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| Free (from masks) again! From sea to shining sea, the United States begins to experience a resumption in normal life. And investors wisely positioned for the reopening trade see continued gains. [Image ©IRStone / Adobe Stock. Modified for The Ignorant Investor: www.theignorantinvestor.com] |
Internal thoughts like “Wait, they’re smiling? Oh, right, I should smile back!”, “I never would have guessed my coworker looked like that…” or more tongue-in-cheek observations “I preferred you with your mask on!” have been dominating in-person *gasp* discussions. And we most recently gathered for Memorial Day family picnics, passing out hamburgers and hotdogs, while enjoying the fresh air and our oft-taken-for-granted freedom once again. As vaccinations continue to progress by leaps and bounds within the USA, the CDC issued guidance earlier this month that masks were no longer necessary for fully vaccinated people. Beaten-down companies that benefit from full reopening (Carnival’s cruises, anyone?) roared higher as the entire reopen trade cheered even as the broader markets were jostled by the volatile mix of highly valued growth stocks, skyrocketing inflation data, and a Fed caught between the desire to keep a good thing going while reigning in a potentially heated economy (raising legitimate questions like is more stimulus really the answer here?).
The May Conundrum
Sell in May and go away* is an old adage that may or may not have been good investment advice for 2021. After all, if one had sold at the beginning of May, then that individual would have had ample opportunity to profit in the short term from the weakness seen towards the middle of the month and could easily be sitting on a free gain well north of 10%. But then again, timing the market can be a bit like rolling the dice even for the best investment professional out there- and keep in mind that a professional’s analysis of prevailing market conditions and expectations can be remarkably accurate (separate thought, but since as a market participant this professional also forms a part of the market and is thus influencing and influenced by – hello, professional peer pressure! - prevailing market sentiment of big players, one could also argue that this professional’s consensus forecast may be at least partially a self-fulfilling prophecy in the near-term as a result of "consensus" fund flows. But we digress and will leave that conversation for another day).
What we can be CERTAIN of is that infrastructure-related, energy, and financial companies led equity sector gains for the S&P 500 while growth companies struggled (hey, the Nasdaq saw its first monthly decline in more than half a year). Okay, this makes sense. After all, the economy is reopening, Congress is kicking the infrastructure/stimulus debate back and forth, and we saw multi-year record increases in the currently favored inflation indicators; the producer price index reading was up a sizzling 6.2% year-on-year and the consumer price index up 4.2% year-on-year. An even more stark comparison can be made between this data and anemic inflation readings prior to the Covid-19 shutdowns.
And despite all reassurances from the Fed that they plan to stay the course, even former Fed Chairwoman - now Treasury Secretary - Janet Yellen commented that raising the funds rate may be necessary to keep the stimulus-fueled economy from running too hot (which also makes perfect sense). After all, the economy is chugging along indeed: the second estimate for second quarter GDP came in at 6.4% on the back of a wave of increased consumer spending.
Among many different topics to close off May, The Ignorant Investor would like to address political risk. Stimulus plans, infrastructure redefinitions, and bipartisan debates are all well and good, but whether it is the Republican’s $1 trillion infrastructure plan or Democrat’s $1.7 trillion infrastructure plan, the big, dirty question both parties like to avoid is HOW are they going to pay for it (which really means WHO is going to pay for it)? President Biden proposed raising capital gains tax to 39.6% on high earners (more than half a million per year if memory serves correct), but then leave the dividend rate at 20%. The Ignorant Investor will avoid the mundane dreariness of the debates over fairness and instead ask, if this were to become reality, what does it mean for the market? How will funds be re-allocated by high-net-worth individuals and institutional investors? How do international institutions, not subject to US capital gains taxes, react? Such drastic measures as that proposed by President Biden have - when taken at face value - the power to reshape the stock market.
Energy Market Snapshot
Energy markets have been adjusting to changing political terrain as country after country lurches towards more stringent environmental regulations (positive for renewables, headwind for fossil fuels; more info in “The Fight for the Environment…” under “Notable Stories” below). The outlook for fossil fuel consumption (ie refined oil products) looks rosy even in the face of uneven global recovery with the IEA predicting that combined North American and Chinese demand growth will more than make up for challenges posed by severe covid-19 outbreaks in India and Japan. Their arguments include supply-side constraints (lack of investment, voluntary cuts a la OPEC+) that may become less compelling should Iran sign a nuclear accord (releasing the country’s added oil production into international markets) and US shale producers begin ramping up production. In the meantime, US inventory and rig data from this month appear to support the bullish oil price thesis by showing American producers are being fiscally responsible this time around (but again, take this with a grain of salt- has any person accurately predicted near-term oil price fluctuations over the last seven years?).
Notable Stories from May
Cyberattacks are very real and have serious real-world consequences
The Colonial Pipeline is one of those incredibly important systems that keep the US economy humming yet remains relatively unknown and unappreciated by the general public- that is, until it stops running. About half of the US East Coast’s refined fossil fuel needs are accommodated by the pipeline, and the entire system was forced to shut down for five days following a successful ransomware attack- the quick restart also involved paying a “ransom” to the hackers (who, understandably, were quick to deny acting on the part of any state and likely eager to escape the media spotlight). The turnaround time from discovery to resumption of services for the pipeline is remarkable (read the CEO’s rationale for paying the hackers for the decryption tools in this article by the Wall Street Journal), but the event once again shines the spotlight on the significance of cyberattacks and the need for international corporations to increase their cybersecurity efforts.
The fight for the environment (or war on fossil fuels, take your pick!) is creating opportunity
Traditionally, The Ignorant Investor would have no reason to ever feel sorry for Big Oil. After all, these juggernauts plod onward year after year, secure in their mammoth size and financing while smirking at any political or financial storm. But this last week has been historic in its brutality for the industry. After all, Exxon Mobile was forced through the efforts of an insignificant hedge fund to accept two new environmentally-focused members to the company’s board!! The fight has now been brought to the inner sanctum of the board room. And what can a fossil fuel company, excellent at all things finding, drilling, extracting and processing fossil fuel do in the face of societies fixated on renewable energy? Well, they also can pivot to renewables- at least, that is what European-based energy companies have been doing in recent years by jettisoning overseas carbon-producing assets and streamlining businesses to align with improving environmental goals. But what exactly happens to these jettisoned oil fields, coal mines, and fossil-fuel consuming power plants? Why, they get offloaded to other energy companies of course! While the fossil fuel energy sector adjusts to stricter environmental oversight across the globe, the energy space remains subdued relative to a fairly rosy near-term future, resulting in “inefficiencies” as far as value is concerned- an opportunity outside of Big Oil for those developing buy lists in close consultation with their investment professionals! Meanwhile, the Guardian has a good article summarizing the sentiment and setbacks confronting international energy giants here.
Not all vaccines are equal and difficulties remain on the road to "herd immunity"
While the technology behind the various types of vaccinations do indeed differ**, questions about efficacy between the vaccines as well as what herd immunity actually means remain. For example, the islands of Seychelles became one of the most vaccinated nations on earth by relying on Sinopharm and AstraZeneca’s formulation. Public confidence rose. Then a significant number of fully vaccinated inhabitants came down with the dreaded Covid-19 (albeit a less severe illness). Notably, exactly which vaccine these sick individuals received remains unreported. This raises legitimate questions on vaccine effectiveness, vaccine effectiveness over time, as well as what percentage of inoculated inhabitants results in the fabled herd immunity. Bloomberg has a good article summarizing the situation as well as relevant questions in this article.
A rare opinion piece
The perils of weakening vaccine patents
Life-saving medicine and medical care should be available to all, regardless of whether they themselves can afford to pay for it. Life-saving medicine and medical care should never be withheld. These important statements, in spirit with the Hippocratic Oath taken by physicians, is not, however, mutually exclusive to the weakening of pharmaceutical drug discovery patents (in this case, vaccine patents).
The staggering amount of funding that drive the development of new types of medicine (statistically, north of two billion dollars to develop a single pharmaceutical drug) requires some form of reward at the end of a long and treacherous development road to make the trek financially worthwhile. This reward comes in the form of fast-expiring patents that grant temporary exclusivity of a pharmaceutical drug discovery to the organization that discovers it. After all, about 90% of drugs will fail in various development stages- failure, not success, is the norm. Even the appearance of weakening protections around pharmaceutical drug discoveries can send a chill through the world that finances it, and the result of pursuing this course of action has the potential to negatively impact the number of future critical drug discoveries. Remember, this is the industry that developed Covid-19 vaccines in record time, allowing a resumption of normal life and saving the lives of countless millions. The industry that discovered a cure for Hepatitis C a mere several years back. Not a treatment, a cure.
Slow global vaccine rollout is NOT a result of intellectual property hoarding but primarily due to difficulties associated with sourcing raw materials, constructing specialized facilities required to produce vaccines, and finding specialized professionals capable of running them. Besides, Pfizer and Moderna already allow free production of their vaccine by anyone after publicly declining to enforce their patents. And what about legal routes through which pharmaceutical companies are compelled to allow production of their specialized discoveries for poor countries? Many uncomfortable questions can RIGHTLY be asked about unfair early vaccine distribution between developed and developing nations- but attacking patent protections? What does this prove? Rarely does The Ignorant Investor address a hot political topic, but this positive-looking-in-the-near-term decision solves a problem that doesn’t exist AND has potentially unpleasant and hazardous long-term consequences. Forbes has an opinion piece here that outlines industry confusion around this decision and emphasizes (better?) alternatives available to the Federal government in times of emergency.
* Historically, positive equity market activity in the early summer months has been relatively limited
** An oversimplified explanation of the two main types of vaccines: mRNA (see the definition from the US National Genome Research Institute here) in the case of Pfizer and Moderna, or a traditional viral vector in the case of Johnson and Johnson and AstraZeneca, create proteins that cause the body’s immune system to recognize Covid-19 as a tenacious enemy
