Commenting on the expansion of the Fed’s balance sheet and today’s markets strategist Louis Navellier wrote in a note to investors:
Expansion In Fed's Balance Sheet
The Fed’s balance sheet is now $7.693 trillion and is expanding at $120 billion a month. At this pace, it will cross the $8 trillion threshold by June.
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This dramatic balance sheet expansion, combined with rampant deficit spending, resulted in a situation where the economic damage from the pandemic was twice as bad as that of the Great Recession of 2008, yet the damage to financial markets was just half as bad. The decline in the stock market lasted just four weeks, and credit spreads did not expand nearly as much for riskier bonds as they did in 2008.
Right now, a different kind of spread is expanding rather dramatically, but unlike credit spreads, its steepness signifies an improving economy. The 2-10 spread made further with the 10-year Treasury yield touching 1.75%, while 2-year Treasuries, heavily correlated to the Fed funds rate, won’t move for a few years as the Fed has short-term rates anchored at a range of zero to 0.25%.
A steep yield curve is good from a strategic standpoint, as it makes the banking system more profitable and signifies a recovering and accelerating economy. From a shorter-term tactical perspective, it will make the stock market shake. I have no idea when we will get to 2% yields, but if we get there quickly, the stock market will shake the same way it shook during the taper tantrum in 2013 (which signaled the Fed’s intent to slow down the pace of quantitative easing – there is no such intent this time) or in 2018, when the Fed was hiking the fed funds rate and shrinking its balance sheet (it’s doing the opposite now).
In the latest extreme case, deficit spending and loan guarantees from the U.S. Treasury, which pushed broader measures of money supply like M1 and M2 sharply higher in 2020, are likely to cause a rise in inflation when the economy normalizes. The U.S. economy normalizing after COVID is similar to the troops coming back home after World War II. Deficit spending during WWII was not as big of a problem for inflation because the economy was not operating in normal fashion and millions of people were abroad fighting the war. When they came home, though, it was another story, and inflation ignited.
Tech Stock Rally Stil Intact
The current correction in the Nasdaq is sizing up to be a textbook consolidation, in that it is following a torrid 2020 rally for the tech-heavy Invesco QQQ Trust (QQQ) that traded at a lofty premium to its long-term moving averages. The “Reopening euphoria,” combined with rotation into financials, industrials, materials, energy, transportation and leisure stocks sucked short-term air out of the tech sector in a classic mean reversion scenario.
But leave no doubt, professional fund managers with 5-star track records are not wild about owning cruise line, airline, restaurant, hotel and casino stocks – many of which are now trading at higher prices than before the pandemic hit. They are also more likely to rent and not own stocks of commodity-producing companies with rising raw materials input costs and those with burgeoning pools of physical labor. In the big picture, they want to own firms engaged in trends that include 5G, IoT, mobile ecommerce, cloud applications, fintech, EV, AI, cyber security, augmented reality, virtual reality, streaming entertainment, remote medical care, robotic manufacturing, clean energy, smart grid, smart cities and smart homes.
When looking at the 3-year chart of the QQQ, the 20-week moving average shows the bull trend is still intact. Shorter-term charts show high levels of implied volatility, reflecting the multiple contraction of high-beta stocks of companies with soaring sales growth but no earnings or P/E ratios yet to speak of.
Capital Spending In IT To Increase
Capital spending – now more than 8% north of pre pandemic levels -- will increase spending in IT is to buttress the expanding global remote work force, to deliver robust performance that can compete with corporate campus infrastructure. This is shaping up to be a permanent shift in corporate culture as there is the ongoing risk of future viruses that are now again showing up in Europe.
Other beneficiaries include makers of industrial robots and 3D printers. Robots eliminate the risks of physical distancing among employees, work 24/7 and don’t require costly benefits packages. And 37% of U.S. assembly plants plan to invest in 3D printers, a record high.
All IT spending segments are forecast to return to growth in 2021. Enterprise software is expected to have the strongest rebound (8.8%) as remote work environments expand and improve. The devices segment will see the second highest growth in 2021 (8%) and is projected to reach $705.4 billion in IT spending.
It’s been a tough – and for some stocks, brutal – past six weeks in the tech sector. But after every storm, there’s a rainbow. And once the market embraces that, the greatest amount of future business spending within the S&P 500 is going to be IT – by a wide margin – so buying the best blue-chip tech stocks on this second Nasdaq pullback might prove to be a very savvy strategy heading into April.