The past week was highlighted by a meaningful decline in volatility, as investors shifted their attention back to fundamental factors – Covid, the economic backdrop, monetary and fiscal policy, and corporate earnings. Trends on this front are either headed in the right direction, or remain very supportive. This reinforces our constructive stance on global equities this year. It is a view that appears to be shared by many investors. And while it is not necessarily troublesome, we have become mindful of the rising levels of positive investor sentiment. We believe it requires some increased vigilance going forward.
The progress made on the pandemic front of late continued this past week. North America in particular has seen notable improvement. In Canada, the 7-day average rate of new daily infections fell to just under 4000 versus the 5100 from a week ago, with declines noted across every part of the country. Meanwhile, in the U.S., the 7-day average rate of new daily cases fell to close to 120,000 versus the 150,000 from a week ago, with signs of broad-based improvement as well. Meanwhile, there continues to be positive news with respect to vaccines. Johnson & Johnson released favorable results on its vaccine candidate, while Russia’s Sputnik V vaccine also demonstrated positive efficacy data.
Thomas Lee of Fundstrat wrote earlier this week on the progress countries are making with respect to vaccination. “Israel remains one of the 3 most important places to watch (the other two are North Dakota and South Dakota, due to their reaching ~60% combined ratio). The nation has delivered at least 1 dose (of 2) to 55% of its citizens” wrote Lee. Overall, cases in Israel continue to move in the right direction and we look to this sustained downturn to become even more apparent as time progresses.
Source: World in data, Johns Hopkins and Fundstrat
The epic “short squeeze” driven by the online coordination among retail investors that impacted a handful of stocks appears to have settled down over the past week. Nevertheless, it brings to light the abundance of money around the world looking for investment returns that could lead to increased risk taking behavior over time.
Global central banks were understandably applauded for their decisive actions taken relatively early in the pandemic. Governments around the world soon followed with a string of bold measures aimed at helping businesses and households. One of the consequences of these efforts has been the creation of excess capital – cash, savings, and cheap loans. Given the current stage of the pandemic and economic cycle, central banks and governments appear unlikely to curtail their policies any time soon. In other words, this additional liquidity may likely persist for a while longer.
The growth in money supply has invariably found its way into the capital markets. The large increase in retail investing, particularly through online trading platforms, suggests as much. Moreover, various popular ratios measuring the number of investors anticipating stock increases relative to those anticipating declines sit near all-time highs, indicative of very positive investor sentiment. Global equity market valuations are above average, but not necessarily extreme, particularly when compared to bond markets. Nevertheless, there are some areas within the global stock markets that appear to be a lot more expensive than others, driven by strong investor interest through the past year.
The excess capital appears to be driving an insatiable demand for virtually any global asset that can earn some kind of return. Most striking of all has been the “IPO” market. It was incredibly strong last year and appears even stronger year-to-date. An IPO, in which private companies become public, typically involves a lengthy process whereby a company discloses information about its business operations, its historical financial statements, and attempts to gage interest from investors before issuing new shares in what’s called an initial public offering. Last year saw the rise of the “SPAC” IPO. A SPAC, or special purpose acquisition company, is a shell company with no operations. It is formed relatively quickly and is backed by investors for the sole purpose of finding a private company to acquire. While the structure is not new, nor is it necessarily problematic, the dramatic increase in new SPACs illustrates the kind of euphoria that is being generated in some parts of the market. Many of these businesses may indeed go on to be very successful public companies over time. But, we believe there will inevitably be others that struggle to fulfill the lofty expectations placed on them.
There are undoubtedly some signs of excess that have surfaced across parts of the global capital markets. Yet, we recognize that government and central bank policies are likely to remain very supportive for equity markets this year. Furthermore, we continue to look forward to an upswing in the global economic cycle that we expect will provide a powerful tailwind to corporate earnings. The key will be whether those earnings can surpass investor expectations. We have become more vigilant given some of these issues, but still maintain a constructive outlook going forward.
Please let us know how we can help as Shannon, Tom, Brett, and I all stand ready to listen and speak with you. We can also be made available to speak with any family members or friends who may need reassurance or direction at this time.
Stay warm this weekend!