What’s important?
April offered investors a breather from the reflation rally. However, it appears as though the break is over. In investing jargon, many of the market leaders from the November rally underwent a “consolidation” or slowdown in their uptrend. The 10-Year Treasury yield stalled out on March 31st at 1.74% and drifted lower. Oil paused. Gold stopped going straight down.
In our view, the consolidation is over. Cyclical stocks are once again breaking out. Cyclical stocks represent companies that make or sell discretionary items and services that are in demand when the economy is doing well. They include restaurants, hotel chains, airlines, furniture, high-end clothing retailers, and automobile manufacturers. The next wave of the “Great Reopening.”
This next leg of reopening is supported by the retreat in COVID-19 infections. US COVID-19 cases are indeed “legging down” in a big way now. If one had any doubts about the impact of vaccination efforts, consider that US daily cases are now below 30,000 (29,660). The progress in US cases is so substantial that former FDA commissioner, Dr. Scott Gottlieb believes that we will see an “acceleration in the decline in US cases” in the coming weeks. This is consistent with the US following the template of Israel. In Israel once vaccination penetration reached 40%, Israel’s cases took a “leg down.” The U.S. is currently 31.4% fully vaccinated, 44.0% 1-dose received.
Additionally, on Monday Florida suspended all local COVID restrictions in the state and other states have plans to reopen in early summer.
Inflation fears are buzzing throughout the hivemind. From agricultural commodities, to metals, to energy, commodity prices are popping higher. At last week’s press conference, Jerome Powell again restated his belief that pandemic-related (i.e. transitory) supply chain issues were the proximate cause of these recent price spikes. In our view, this is the correct diagnosis...for now. As the debate between “transitory” and “structural” inflation rages on, we will keep a close eye on the relative movements.
What we are watching in the month ahead.
As we look into May, here is what we are keeping an eye on
- US Daily COVID-19 cases retreating at an accelerating pace
- US easing restrictions and set to fully reopen within 6 weeks
- India likely past worst in COVID-19 cases
- Commodities continue to rally= reflation trade
The bottom line.
There are a lot of positive things happening in the next wave of the “Great Reopening.” Despite politics, the economy continues to press forward as more industries continue to come online. We continue to monitor the positions in your portfolio with a strategy grounded in mathematics and not emotion. Have a great May!