Market Outlook Markets Notes from the Kitchen

Watermelon Sugar High

  • May 07, 2021
  • Mark Clubb

(Cover Photo Source: Joanna Kosinska)

I am afraid I am not the biggest Harry Styles fan, but I do like this song;

Harry Styles - Watermelon Sugar

The U.S. stock market in particular has been behaving a bit like a child on a “sugar high”. Too many Smarties (do they still exist?).

Last week the “sugar rush” wore off a little and the child threw tantrums on Thursday and Friday.

The stock market’s “sugar” has been the “Goldilocks” economic and earnings environment.

There is much to support this environment of sweet energy. Not least the proposed $2.25 trillion Infrastructure package and the $1.8 trillion Families Plan.

  1. The jobs market in the U.S. is stronger than most believe. The Fed’s recent Beige Book highlighted employers are reporting shortages of workers and many are now desperate to hire. I am thinking restaurants, drivers, child care, services etc.

  2. Corporate Bonds. The spread between more speculative high yield corporate bonds and the 10-year U.S. Treasury bond has fallen to multi-year lows. This informs us that, currently, investors are not demanding much compensation for risk taken. Yes, investors are starved of yield. But the signs suggest many may be more confident in their outlook for the economy and the prospect of further signs of recovery.

  3. Startups. The pandemic devastated many businesses. However, ther are signs the landscape is changing. In the U.S., applications for new businesses hit nearly 1.4 million in the first quarter of this year, the second-highest quarterly total in over 15 years. It would appear that entrepreneurs have been encouraged by what they see.. That’s a clear sign to us that the U.S. economy is pushing ahead. Growth opportunities are manifesting following 2020’s Covid-induced global recession.

Markets have enjoyed a perfect cocktail of strong quarterly sales and earnings figures and a V-shaped economic recovery in many economies, all underpinned by ultra-low nterest rates. , the effect has been to steer swathes of investors to seek out a new “watermelon sugar high”. This has extended tospecific growth opportunities, including a potential powder keg scenario forming within the SPACS and “blue sky” technology y sphere.

Against this backdrop now is the time when we feel the need to be far more selective in where we invest. I see a lot of froth in many areas and investors seem to be abandoning strong long-term companies to chase after the new “hot” thing. This adds to the volatility, the petulant “sugar rush” child.

We have seen bouts of this “bad behavior” over the past few trading sessions.

Apple encountered high volume profit taking despite reporting sales growth of 54% in the last quarter. It increased its dividend by 7% and authorized a share buyback of $90 billion.

Expect more outcomes and events like this, namely high quality company shares retreating on good results and positive outlooks. Not enough “sugar” for the child. But in our view, these setbacks will create fantastic buying opportunities.

Roughly 30% of S&P companies have reported first quarter results so far. Average sales or revenues have been on average 3% higher than estimated. Average earnings surprises have been circa 22%. But these earnings surprises are not mean reversion. Unlike the final quarter of 2020 where we had a rising tide and all boats benefitted, the number of winners is narrowing.

We are no longer in an all boats (shares) rise environment. Fundamentally strong companies are distancing themselves from weaker companies. At TEAM, . we expect this trend to continue.

Lastly, I want to cover to topics of “profits”. People taking profits to buy more “sugar”.

How many times in life have we all said to ourselves, “If only I hadn’t sold…The Big Money is not made from selling. It is made from buying the right asset and holding on. Typically, investors don’t, won’t or are unable to hold on for long enough.

You don’t get rich by taking profits. You get rich by owning valuable things.

Here are two rules:

  1. Buy assets that appreciate in value.
  2. Don’t sell them.

You may think the hard part is picking the asset. It’s not. That’s about common sense and sticking with what you know and understand. The hard part is the psychological pressure of constantly fighting instant gratification; the “sugar rush”.

Historically, almost all markets go up. Go back 10, 20, 30 years ago, and look at some prices. Stocks? Up.Property? Up. Commodities? Up. The further back in time, the higher the chance that prices went up. Flipping heck, old Nike original 25-year-old trainers can be worth $10,000.

Look at a 100-year stock market chart, a 50-year property price index chart, or a 30-year gold market chart, the numbers always go up.

The cynic in me thinks this is because the world and it’s Central Banks are on a “sugar rush” too. It’s called printing money. Certainly, for the last 50 years, this has been the case. Money gets printed, more money and that means all the numbers go up. Not immediately but ultimately, this new money finds its way into assets, like bonds, shares and property via mortgages and loans.

To be less cynical, the numbers go up because the world keeps growing over the long term. 1961 to 2019 global GDP growth average was 2.36% (Macrotrends).

My very simplistic view on this is, that this trend is partly due to population growth, currently averaging 1.1% or 83 million per year (more consumers), partly due to technology leading to greater economic output per population (to feed consumers’ desires) and partly due to wealth creation leading to more consumers. GDP is productivity times the number of working participants of populations.

Demographics is changing all the time. Birth rates change, life expectancy changes. For the last 40 to 50 years the global economy has benefited from the “baby boomers”. This cohort swelled the number of productive workers and consequently the number of consumers.

Today, the number of these “Boomers” working or producing economic output is falling as they retire at an increasing number. I am a believer in technology because I am a believer in our human capacity to invent and innovate. Technological progress is on an accelerating trajectory.

As a result of the “boomers” generation, consumption and services became the dominant parts of the global economy, and both of these aren’t as responsive to productivity growth as manufacturing.

When we look back on Covid and the economic shutdown it will be a blip on a GDP chart amongst others. So, it is reasonable to assume we will go back to the economic trajectory we were on before, with the difference being the unprecedented levels of debt. The recovery year of 2021 will be a footnote. For Europe that recovery is yet to begin, and will extend into 2022, mainly because Europe is lagging sharply on the vaccination rollout.

Looking forward to the 2020s, I think matching that 2.36% growth will be difficult to achieve. I suspect 1.5% to 2% growth will probably be nearer the outcome, because technology will be slowly replacing the service jobs and other low-income jobs.

But it is still growth.

Great investors make money by letting time pass. Doing nothing is the most valuable thing they do, and it’s the right thing to do most of the time.

Why is it so hard to sit on our hands? Why can’t we let the market take care of it? Two reasons: Greed and fear.

Greed: you buy something you believe in but then sell it too early because you think you’re smarter than the market or suffer from temporary short-sightedness.

Fear: you buy something you don’t believe in because you’re afraid you’ll miss out on the gains other people make.

Lastly, consider this.

When you buy shares in Amazon, Jeff Bezos is working for you. He is literally working for you. The same with all and any of the managements of companies whose shares you own.

Even Mark Clubb. TEAM Plc shareholders are my employers. I work for the shareholders.

So, if Jeff, (not quite got to the point of talking to him yet) or I, or Warren “B”, etc, succeed at our jobs so will the shares.

What we all always need is more money, more firepower to buy more assets we can hold forever.

TEAM Asset Management is a trading name of Theta Enhanced Asset Management Limited which is regulated by the Jersey Financial Services Commission.