Written by Michael Forrester – Founder, President, and CIO of High Note Wealth
The second week of May is wrapped up with a nice bow and we are ready to dive in. If this week were a dramatic television series, it would be the first couple of episodes of the second season. The first season cliffhanger ended up not getting resolved as we had hoped, but it’s still lingering out there in the distance. New characters and story arcs are being introduced which muddies the waters as we try to determine if they are here to stay or simply a temporary distraction from the plot. Thus, leading to viewers to wonder, “are they writing this as they go?” or ponder the rhetorical conclusion, “they weren’t planning on a second season, were they?”
While the pandemic plot line is still fully intact, a lot of news was introduced this week and it is difficult to determine if it will stick around. All are potentially important new “characters,” yet they could get written out in another episode or two, so we will wait and watch how it plays out. The short list of items grabbing our attention this week are:
- The House introduced a $3 Tra-tra-tra-trillion-dollar additional relief package (that surely will be revised).
- President Trump and President Xi seem to have crossed each other off their holiday card lists as a new trade war ensues.
- Former Health & Human Services scientist turned whistleblower, Dr. Rick Bright, warned that even if a vaccine were to be developed, provisions have not been made to produce it in the quantities needed.
- Richard Burr, U.S. Senator that chaired the Intelligence Committee no less, got his cell phone seized by the FBI on allegations of insider trading.
In terms of the stock and bond markets, it was a bit of a mixed week. On Tuesday, there started to be some selling of stocks that felt like the beginning of a move down, but then Thursday was positive and Friday started the day red and ended green which is a good sign. The bond market was very flat with interest rates almost the same throughout the week. It seems many market participants were watching the same series we were.
Financial Media Idiom of the Week: “Sector Leadership”
Lots of talk of leadership this week and it wasn’t about historical titans such as Winston Churchill, General Patton, or Colonel Sanders. This type of leadership is specific to which parts of the stock market are performing and which are not. We are not going to go deep into the weeds here, but let’s assume our tee shot landed in the fairway only to trickle through and rest in the first cut of the rough – we aren’t lost ball hunting, we have a shot but we will take a second look.
Taking the 500 companies of the S&P 500 stock index, we can break them down into categories which we call “sectors” based on the nature of their businesses. The sectors are fairly self-explanatory with software companies being in “technology” and banks being in “financials”, for example. Each sector has its own winners and losers within, but if we look at the sectors as a whole, it allows us to track the performance of the market with a little more depth by watching what each of these little mini-markets do in comparison to one another. What the media then likes to discuss and debate is what sectors are leading (i.e., sector leadership). Throughout the year and the pandemic, the two sectors that have performed well are technology and health care. You’ve read that many times right here in these letters. What gets thrown around as conventional wisdom is that for a solid recovery to occur, we must have sector leadership from the financials. The idea being that the economy goes as the banks go. It makes sense as it has at times in the past, but things change. The reason this became such a talking point this week is that the banks continued to struggle while other sectors remained strong leading some to assume that we must be heading back down. What we point out to the contrary is that this isn’t 2008-09 where the financial sector was a disaster. In those days, the market certainly needed the banks solidified as step one. Also, a lot has changed as this idea of sectors has continued to get blurry. Things like PayPal, Venmo, Cash App, cryptocurrency and others are not in the traditional financial sector, yet they all do some function of a bank. How much of the market they make is up for debate. However, it feels simplistic to think that we will get sector leadership from the financials riding in on their white horse to signal the all-clear. As great as it sounds, it’s a little more nuanced than that.
<<< HIGH NOTE (not so) QUICK HITS >>>
Everybody Loves a Scatter Chart
- Nothing like a good scatter chart to get the blood flowing. KPMG put this together which breaks down the different industries in the US and how they are faring. Unsurprisingly, those with the greatest amount of debt are in the most trouble. Interest rates are low which helps, but for those who are highly-levered this will be a big hole to climb out of.
RetailmeNOT
- If you ever find yourself to be the subject of a chart and it is titled, “total nosedive,” you aren’t off to a good start. Retail sales for April were reported and the number was a blue light special. April this year compared to last year was down 16.4%. It shouldn’t be surprising being that so many things were shut, but consensus estimates were anticipating better results. Is online shopping a big deal? Yes. Is it growing at an incredible rate? Yes. While that is true, what is also true is that a lot of business is done in brick and mortar stores and this is a clear example.
- If that chart wasn’t dramatic enough, check this one out. This is clothing sales only by year. Year-to-date, clothing sales are down 90% from peak. We are looking at you, pajamas.
Que Up Puff Daddy – “I’m Coming Home”
- A question that’s being asked throughout the business community is about moving supply chains home (or simply out of China). The idea being that the pandemic has shown the vulnerability of American companies that solely rely on China for all aspects of production. Whether it’s medical supplies or computer parts, if China shuts down, the American business shuts down. Economic advisor to the President, Larry Kudlow, has even indicated that they might incentivize companies or “pay the moving freight”. While not technically “coming home,” Taiwan Semiconductor sees the trend and is acting. They announced they are building a factory in Arizona to supply American business. We will see more of this.
- https://www.wsj.com/articles/taiwan-company-to-build-advanced-semiconductor-factory-in-arizona-11589481659
FaceGIF
- A picture is worth a thousand words, but a GIF is worth $400M. Or to be fair ALL of the GIFs are worth $400M. Facebook announced on Friday that they had purchased Giphy, the GIF-sharing company that we see plastered all over the internet. Initial thought is that it will be integrated into Instagram which they also own. Facebook continues to be active during the downturn which we like to see as owners of the stock. You can read more here.
Charts Can Be Fun Too
- This chart needs no introduction.
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