April is coming to an end and we are entering the month of May. As we mentioned last month, the old adage of “Sell In May And Go Away” comes to mind again, especially after a powerful April which delivered an interesting Q1 reporting season. We would give some thought to the state of being before blindly following this old maxim... Remember that as Anthony Burgess once said, “Every dogma has its day.” Much is different this time around and the world is not the dystopian Britain from a Clockwork Orange! We are, however, probably observing the end of the Covid-19 pandemic in its current form; the disaster in Brazil and India notwithstanding. We have observed many of the S&P 500 companies reporting better than expected top and bottom lines; Banks, Industrials and even Retailers (!!) have surprised on the up-side. As a direct result we note good YTD returns for the main US indices, DJIA (+13%), S&P500 (+13%) and NASDAQ (+10%). We would suggest that the upswing in the general economy is likely to accelerate, so stay with the flow...
We have had some interest-rate scares driven by the long-end of the curve rising whilst the short anchor held as promised by the Federal Reserve. The 10-year Treasury Note rose in yield to 1.77% from 1.50%, only to fall right back to the departure levels. This, in the face of higher-than-expected inflation data. We agree with Jerome Powell that inflation was/is transitory and likely to come back down below the 2% target. The Amazon-effect rules all! Extending its effects into the services... We say that the CPI measure of inflation will remain muted and is unlikely to push Central Banks to tighten any time soon.
We will share with you a thought about the measure of inflation – the CPI or the PCE (another measure favoured by the Fed) are built as constant baskets of goods and services, representing the average households’ expenditure patterns. A form of an index representing the “cost-of-living”. There are two very substantial lacunes in these measures. Firstly, they are designed for the average household, i.e., Middle Class people. For those whose income and spending patterns are at a higher level than the average, you know that prices have been moving further up and faster than the indices. EasyJet and others have pressured travel costs whilst premium travel has gone up substantially. Cheap cars have become cheaper over the years whilst Ferraris, Bentleys and the likes have increased hugely. Secondly, and more importantly, which is applicable to the full spectrum of earners and spenders, we find that ‘the cost of the future’ has risen exponentially over the past few years. Let us pause to think here – the standard “basket” includes housing. The single largest component at about 25%. Allocations for foodstuff, clothing, healthcare, transportation and others are held fairly constant over time. One component of the true spend basket is missing in all such measure–our retirement costs. Effectively, the present value of our expenses in our future. As interest rates (discounting factor) decline, the amount required to put aside now for that same expected future increases. Meaning we must save and invest more today to pay for the same future. If the standard allocation was 18% of gross income to be set aside, it should be much higher now than when in a 10% yield environment. Scary that the future is becoming more expensive!
President Biden is pushing hard for big infrastructure spend by the Federal Government. Markets were rattled for all of a trading day last week, when it was “leaked” that a tax increase was under consideration to pay for the splurge. Then the realisation settled in that the taxes, when applied, will just support the cash to be added to the economy. It is a wash... A trillion this way or that way, taken from the public (or part of it) only to be redeployed into the economy. The proof? Treasuries remained steady through the tax scare. The US$ however reversed its rally to sink back. The interest rates that affect FX rates are the short end of the curve and these, we all believe are truly anchored for the next very long time.
We have observed huge volatility in Crypto currencies. The market-cap of Bitcoin is growing to match that of Gold. Both are non-productive assets whose “value” is defined by emotional drivers. We prefer to stay away from both. We stay long equities. Hedge inflation, build future values to cover savings’ shortfalls. “It is better to know some of the questions than all the answers” – James Thurber.