To my clients:
It was a flattish/mixed week for North American stock markets with the Canadian TSX finishing up 0.03% (note the extra zero); the U.S. Dow Jones Index down 0.5%; and the U.S. S&P 500 up 0.02% (again, note the extra zero).
Another shortish update this week…
In addition to stellar U.S. economic data of late, many systemically important companies have also been reporting exceedingly strong quarterly earnings. Notably, three of these are held by clients: Alphabet (Google); Apple; and Amazon. In layman terms, all three companies shot the lights out, handily beating analyst estimates for both revenue and earnings growth, as well as generally guiding to higher expectations for subsequent quarters. Usually such strength by these particular companies would lead to strong overall market results as well. But as revealed by my customary opening paragraph on index returns, the market response was tepid. What gives?
I don’t want to dig in the weeds too much on this topic, so I’ll keep my thoughts very high level and hit upon what I believe are the two biggest factors:
1) Market valuations heading into these results were high relative to history. It can be argued that the combination of low interest rates, large amounts of fiscal stimulus, and strong economic growth justify these high valuations. I largely agree with this perspective. But lurking below the surface is another, more esoteric factor: the impact upon earnings from the accounting treatment of intangible vs tangible assets and how this differing treatment has been putting upward and growing pressure on valuation metrics of companies in the modern world vis-à-vis comparably large, capital intensive, manufacturing–type companies of decades past. Were the treatment more equitable, valuation concerns would be substantially lessened. Regardless, after a strong run to the upside, markets were likely due for a pause. The next leg up will likely coincide with back-half 2021 growth coming into greater focus.
2) President Biden has unveiled perhaps the most progressive agenda of any U.S. president during my lifetime. Watching him address Congress this week, I was staggered by the scope of his vision. Without getting into the details, I’d just observe that: a) much (though certainly not all) of his vision is likely to be highly stimulative of the U.S. economy; and b) taxes will be going up because his vision will be expensive. I believe some of this week’s restrained market action owes to the uncertainty engendered by Biden’s vision. I’d imagine this to be a recurring theme over the next 12 to 18 months as Biden looks to enact his vision while Democrats retain control of Congress.
That’s it for this week. All the best and keep safe,
Nick Scholte, CIM, FCSI
Vice-President & Portfolio Manager
Scholte Wealth Management
RBC Dominion Securities Inc. │ Tel: 604.257.7569 │ Fax: 604.235.9950
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