Top Weekly Themes
- Time to Fly? The airline industry has been in the crosshairs of COVID-19. Data from TSA measuring daily traveler throughput shows that air travel is still about 60% below 2019 levels. With about 1 million vaccines now being administered per day here in the U.S., we wonder how quickly (if ever) airlines will return to pre-virus levels of activity. Delta recently conducted a corporate survey to gauge the recovery path of business travel, a critical component of revenue and margin support. We would interpret the results as promising, yet still very uncertain. 40% of Delta’s large corporate customers believe they will be fully back to 2019 air travel levels by 2022, with an additional 11% by 2023. Only 7% said they would never return to 2019 levels. The major question mark is in the remaining 42%, who said they need more time to determine future steady-state travel activity. Most airline stocks are up about 100% since the March 2020 lows, so some of this anticipated recovery is reflected in current prices. When combining the additional debt burden added during the pandemic, and the uncertainly that still exists regarding future levels of air travel, we continue to believe there are better opportunities elsewhere.
- Loan Growth is Key for Banks. We continue to watch loan growth very closely in assessing the future of bank earnings. Higher interest rates at the longer end of the yield curve are certainly helpful, if only for the perception of higher net interest margins and better profitability. A steeper curve, regardless of fundamental impact, may be a much-needed catalyst for bank valuations to increase from currently depressed levels. Ultimately, for a steeper yield curve to drive better earnings, loan growth is needed. Banks do face some near-term challenges related to this, with corporate cash being at all-time highs.
- Tech in the Tax Crosshairs. Although the Democratic Party’s narrow majorities in the House and Senate mean a watered-down version of Biden’s tax plan is far more likely, we believe the tech sector is most vulnerable to an increase in corporate taxes. Just prior to the pandemic, the median technology and interactive media company was paying an effective corporate tax rate of 13%. This rate is 5% lower than the median for the rest of the market. With consideration of the historically high valuation multiples many of these companies currently carry, we believe their stock prices may be most vulnerable to an increase in corporate taxes.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | 1.5 | 2.7 | 18.2 | 45.3 | 127.7 | 1.47 |
| Russell 1000 Value | (0.6) | 3.1 | 5.0 | 18.4 | 81.1 | 2.15 |
| Russell 1000 Growth | 3.4 | 2.7 | 35.8 | 80.0 | 190.9 | 0.72 |
| Russell 2000 | (0.6) | 8.5 | 28.7 | 39.6 | 130.1 | 1.08 |
| MSCI EAFE | 0.0 | 2.9 | 10.7 | 12.9 | 70.7 | 2.36* |
| MSCI EM (Emerging Markets) | 2.6 | 8.9 | 27.8 | 23.8 | 133.6 | 1.97* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Div Yield |
| Bloomberg Barclays US Aggregate | 0.1 | (0.8) | 5.8 | 17.1 | 22.2 | 1.18 |
| Bloomberg Barclays US High Yield – Corporate | 0.3 | 0.6 | 7.1 | 19.9 | 57.7 | 4.10 |
| Bloomberg Barclays Municipal Bond | 0.2 | 0.2 | 4.2 | 15.2 | 20.0 | 1.04 |
| Bloomberg Barclays Global Aggregate x US (Country) | (0.1) | (0.6) | 9.5 | 11.8 | 26.2 | 0.73 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | (0.8) | 9.5 | (9.0) | (16.1) | 79.9 | 53.1 |
| Natural Gas (NYM $/mmbtu) Continuous | (5.1) | (1.1) | 31.8 | (21.6) | 16.8 | 2.5 |
| Gold NYMEX Near Term ($/ozt) | 0.8 | (1.5) | 19.8 | 40.0 | 69.7 | 1,865.3 |
| Copper Cash Official LME ($/mt) | 0.6 | 4.0 | 30.7 | 13.7 | 84.0 | 8,051.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.21 | 1.22 | 1.11 | 1.22 | 1.08 | 1.22 |
| Japanese Yen per U.S. Dollar | 103.83 | 103.25 | 109.91 | 110.64 | 117.31 | 103.57 |
| U.S. Dollar per British Pounds | 1.37 | 1.37 | 1.31 | 1.38 | 1.41 | 1.37 |
Chart of the Week: Investment Flows Out of Tech are Looking Extreme
QQQ Outflows have been flushed… different from last summer
Takeaways
- In the spring and summer of 2020, investors were flooding into technology stocks.
- The perceived safety, and lack of cyclicality, made the tech sector the perfect trade for a “stay at home” world with tremendous economic uncertainty.
- With the announcement of viable vaccines, market participants ran in the opposite direction. Many cyclical areas of the market (value, mid-cap, small-cap) began to outperform as the light at the end of the COVD-19 tunnel became brighter.
- We continue to believe that large-cap tech will be a laggard in 2021 as the global economy regains its footing, however, investment flows out of tech (shown via the Nasdaq 100 EFT) are now very aggressive.
- This may be an indication that positioning (at least in the near term) has become extreme. We would expect tech to perform better in the coming weeks/months as these flows normalize before the trend of cyclical leadership resumes.
Commentary: Index Construction Matters – Europe’s Lack of Tech May Finally Help
S&P 500 Return Breakdown (2019-2020)
Over the last 5 years, the information technology sector in the U.S. outperformed the broad S&P 500 by about 130%. Tech has been a juggernaut in every sense of the word, and a lack of exposure to the sector has almost guaranteed underperformance.
Unfortunately for developed international stocks, this has led to habitual underperformance. Over the same 5-year time period, European stocks trailed the S&P 500 by nearly 70%. We can attribute much of that underperformance to the significant difference in index composition between the two regions. The chart above outlines the spread between the S&P 500 and the Vanguard FTSE Europe stock indexes. Most strikingly, Europe has 19% less technology exposure.
In our view, as the pandemic subsides and global economic growth reaccelerates, the persistent disadvantage of being underweight in the technology sector may turn into an advantage. We think that throughout 2021, that market will continue to broaden as investors look for opportunities in less crowded (less expensive) areas of the stock market that are more exposed to an economic recovery.
