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| Since our last post, the financial sector has outperformed and energy and infrastructure-related companies have seen significant buying pressure. There isn’t too much surprise among market participants. [Image ©kinwun / Adobe Stock] |
Between the beginning of March and the end of the first full trading week of April, the S&P 500 has moved more than eight percent higher – an impressive rally that managed to surmount the proverbial “wall of worry.” Looking further under the hood, we see that nine component sectors have now gained more than 8.5% during that period, lagged only by Health Care and Energy (which moved close to the flatline). Drivers are broad-based and include:
- Rising inoculation rates
- Solid economic data (US, China).
- Unprecedented monetary and fiscal support
- Expectations for an infrastructure bill
This winning combination helped push both growth and value names higher as the rally moved beyond the reopening trade. Tempering investor enthusiasm and causing concern for many fund managers, Treasury yields flexed their own muscles in March, demonstrating that they, too, can rise rapidly. Also helpful to keep in mind that such a long winning streak has driven valuations by most metrics to historic levels- levels that will have to rebalance once, say, a new tax regime appears on the horizon.
The Ignorant Investor has been attempting to emphasize over the past year that market movements don’t always make sense, and investors need not pay too much attention to daily fluctuations as long as the fundamental story behind their long-term vision remains intact (caveat: keep in mind the John Maynard Keynes adage that “markets can remain irrational longer than you can remain solvent”). And what better way to craft that investment story and curate a buy list of associated companies than in close consultation with your financial advisor?
Market Tabloids: The dramatic collapse of a massive, unknown hedge fund
The US stock market recovery from the dark depths reached a mere thirteen months ago has been remarkable. And the stories that have accompanied the market’s spectacular run have been equally remarkable- think the hydrogen vehicle craze, cryptocurrency boom, and Gamestop short squeeze saga. More recently, market participants have been fixated on the drama surrounding the blowup of the Archegos Capital Management family office run by Bill Hwang. Family offices are quite common for ultra-high net worth individuals who prefer the privacy afforded by such funds. Mr Hwang successfully maintained relative anonymity until achieving fame for all the wrong reasons when he managed to lose around $10 billion (yes, with a “B”)- all in less than a trading week. There are billionaires in history who have lost it all, with the closest match to Mr Hwang perhaps being the Stroh family, whose $9 billion fortune stemming from their beer business evaporated over several decades. But perhaps no one (at least, among “honest money” in the “free west”) has ever lost their fortune with the speed and ferocity of Archegos.
In the vein of market participants behaving badly (a theme we have followed over the past year), we could talk about how regulatory oversight could be improved so that everyday market participants could have better understood the risk associated with Mr Hwang’s ultra-concentrated positions (estimated far north of $50 billion after including leverage extended by various prime brokers- indeed, losing $10 billion in a trading week without leverage would be an incredibly difficult feat; Bloomberg has a decidedly excellent opinion piece that summarizes what happened). We could also talk about how leverage is most definitely a two-edged sword for both hedge funds and prime brokers- but these stories are already heavily covered across business and financial news media. And yes, the positions and strategy that Archegos employed appears to have been staggeringly reckless in recent months. Let us pause for a minute here and look beyond the current drama to focus on something else: assuming no untoward legal activity, Bill Hwang must indeed be a brilliant investor, with almost a decade of spectacular success in the regular stock market before his even more spectacular demise. What positions did he take? What strategies did he employ? The Ignorant Investor finds it is far better to learn from others’ achievements AND mistakes to enhance our own market performance!
Had this blowup had been a better-known fund, Wall Street might have simply shrugged and gone on about its business. There is something more intriguing (mysterious?) about a relatively secretive player – a scion of dotcom hedge funds past to boot – exercising sizable influence in large, publicly-traded names. But in the meantime, stay tuned! More details will likely emerge as banks update investors on their performance for the first quarter of 2021.
Notable Stories from March
Infrastructure, definitions, and corporate taxes
Mere weeks ago, the word infrastructure referred to transportation networks and other physical elements responsible for keeping the United States moving. Now that definition may be expanding to cover other areas as well, all thanks to the Biden Infrastructure Plan. The plethora of news on the proposal has since become tainted with accusations and opinion pieces on either side and discussions on how the government is going too far or not far enough. In this surrounding storm the details have become murky. But The Ignorant Investor likes to ignore the winds of chaotic and emotional commentary and get down to the cold, hard facts: thankfully Forbes has provided an excellent BREAKDOWN of exactly WHAT is in infrastructure proposal. Keep in mind that the bill’s hefty (nearly) $2 trillion pricetag is meant to be partially paid for by raising the corporate tax to 28% (likely 25% after pushback from corporate America) and introducing a “global minimum corporate tax”. Should these measures be enacted, markets are reasonably expected to rebalance according to how those dollars are spent and the associated tax regime. Which brings us to another great article, this time by Barrons, which discusses technology names that could benefit from the plan as well as some commentary by analysts.
Rising yields spook the stock market
In March, the stock market suffered some weakness as Treasury yields suddenly shot higher over a period of weeks. This matters since solid economic data in combination with accommodating fiscal and monetary policy for a nation awash in stimulus funds forms fertile ground for inflation (data has shown that inflation is rising). As Treasury yields rise, so do stock market risks since at some point participants will desire to climb back down the risk curve and pick up higher-yielding Treasuries. While the Fed has managed to talk down some fears by emphasizing commitment to unchanged rates, bond markets initially responded with a degree of skepticism. Strong economic growth coupled with continued easy money policy? How long can that last before inflation starts accelerating? These questions will linger, but bond traders appear to have capitulated- at least for now - according to this Bloomberg newsletter.
Ever Given aggravates existing supply chain challenges
The Ever Given is that ultra large container vessel which managed to block the Suez Canal for almost a week before being freed on March 29th (yes, The Ignorant Investor did do a quick check for fun: this mammoth ship is 50% longer than the RMS Titanic and has twice the breadth). And for an intra-article comparison, the global economic blow resulting from the grounding of the Ever Given is roughly equivalent to a large portion of the leverage that the Archigos Capital Management had drawn from its prime brokers. Beyond a large fixer-upper bill from Egypt, the grounding of the Ever Given also demonstrates the fragility of a global supply chain that is currently creaking and groaning from heavy use. VOX has a good article summarizing how shipping disruptions like the Ever Given may affect consumers in the months to come.
