Bob’s Journal for 4/8/21

More Signs Growth is Surging

Data and anecdotes continue to indicate that economic growth is stronger than most investors and politicians recognize.

The surprising strength was apparent from a recent interview on CNBC with Tilman Fertitta, chairman and CEO of Landry’s. The company owns restaurants, hotels, and casinos in 40 states, including Morton’s, Landry’s and Joe’s Crab Shack.

Fertitta said his company did so well in March that he was caught off guard. He said the strength was apparent in all the states in which the company does business, including California and New York.

There is much pent-up demand and people are taking advantage of reduced restrictions on businesses and activities.

The question at this point is whether the increased activity will be sustained. Some argue the surge is a temporary result of the latest round of stimulus.

As I’ve explained before, I believe the increased activity is widespread and will be sustained as vaccine administration continues to increase and people resume more activities that they avoided the last 13 months.

Where Are the Bubbles?

Stock indexes have been driving relentlessly higher over the last 12 months, leading many investors to wonder if the markets are in a bubble.

While index levels and valuation metrics are at or near historic highs, many stocks lagged in the rally. The indexes were driven higher primarily by the strong returns of a relatively small number of growth stocks.

If you’re looking for a real bubble in the markets, look at the young technology companies, especially those that went public for the first time in the last year. Most of those companies have had no profits and sell at price-to-sales ratios that match or exceed those of the technology stock bubble of the late 1990s.

So far, there has been significant demand for the stocks of such companies. The stocks are selling at such high prices because the demand far exceeds the supply. Rising prices only increase the demand.

The big test for this segment of the market will come during the next couple of years.

Private equity firms invested a lot of money in many similar companies in the last few years. These investors want to bring these companies public and cash in on the demand for the stocks.

The number of similar companies waiting to go public is unknown, but I have seen estimates exceeding 200 of them with a potential market value of $1 trillion in aggregate.

That volume of companies coming public with little or no history of consistent profitability will be a real test for the markets. We’ll have to see if the demand continues.

The real issue is whether a series of disappointments in this market will drive investor dollars to more traditional stocks or will it cause investors to sour on stocks in general and leave the markets?

Big Swings in Big Stocks

The steady rise of the stock indexes masks the extreme volatility in a number of individual stocks.

The price swings in the individual stocks have been both up and down, sometimes in the same stock.

A few of the stocks, such as GameStop (GME) and ViacomCBS, made headlines due to extreme trading volatility. The stories behind the volatility also are well known.

But Bank of America issued a research paper with some details about the 50 largest stock swings so far this year among S&P 500 companies. By restricting the analysis to S&P 500 companies, the bank eliminates most of the small, thinly traded companies from the study.

In only five days in January, Apple (AAPL) gained $265 million in market value. As a benchmark, that’s more than the total market value of Coca-Cola.

In March, Nvidia (NVDA) and PayPal (PYPL) each declined by about $56 million in only a few days.

These are only a few examples. While the volatility measures of the broader market indexes have been declining, volatility among individual stocks and sectors is quite high.

Some of this volatility is due to increased activity among retail investors, especially retail investors using momentum strategies and leverage.

The volatility also is due to a steady decline in the number of stocks available on the public exchanges, because many companies have gone private in recent years. More dollars are chasing fewer stocks.

The volatility has important lessons for individual investors. Those who own diversified portfolios and index funds have seen steady appreciation.

But there is a wide range of results for those with concentrated portfolios. Those investors are likely to have extremely positive or extremely negative returns, depending on the stocks they own. They also were likely to earn most of those profits or incur most of those losses in just a few days.

The Data

New unemployment claims increased to 744,000 in the latest week from 728,000 the previous week, which was revised higher from last week’s initial announcement. Analysts were expecting a decline.

Continuing claims declined by 16,000 to 3.73 million. That’s the lowest level since March 21, 2020.

The total number of people receiving some kind of unemployment benefits declined a little to 18.2 million.

Consumers used their credit cards in February. Total consumer credit increased by 7.9% from January to February.

But revolving credit, which is mostly credit card use, increased by 10.1%. Nonrevolving credit, which is mostly auto and student loans, increased 7.3%.

Factory Orders declined 0.8% in February, following a 2.7% increase in January. That’s the first decline in 10 months.

The services sector grew sharply in March, according to the ISM Services Index. The index increased to 63.7, compared to 55.3 in February.

That’s the all-time high for the index, which began in 2008.

The PMI Composite Index for March was strong but not as robust. The Composite Index increased to 59.7 from 59.5 in February. The Services Index increased to 60.4 from 59.8.

Last Friday’s Employment Situation reports were a major positive surprise for the markets.

The reports indicated that 916,000 new nonfarm payroll jobs were created in March, the highest number since August 2020 when 1.58 million jobs were created.

In addition, revisions to the January and February data added 156,000 new jobs in those months.

The strongest job gains were in the leisure and hospitality industries, but construction also added 110,000 new jobs.

The labor market improved a little in February, according to the JOLTS (Job Openings and Labor Turnover Survey) report. The JOLTS report is more detailed than the Employment Situation reports but is a month behind.

The JOLTS report found that in February there was a small increase in job openings. The sectors with the most openings were health care and accommodations and food services.

The number of new hires also increased, with the bulk of those in accommodations and food services. The number of separations didn’t change much.

The Markets

The S&P 500 rose 2.59% for the week ended with Wednesday’s close. The Dow Jones Industrial Average gained 1.27%. The Russell 2000 declined 0.11%. The All-Country World Index (excluding U.S. stocks) added 1.49%. Emerging market equities increased 0.43%.

Long-term treasuries rose 1.19% for the week. Investment-grade bonds increased 0.60%. Treasury Inflation-Protected Securities (TIPS) added 0.12%. High-yield bonds gained 0.39%.

In the currency arena, the U.S. dollar declined 0.88%.

Energy-based commodities increased 0.36%. Broader-based commodities rose 0.30%. Gold rose 1.78%.

Bob’s News & Updates

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