Tuesday Talk: Consumption Rising
Vaccination is getting people off the couch, the stimulus bill is giving people dollars to spend. Leisure destinations should benefit. Is pandemic stay at home behavior over? The get up and go mood seemed to be evident in the stock market yesterday with the Dow (DIA) gaining nearly 1% and the Nasdaq (QQQ) losing 2.4%. Disney (DIS) was up 6.27%, while Nvidia (NVDA) was down 6.97%, Southwest Airlines (LUV) was up 6.38% and Apple (AAPL) was down 4.17%. Currently S&P futures are trading at 3,854, up 35 points, Dow futures are trading at 31,889, up 113 points and Nasdaq futures are trading at 12,545, up 248 points.
TalkMarkets contributor Mish Shedlock takes a look at the diversion in the indices in his article Technology Stocks Enter Fourth Week Of Declines As The Dow Hits A New Record. Shedlock offers the following for our consideration:
"The Nasdaq dropped 310.99 points, or 2.4%, to 12609.16, extending the declines from its Feb. 12 record to more than 10%. Rising bond yields dent the allure of growth stocks like those of big tech companies."
"The Dow Jones Industrial Average surged 306.14 points, or 1%, to 31802.44 following progress on a new fiscal stimulus bill that brightened economic prospects. "
Shedlock says he does not believe the divergence illustrated in the above chart will continue. He believes the Dow will join the Nasdaq in correction mode in the near future.
"This divergence won't last. Either the S&P and Dow join the correction party or hiding out in the Dow will fail. My guess is hiding out in the Dow will fail."
He also, believes that the recent rise in Treasury yields is coming to an end, at least for now.
Hmm and hmm.
David Merkel in a TalkMarkets Editor's Choice column Time For Another Convexity Crisis? takes a look at what is going up and from what he sees from his perch it's not the stock market.
Here is what he sees:
"At present, long Treasury rates are rising. I think it is because the economy is booming, and we don’t need more “stimulus.”...what else is rising now? Mortgage rates, and the ICE MOVE index (interest rate volatility)."
"As it stands now, the equity market as a whole is priced to return less than a 10-year Treasury Note at present over the next ten years. When valuations are this high, it doesn’t take much to create a panic. We are in the 98th percentile of valuations now, akin to the dot-com bubble."
" If you think that this is a reasonable hypothesis, the rational thing to do is raise cash. Sell stocks, reduce bond duration, give up income to preserve capital....I think this is an era where there is not much additional upside under any circumstances for a portfolio that is like the S&P 500, much less large growth stocks. But make up your own mind, and balance return versus risk."
Economist Scott Sumner in his article Will We Have High Inflation In The 2020s? says if there is strong growth the answer is probably yes, but for now he is willing to "trust" the Fed to keep their word.
More pessimistic Kelsey Williams, in a TalkMarkets exclusive Powell And Yellen - Team Fed, seems hardly inclined to put his faith in the Fed.
"Chairman Powell said that as the economy improves, it "could create some upward pressure on prices" but that the effects would likely be transitory. Treasury Secretary Yellen appears to feel similarly to Fed Chairman Powell...When she was asked about volatility in the financial markets over the past two weeks, she said that rising interest rates are a sign that prospects for the economy are starting to improve. That is a possibility. It is also a possibility that interest rates could move higher and that the economy wouldn't improve; and that the effects of inflation get a lot worse...In our real-life Fantasy Financial League, there are two quarterbacks - Powell and Yellen. As much as they are striving to keep the team out of the basement, their efforts seem futile...it is late in the fourth quarter and we are way behind. And there is no air in the ball."
Late last Spring as people began to "shelter in place" in earnest, my local Coca-Cola (KO) bottler hand delivered free bottles of Coke classic and Zero to my doorstep. Evidently, consumption was down. Well as couches start to empty-out Jayson Derrick in RBC Upgrades Coca-Cola's Stock, Says 'Things Have Changed' makes note that RBC analysts believe that consumption of "The Real Thing" will once again be on the rise. As usual, caveat emptor.
"The Coca-Cola Analyst: Nik Modi upgraded Coca-Cola's stock from Sector Perform to Outperform with a price target lifted from $55 to $60.
The Coca-Cola Thesis: RBC downgraded Coca-Cola's stock in January amid a surge in COVID-19 cases. But weeks later, Modi says, the health situation took a turn for the better and the pandemic "seems to have stabilized in the US" and other international markets.
Modi said expectations for a "material increase" in consumer mobility amid better weather in the coming months represent a catalyst for Coca-Cola's stock. Other factors that make the case for a return back to some form of normalcy include stay-at-home fatigue, a "fairly efficient" vaccine distribution, reduction in vaccine hesitancy, and better knowledge on how to protect against the virus.
Meanwhile, Coca-Cola's stock might look expensive relative to its mega-cap peers, but shares are trading 21.8 times earnings and this is below the stock's historical average and an 11% discount versus pre-COVID levels."
The market is off to a good start for the week. Here are a few Coca-Cola slogans to keep the vibe going:
"Look up, America" (1975), "It's the real thing" (1969) and post-pandemic "Life tastes good" (2001).
Have a good week.
Well wrtten and quite interesting. Thanks!
Thank you 👍🏽