In his Daily Market Notes report to investors, while commenting on high-beta hotties, Louis Navellier wrote:
Q1 2021 hedge fund letters, conferences and more
More Fed Officials are Talking about “Tapering”
Due to the surge in inflation and other indicators of a strong recovery, more Fed officials are openly talking about “tapering,” but they are still in a minority, and the next Federal Open Market Committee (FOMC) statement (in mid-June) will be closely scrutinized for any change in the Fed’s language.
In the meantime, the 10-year Treasury bond remains remarkably well behaved, falling below 1.6% last week. There were also well-received 5-year and 7-year Treasury auctions on Wednesday and Thursday.
It is also notable that the demand for corporate bonds remains relentless as companies rush to raise capital at ultra-low historic yields to refinance existing debt, boost their cash reserves, and buy their outstanding shares back. The simple fact of the matter is that relative to bond yields, the stock market remains grossly undervalued, which is why most companies prefer to sell new debt rather than issue new stock.
The Conference Board last Tuesday announced that its May consumer confidence index slipped slightly. The “present situation” component rose to a 14-month high in May. That is a good omen that we will hopefully see higher consumer spending, but the “expectations” component plunged to 99.1 in May. That means it is imperative that the Biden Administration works hard to cheer people up, since the decline in this Expectations component was a sign of rising concerns.
Inflation In The Real Estate World
The CoreLogic Case-Shiller Home Price Index, announced last Tuesday, reported that home appreciation is now running at the fastest pace in more than 15 years. In other words, inflation is accelerating in the real estate world, a major expense for most families.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditure (PCE) index, was revised up to a 4.6% annual pace through April. The core PCE index, excluding food and energy, was revised up to a 3.1% annual pace through April. The Fed was expecting inflation to rise to a 2.4% annual pace, so I expect that the Fed will have to clarify its inflation outlook, other than to keep saying it is transitory.
The various port bottlenecks and supply shortages are expected to continue, since China recently had to close one of its major container ship ports in Shenzhen and lockdowns are now underway in Malaysia and Melbourne, Australia, reminding us that Covid-19 has not gone away. As a result, supply shortages are expected to persist for several months, fueling inflation. Fortunately, quality growth stocks represent an oasis for investors frustrated by the low bond-yield alternatives.
High-Beta Hotties Trade Off Their Extreme 2020 Highs
Most if not all of the high-beta hotties – think Tesla or ARK Fund stocks – are trading well off their extreme 2020 highs, as a lot of air has come out of their valuations. Even some vaunted FAANG stocks are stuck in the mud.
The market has clearly turned its attention to tech stocks with real earnings, solid dividend yields, stock buy-backs, and reasonable P/E ratios. It’s happening now, in 2021, with little fanfare, as worldwide IT spending is expected to jump by 8.4% this year, to exceed $4 trillion for the first time on record, as mature companies with reshaped leaner and meaner business models, sporting reasonable P/E ratios, will likely continue to excel and outperform.
The month of May has historically been flat for stocks, and this May was no exception. The S&P 500 rose just 0.47% this May. Over the last 20 years, June has been worse.
This chart backs up the old chestnut, “Sell in May and Go Away.” What if we use the S&P 500? How would “Sell in May” fare during the last five years?
| Year | June Gains | April 30 to October 31 Gains |
| 2016 | +0.09% | +2.95% |
| 2017 | +0.48% | +8.01% |
| 2018 | +0.18% | +2.41% |
| 2019 | +6.89% | +3.11% |
| 2020 | +1.84% | +24.35% |
| Average Gain | +1.90% | +8.17% |
| Data source: Yahoo Finance, using the S&P 500 | ||
Conclusion
Trading by calendar rules – or any other form of market timing – tends to be a loser’s game.
