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BMT Monday Market Insights – May 24, 2021

Top Weekly Themes

  1. Mask on Mask Off. The U.S. Center for Disease Control (CDC) announced on May 16, that fully vaccinated individuals can resume activities without wearing a mask or practicing social distancing. This policy shift will fundamentally change how Americans have been interacting with each other since initial restrictions were introduced in March 2020. As more become fully vaccinated and restrictions are eased, the pent-up demand for travel and leisure may come to a head as many consumers yearn for their first vacation in 18 months. Using the Walt Disney Company as an example, the pandemic significantly hampered the Parks & Resorts segment’s ability to operate as most locations were underutilized or closed altogether. Recently, however, management stated that the Shanghai location is operating at pre-COVID capacity and that Disney World Orlando is seeing 2019 levels of “intent to visit,” which bodes well for the remainder of 2021. While this is a singular example, we believe it shows how the reopening trade will manifest in practice.
  2. Back to School. The consumer retail sector has shown continued strength as evidenced by recent earnings releases from companies such as Target, TJ Maxx, and Walmart. All reported huge sales growth within the most recent quarter and stated that consumers are starting to return to physical stores as more COVID-related restrictions are relaxed. One of the main sources of this strength was the increasing sale of apparel products. Those within the industry believe this to be an initial push of consumers re-stocking their closets with non-athleisure clothing such as jeans and shirts. This may be a continuing trend as the first true post-COVID-lockdown Back to School season seems likely to drive further growth. One of the holdings within our internal strategies, American Eagle Outfitters, embodies this trend as the push to re-stock on “normal clothing” for teens and tweens has already begun. The executive team called out denim and dressier tops as exceptional outperformers within the previous quarter, and they expect these trends to continue. Another tailwind for this space is the child tax credit that is part of the American Rescue Plan and will go into effect on July 15, 2021. Parents of low to middle-income families will receive monthly advance payments of $250 to $300 through December. This will likely allow for larger amounts of spending on children and the supplies that are needed when school resumes in the fall.
  3. The Predictable Performance of SPACs. In our August 17, 2020, Monday Market Insights, we provided an explanation of SPACs and the surrounding industry. We also included our belief that the SPAC market may have been exhibiting signs of unhealthy investor behavior, particularly surrounding optimistic valuations, and the volume of listings. The asset vehicle is inherently speculative and can easily be influenced by outside macroeconomic developments. A large portion of these listings merged with high-flying technology startups such as QuantumScape and Virgin Galactic, which are down over 45% and 20% YTD, respectively. A driving force behind the drop is likely the Federal Reserve (Fed) and the possible reversal of easy monetary policy. This action would make currently unprofitable growth-at-any-price companies a much less attractive investment. Additionally, the Securities and Exchange Commission made comments in April about the possibility of additional regulation surrounding the SPAC industry and the use of warrants. If the implied changes to accounting procedures are implemented, many SPACs would likely have to restate financial results, further cooling the already chilly market. As we stated before, there is nothing inherently wrong with SPACs; however, they are still a speculative investment in many cases and should be treated as such.

Returns Table

EquitiesWeek(%)YTD(%)1-Year(%)3-Year(%)5-Year(%)Div Yield(%)
S&P 500(0.4)13.237.817.1017.541.33
Russell 1000 Value(2.1)16.039.211.4812.021.86
Russell 1000 Growth1.49.940.022.8323.230.71
Russell 2000(1.0)16.362.112.2316.390.83
MSCI EAFE(0.6)11.233.38.7211.412.3*
MSCI EM (Emerging Markets)(1.1)6.540.39.9214.091.82*
Fixed IncomeWeekYTD1-Year3-Year5-YearDiv Yield
Bloomberg Barclays US Aggregate(0.3)(1.9)(0.3)5.353.111.53
Bloomberg Barclays US High Yield – Corporate0.03.012.57.037.513.94
Bloomberg Barclays Municipal Bond(0.3)1.14.55.213.360.99
Bloomberg Barclays Global Aggregate x US (Country)(1.4)(3.7)4.73.712.090.93
CommoditiesWeekYTD1-Year3-Year5-YearCurrent Level
Crude Oil WTI (NYM $/bbl) Continuous1.146.487.13.08.271.0
Natural Gas (NYM $/mmbtu) Continuous3.328.898.62.54.43.3
Gold NYMEX Near Term ($/ozt)(6.4)(6.3)2.611.66.51,773.8
Copper Cash Official LME ($/mt)(3.9)21.864.49.715.89,427.5
Currencies1 Week AgoYTD1-Year Ago3-Years Ago5-Years AgoCurrent Level
U.S. Dollar per Euro1.221.221.121.161.121.19
Japanese Yen per U.S. Dollar109.61103.25107.25110.50104.29110.23
U.S. Dollar per British Pounds1.411.371.251.331.431.40
As of June 17, 2021 (close). Three-year and 5-year returns are annualized. *Dividend Yield For MSCI EAFE and MSCI EM are from 5/31/2021.

Chart of the Week: Higher Inflation Even Beyond Our Borders

Chart of the Week
Sources: BMT, FactSet, Inc.

Takeaways:

  • Throughout the recent earnings season, there were two consistent messages: results were better than expected, and inflation is on the rise. The latter can be quantified by the rise in price indices in the U.S. and abroad as stimulus-fueled demand and COVID-driven supply chain disruptions have led to product shortages and the need for expedited –higher cost – freight.
  • Our view that these added costs are transitory has been echoed by most company management teams. The expectation is that these bottlenecks should subside as stimulus and COVID wane. However, following the release of the April FOMC minutes last week, it appears recent inflation data is causing angst among some members with discussion about “talking about talking about” a reduction in asset purchases.
  • This more hawkish than expected tone sent the 10-year Treasury yield higher last Wednesday by about 5 basis points (0.05%) to 1.69% before settling back down to 1.66%, or 2 basis points higher (0.02%) from the prior day’s close.
  • Our view continues to mirror that of the Fed: that current spikes in inflation are transitory and will eventually pass, but the slightly more hawkish meeting minutes are worth considering if inflation does not settle back down.

Commentary: Lightning Strikes

Last week the Ford Motor Company unveiled the F-150 Lightning pickup truck, the company’s first all-electric truck. The announcement is significant because the Ford F-Series has been the best-selling vehicle in the U.S. for nearly 40 consecutive years. Combined with sales of its competitive counterparts from Dodge (RAM) and General Motors (Chevrolet), these trucks account for 13% of the 14.5 million vehicles sold in the U.S. each year. Thus, consumer interest in the F-150 Lightning could be a canary in the coal mine for how quickly mainstream U.S. consumers adopt electric vehicles (EVs). If a product like the Lightning sells better than anticipated, it would likely accelerate the development of EVs and the necessary charging infrastructure. Greater EV proliferation should boost sales for several of our equity holdings within our internal strategies, namely Aptiv plc, Analog Devices, and Standex International. All three of these companies are poised to benefit from EVs and their infrastructure through more significant and specialized electrical content.

Vehicle ModelU.S. Units% of New US. Light Vehicles Sold
Ford F-Series787,4225.4%
Chevrolet Silverado586,6754.0%
Ram Pickup563,6763.9%
Toyota RAV4430,3872.9%
Honda CR-V333,5022.3%
*2020 Sales Data Sources: Motor Intelligence, Forbes, BMT

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