and as always; please let us know your thoughts by replying to this email!
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What The Market?
After months of partying and celebrating new highs, Mr. Market is taking a moment to recharge and familiarize himself with his new environment. The Biden administration took over and promised substantial change. Mr. Market is going to need a bit more information before he decides what to do next...
I hereby decree: President Biden signed numerous executive orders upon taking office (a common practice for incoming Presidents). Many of the orders scaled back, or straight up reversed, Trump-era policies, and analysts are still sorting out the short- and long-term impacts of these decisions.
Show me the stimulus! Biden’s $1.9T stimulus package will advance to Congress for approval or modification (hopefully we can stick to the topic on this one). Experts suggest Democrats will be willing to compromise in a more conservative deal designed to prioritize delivery to those more in need. On the other hand, after losing all three branches of government, the GOP is more likely to play ball with Democrats. Mr. Market will be watching to see how the fiscal stimulus plays out.
What’s an investor to do?
Patience – sometimes the best move for the long-term is no move at all. The coming weeks will likely be volatile as the market adjusts and factors in the new administration’s changes on COVID management and economic regulation.
Focus on building positions in strong value plays that are still recovering from 2020 lows
Consider increased longer-term exposure in sectors aligned with Biden’s plans, continued COVID recovery, and reopening sectors (e.g., 5G networks, cybersecurity, green energy, and consumer cyclicals such as airlines and luxury items).
Keep an eye on the economy:
Q4 US GDP figures (Thursday) will provide insight into how the US economy closed out the year
Consumer confidence (Tuesday) and personal spending data (Friday) will contextualize Americans’ economic standing
The Fed is expected to remain dovish, keeping its monetary policy strategy unchanged. Pay attention to commentary on the fiscal stimulus and concerns about inflation expectations during the Fed’s interest decision (Wednesday).
For the curious investor:
Who’s playing monopoly in China? China redefined its monopoly rules in an effort to “prevent systemic financial risks” tacitly targeting fintechs Ant Financial and WeChat Pay. Antitrust regulators will likely be knocking on their doors shortly, which, if successful, may negatively impact valuations. For now, Alibaba shareholders celebrated Jack Ma’s return from the dead (BABA +6% ), and Twitter even threw him a meme party!
Earnings season in full throttle: This week will be one of the busiest of earnings season. Some of the best performing stocks of 2020 will be showing us how Q4 fared for them, providing insight into how the second COVID wave impacted their operations. Notable reports this week include:
Payments: Visa, Mastercard, American Express
Healthcare & Pharmaceuticals: Johnson & Johnson, Abbott Labs, Eli Lilly
Semiconductors: Advanced Micro Devices
Recovering sectors: Jet Blue, Southwest, American Airlines (be sure to compare with Delta’s recent earnings)
Build it, and they will clean? Biden’s plan to build sustainable clean energy infrastructure aims to create jobs across lateral sectors and drive economic growth nationwide. The plan focuses on modernizing the auto industry with domestic supply chains, electric charging stations, and union choices for workers by upgrading transit and low-carbon infrastructure with a focus on local clean energy (pollution free by 2035!), constructing sustainable buildings and efficient light industry products (e.g., appliances), as well as developing negative emission tech, including building materials and battery storage.
Consider investments in large scale, long-term plays:
Broad and conservative: clean energy ETFs (TAN, QCLN, FAN, SMOG)
Dig deeper for a winner focusing on hydrogen and nuclear energy
Expected upcoming IPO this week: Shoals Technologies Group (solar energy project supplier)
With great stimulus, maybe, comes some inflation: Inflation talk has increased substantially over the past few weeks as the Fed and Treasury continue increasing the money supply by printing more money which may carry inflationary risks. Analysts are focusing on Treasury bond yields to determine any expected inflation. Inflation results in a depreciation of the dollar’s value (a.k.a. its buying power), meaning investors will expect higher returns on bonds to compensate for inflation’s erosion of their future cash flow’s purchasing power. Although this is not a big concern at the moment, it’s important to know how to hedge against it. Consider exposure to companies that cover the following criteria:
Price transfers: Can the increasing costs of inflation be transferred directly to consumers? Industries with inelastic demand such as healthcare and consumer staples tend to do best in these contexts because they are always in demand and can easily increase prices to offset a depreciating currency.
Location: As the dollar depreciates, US manufacturing companies will become more competitive for exports. A weaker currency allows for more business abroad (same price + lower production costs = bigger margins and/or more competitive positions).
Asset-backed value: Assets, like real estate and commodities, tend to hedge inflationary risks because they are not explicitly tied to currency, and they derive their value from real assets. As the purchasing power of the dollar depreciates, investors seek out alternative assets that will conserve value over time (e.g., gold or a home). This can be played through real estate investment trusts or mining companies, for example.
Check out the WTM Watchlist including positions mentioned in all weekly updates.
Monday: Chicago Fed National Activity Index, Bank of Japan monetary policy minutes
Tuesday: UK unemployment figures, US housing Price Index and Consumer Confidence, IMF World Economic Outlook
Wednesday: Federal Reserve interest rate decision and statement, US durable goods orders, Japanese retail trade figures
Thursday: Eurozone economic, consumer and industrial confidence, US jobless claims, Q4 GDP growth figures and new home sales
Friday: US personal spending figures, Chicago PMI, Michigan Consumer sentiment index, German Q4 GDP figures
If you didn’t know, now you know
The Prime Minister of Nepal, Khadga Prasad Oli, dissolved the nation’s parliament and ordered new elections as conflicts within the governing party escalated. Oli is the head of Nepal’s communist party, which merged with a party of former Maoist rebels led by Pushpa Kamal Dahal. The two were supposed to split the 5-year prime minister’s term between them, but Oli crossed his fingers behind his back. Already facing accusations of corruption and mishandling of the coronavirus, Oli is now dealing with over 25,000 people who took to the streets in protest, including a splinter group of Oli’s own party.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
Ender’s Game Alive, the full cast audioplay. If you haven’t discovered audioplays yet, you’re in for a treat. Rather than narration, over 100 voice actors bring the classic sci-fi novel to life.
Super Forecasting - The Art and Science of Prediction by Philip Tetlock. A great introductory book to the art of forecasting. With data becoming increasingly present in our everyday lives, understanding how it is created is important!
Looking for more?
This writing is for informational purposes only and the author/s undertake/s no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author/s expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.