Insights & Advice

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Jobs and jabs

Bank of America (BoA) has been tracking the credit card use of clients who received the stimulus payments authorized by the American Rescue Plan (ARP). For the seven days ending March 27, 2021, aggregate credit card spending was up 82 percent from a year ago.

Where is the money being spent? Everywhere. Furniture stands out, which reflects the heated home-building industry. And then electronics, clothing, airlines, home improvement, and restaurants (in that order of year-over-year growth).

The two-year percentage change tells a better story because the world came to a halt the week of March 27, 2020. For the seven days through March 20, 2021 total credit card spending was 23 percent higher than two years prior. BoA found that the people spending most of their stimulus checks, as opposed to saving them, were households earning less than $50,000.

The stimulus checks are getting spent, which is good news for economic growth and, ultimately, job creation. I am not sure if the next 10 percent move for the stock market will be up or down. Still, I can’t remember a time in which I’ve been more confident that the economy will perform well in the next six to 12 months.

Additionally, the distribution of COVID-19 vaccines is playing a significant role in growing the economy. For more than a year, I’ve been adamant that the course of the economy depends on the path of the virus. That remains true. I am confident in the rollout of COVID-19 vaccines, so I’m convinced that the economy will prosper.

As of April 6, 2021, 169 million doses of the vaccine were given in the U.S. For the week prior, an average of 3 million doses per day was administered. As of April 6, 2021, 19.2 percent of U.S. citizens were fully vaccinated. Another 9 percent of the population has contracted COVID-19. Assuming 80% of the population needs to have either been vaccinated or have contracted the coronavirus to claim herd immunity, herd immunity could be achieved by the end of this summer. It could be a blowout year for the economy. So far this quarter, U.S. Gross Domestic Product (GDP) growth is tracking 6.2 percent.

The data supports my expectations. On April 2, 2021, the jobs report revealed that employment increased by 916,000 jobs in the prior month. Many of those jobs were associated with businesses and schools reopening, which will accelerate as more people get vaccinated. The $1.9 trillion of fiscal support from the American Rescue Plan (ARP) was signed into law only a month ago, on March 11, 2021. The ARP should start having more of an effect on job creation this month and next.

Bank of America’s report tracked credit card transactions, but other purchases were made. There were 17.7 million new vehicles sold (at an annualized rate) in March 2021. There have only been a couple of handfuls of other times so many cars were sold in a month. Manufacturing is on a tear as inventory is being rebuilt to meet new and expected demand. For March 2021, The Institute of Supply Management (ISM) manufacturing survey posted its strongest reading since 1983. Both household and corporate confidence are on the upswing.

And I haven’t even mentioned the White House’s proposed $2.3 trillion American Jobs Plan infrastructure package. I will wait just a bit longer to get a better sense of what may become law (and when) before I flood you with speculation on particulars. However, it is worth reiterating that I am becoming “more attracted to stocks of companies involved with infrastructure development.”

While the vaccination rollout is undoubtedly good news, it challenges investors. In 2020, the stay-at-home stocks (as represented by the Nasdaq-100 stock index) were leaders. Since the November 2020 market lows, there have been bouts of weakness for the stay-at-home stocks and a comeback for the reopening trade (as represented by the Dow Jones Industrial Average). The rotation has seemingly not held back some stock market indices as they’ve made record highs. I own pieces of both trades, with an overemphasis on large-cap growth stocks. I still like large-cap growth stocks. However, as I mentioned last week, “in a few tiny spaces, I shifted some large-cap growth broadly and technology stocks specifically into large-cap value stocks. I also placed some of the proceeds into high-yielding corporate bonds.”

In particular, stocks in the energy and financial sectors have performed well this year. I’m still not a big fan of energy stocks. I think energy stocks are benefiting from a short-term bounce due to oversold conditions. Long-term, I prefer clean- and alternative-energy stocks. However, I can get behind additional exposure to financial stocks. Bank stocks got crushed in 2020. Then the stocks of those companies got left behind when investors jumped on the tech train. Banks went into the health crisis well-capitalized and have passed stress tests imposed since the financial crisis. Now that business activity is picking up, their loan write-offs will improve. That will help bank profits and will also assist high-yield bond investors.

I acknowledge that, in aggregate, junk bonds have gotten rather pricey. For example, in November 2020, 25 percent of junk bonds yielded more than 5 percentage points above Treasuries. Today, only about 10 percent do. Nonetheless, investors of junk bonds tend to favor a booming economy because the default rate goes down, and investors find them to be less risky and more attractive. High-yield bonds have become a relatively safe way for investors to participate in the reopening trade.

But I know what you’re thinking: “Can the stock market do well when interest rates are rising?”  According to T. Rowe Price, during the last 30 years, there have been 72 instances over a rolling 12-month period during which the yield of the Ten-Year Treasury increased by at least 50 basis points (one-half percentage point). The average return of the stock market over those periods was 17 percent. T. Rowe Price notes that rising interest rates do not cause stocks to go up. Their point is that rising interest rates can coincide with higher stock prices.

Rotation is one thing. A deterioration in breadth is another. (Breadth refers to how many stocks are participating in an index or sector. As participation drops, the investment becomes riskier.) The market looks more like it is rotating than it is losing participation. The number of stocks in the S&P 500 trading above their 50-day and 200-day moving averages had been on the rise. This is one indicator of healthy breadth. It’s not an “all clear” signal for the stock market. Still, it is an indication that a rotation can occur without damaging the broader stock market.

A stock market needs its generals to lead. It also needs its soldiers to perform, or else the entire cohort could roll over and decline. The largest five stocks of the S&P 500 grew to nearly one-fourth of the entire index’s capitalization by September 2020. Year-to-date through September 2020, those five largest stocks were up an average of 65 percent as the index was up only 11.16 percent. Since then, there have been two brief bouts of underperformance by the stay-at-home-stocks — last fall and earlier this year.

According to Bloomberg News, the 25 worst-performing stocks from 2020 are up an average of 32 percent year-to-date as of April 5, 2021. And the 25 best-performing stocks for 2020 are down an average of 3 percent this year. It’s possible that new generals, and their soldiers, lead the stock market for the rest of the year. Hence our tiny shift.

Will the next time last longer as earnings of large-cap growth companies catch up with their stock prices? Longer-term, I prefer to invest in the biggest and fastest growing stocks. But as the economy experiences a boom over the next 6 to 12 months, I may yet make some subtle readjustments toward the reopening stocks.

Allen Harris is the owner of Berkshire Money Management in Dalton, Mass., managing investments of more than $700 million. Unless specifically identified as original research or data-gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable. Full disclosures. Direct inquiries: email hidden; JavaScript is required.

This article originally appeared in The Berkshire Edge on April 12, 2021.