Okay, I'm a little nervous
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Okay, I'm a little nervous
The Curious Investor - May 10, 2021
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What the Market?
Mr. Market is feeling a bit overwhelmed by the current global environment. He’s taking some time to reflect and search within himself to see how he feels about what’s happening in the present and where he might be going next. Lately, he’s felt like a bit of an emotional rollercoaster as global markets have been acting up lately. Hopefully, additional corporate and economic data can shed light on what lies ahead.
What’s driving the market?
Is this a dinner with my parents or a Jobs Report? Last week’s April Employment report left analysts disappointed, reporting that only 266k jobs were created vs an anticipated 1 million. The lackluster report has even sparked debate over efficient government spending, as the April report would not qualify as the “substantial further progress” towards recovery Powell wanted to see. In response, US equity markets rallied as the unexpectedly low reading relieved pressure from the Federal Reserve to shift gears to a less dovish gameplan; allowing growth stocks to benefit from the lower interest rate scenario for a little bit longer.
Inflation data at bat: The April inflation data will be the highlight of the week ahead. Economist’s consensus for headline CPI is at 3.6% YoY; accelerating from a 2.6% rise in March. The two main drivers for this jump can be understood as base effects (jump off vs. last year’s low pandemic levels) and the ongoing supply chain disruption caused by the delay between how fast demand recovers and suppliers adapt; with the latter being the bottleneck to watch in the coming months.
What’s an investor to do?
Investor mindset
At this point, any news seems to be good news, and that should raise at least some inquisitive eyebrows. At some point, the party needs to come to an end and the inevitable hangover needs to set in. I don’t care if you’re Charlie Sheen or Sterling Archer, it eventually catches up with you, and you better be ready for it. Focus on the long-term.
Portfolio management
If you’re still clinging to pandemic winners and aggressive growth stocks, the weak jobs report may have created a new opportunity to exit at strong levels. Take advantage to rebalance your portfolio and re-evaluate your long-term strategy.
Keep an eye on the economy
In addition to CPI data, take a look at retail sales figures on Friday. After the 9.8% jump in March driven by stimulus checks and continued economic reopening, April is expected to carry-through with some inertia and post a rise of roughly 1% MoM. As we approach the summer months and Americans sit on roughly $3 trillion in savings, there is plenty of money to be spent on your post-pandemic Hot Girl Summer.
The Curious Investor:
Let’s talk about the chip shortage and the bullwhip effect (Disclaimer: WTM is long SOXL): As technology continues to embed itself into the fabric of everyday life and nearly every business, it’s no surprise that the demand for semiconductors (a.k.a. chips) has soared over the past year. Semiconductors are used to power anything from smartphones, 5G modems, automobiles, appliances, aircraft, gaming consoles and more. By the end of 2020, semiconductors were found to be in short-supply. Goldman Sachs even put a price tag to this shortage, at roughly 1% of US GDP in 2021. One driver of increased demand came from an increase in consumer spending on electronics during pandemic-lockdowns. Consumers flocked to purchase home offices and digital entertainment consoles among other devices. The sudden increase in demand caught manufacturers like a deer in headlights. Chip manufacturers rushed their suppliers with additional foundry orders, who in turn, overwhelmed basic parts suppliers with additional orders (e.g. Motorola rushes Qualcomm for chips. Qualcomm rushes TSMC for foundry orders. TSMC rushes ASML for basic parts. ASML rushes basic material manufacturers and miners). As we’ve seen with inflation, demand tends to move faster than supply, especially as consumer habits shift faster than the time it may take a manufacturer to build a quarry or industrial assembly plant. This is known as the bull-whip effect.
When supply cannot keep up with the rise in demand, prices tend to increase. A common response by manufacturers is to build another factory. However, factories can take up to two years to build and require significant capital costs and risk to the manufacturer should demand fall. Furthermore, by the time the factory is operational, demand may have already been met and the factory is now contributing to a surplus that is driving prices down.
In today’s industrial and internet-of-things landscape, semiconductors have become a modern commodity. The few established manufacturers are set to cement themselves as global powerhouses across segments and industries with the power to cause significant ripples globally.
Consider gaining exposure through:
Doge Update: The value of Dogecoin dropped sharply after Elon Musk, Tesla’s Technoking and cryptocurrency supporter called it a “hustle” during his guest-host stint on Saturday Night Live. For days, Doge enthusiasts had been eager to see what he would say or announce about the digital meme currency. The verdict was “not impressed.” Despite his support for cryptocurrencies, Musk has repeatedly suggested caution when investing in the space due to its speculative notion. Q1 2022, SpaceX will be launching the DOGE-1 mission to the moon! to set the foundation for “interplanetary commerce.” Although the publicity stunt seems to have gone wrong, remember Doge is up 800% in the last 4 months alone. Should you still #HODL? Hell if we know…
Notable earnings this week:
Economic Calendar:
Monday: Australian and UK Retail Sales, Chinese FDI, Japanese household spending
Tuesday: Chinese CPI, Eurozone economic sentiment, Bank of England and Federal Reserve speeches
Wednesday: Australian consumer confidence, Japanese economic index, UK GDP, Industrial and manufacturing production, US CPI, Bank of England and Federal Reserve speeches
Thursday: US PPI and Jobless Claims, Bank of England speech
Friday: US Retail Sales and consumer sentiment index, ECB monetary policy meeting accounts
If you didn’t know, now you know
On April 28th, thousands of Colombians took to the streets to protest a proposal by the government to increase taxes on public services, fuel, wages, and pensions during a pandemic lockdown. The protests have been mostly peaceful however, recent clashes during demonstrations have left 26 dead and more than 800 people injured. While the government has withdrawn the tax proposal (#fTaxes), demonstrations have continued more broadly against government abuse, corruption and police violence.
This summary only covers the surface of the conflict. To read more, click here.
What we’re vibing:
30 Rock (TV Show): A sitcom that will have you laughing out loud. How we have not watched this sooner, beats us. Alec Baldwin, Tina Fey, and Tracy Morgan are at their best.
Begin Again (movie): Aside from the mind-blowing soundtrack, which in itself is a reason to watch, this absolute feel-good comedy-drama with Keira Knightley and Mark Ruffalo is a must watch, more so during the pandemic languishing we are all experiencing. Chin up, we’ll get through it.
Resources
WTM Mentions Performance Tracker
A content guide to investing (books, books, books!)
Disclaimer
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.