Don’t fight the feds, vaccines, or fiscal authorities.

The first quarter of the year started with a lot of changes in political and market leadership. During the quarter, we saw a rotation away from the large tech names that have been a dominant theme for many years to non-technology. For example, we saw Apple lose 8% of its value in the quarter, but Exxon Mobile went up 35%. In general, the energy sector was the big winner, with a 30% gain, whereas the technology sector went up only around 2%. We’ve spoken a lot about value versus growth investing, and this “rotation” is a part of that discussion. Markets are impossible to predict, so we don’t know if this rotation is sustainable, but the valuations are ripe for this leadership change.

The Federal Reserve continues to be highly accommodating, with the lowest interest rates in history. We are often asked why those rates matter. Well, consumers make up 70% of the economy in the US, so with the lower rates, people can refinance homes and have more cash flow. Also, many car dealerships are now offering 0.9% interest rate deals right now. These circumstances put money directly into consumers’ hands, and we anticipate a continuation of these policies for a while.

Covid-19 was (and still is) a shock like we haven’t seen in over a hundred years. It’s the first time in modern history that all countries worked together tirelessly to come up with a solution for humanity, and we now have vaccines that aid in the prevention of serious Covid illness. Therefore, it’s reasonable to believe that as people get vaccinated, they will start feeling more comfortable about eating out and going to theaters and other entertainment venues.

Jamie Dimon, the CEO of JP Morgan, recently said that consumers “are coiled for a rebound.” In fact, tremendous demand has probably built up, which should further rocket the economy and consumer spending.

Also, the fiscal authorities have been turning on the printing presses again. Congress signed a 1.9 trillion Covid relief bill last month, and this bill, coupled with the previous 3 trillion, is certainly greasing the economy’s wheels. We may get further stimulus as well from an infrastructure bill worth over 2 trillion.

Thus, when you put the feds, congress, and a vaccine together, they’ll continue to power the economy forward and take it out of its Covid doldrums!

The other change we saw was in the bond markets. The 10-year US Treasury note went from .93% to 1.74%. That may not seem like a lot, but it’s almost a 100% change in rates. The largest bond index, AGG, was down over 3% for the quarter. What this scenario indicates is a heating up of the economy and some inflation. However, inflation will probably be a temporary issue as the stimulus trifecta wears off later in 2022.

In some parts of the market, the kinds of excessive speculation that we’ve talked about many times are continuing. A great example is Hometown Deli in New Jersey. This deli is owned by a company called Hometown International, a publicly-traded company (ticker – HWIN) that only owns this one deli. The market capitalization (value of all the shares combined) of this company is $100,000,000 (one hundred million dollars) for a deli that has done no more than $35,000 of sales in the last two years. Granted, this is an extreme example, but it showcases some of the crazy valuations going on in parts of the market, like electric car companies, SPAC’s, and the Reddit board traders. This situation won’t end well — gambling and day trading generally don’t. Traders are ignoring fundamental investment values, which is always dangerous.

Overall, the markets in 2021 have had a great start! Be safe and healthy, and as always, the only bad question is the one you don’t ask.

Raj Chokshi