Friday Market Insights – Strong earnings driving markets to all-time highs

Mary Lou Miles: [00:00:04] So welcome to our Friday Market Insights video for April the 16th, twenty twenty one. My name is Mary Miles. I’m a partner and director of wealth management here at Genus. And with me today is Justin Hahn, our macro research analyst. And I’m here to ask him a few questions. Many of these questions came from our clients. So, Justin, although I see virtually every weekday morning when the investment team in the portfolio managers receive our morning update, I realize I have not seen you in person for over a year. Anyway, it’s nice to be on the video with you this week. From the market perspective, we continue to be at all time highs, particularly in the U.S. So what’s been happening in the markets this week?

Justin Hahn: [00:00:44] So this week, we saw the markets continue its strength from last week as the strong earnings season begins. The Nasdaq, which isn’t the more tech centric index, was up to new highs following last week’s S&P rise to new highs. From a macro perspective, we saw CPI inflation rates come in at about two point seven percent on a year over year basis, which is higher than expectations as well as retail sales rebound from February’s negative contraction, up about nine point eight percent versus the five point five percent expectations. This was mainly driven by the stimulus checks that were sent out last month and a lot of spending in that area.

Mary Lou Miles: [00:01:26] So just to clarify, the CPI is the consumer price index that you’re talking about sort of measure of inflation. That’s great Justin. So with earnings season arriving, so this is when all our companies are reporting their profit or losses and the market that historical high, is there a risk of disappointment?

Justin Hahn: [00:01:45] Yeah. Given the strength of the market rebound last year and the strong investor sentiment we have currently, there is room for some disappointment in some companies, particularly in more of the technology sector. However, we expect strong earnings overall due to the successful vaccine rollout in the US with Biden’s plan and the re ignition of the economy from all the stimulus that’s been spent. The S&P this quarter is expected to earn over twenty four point five percent on a quarter over quarter basis. So there are very high expectations for this quarter.

Mary Lou Miles: [00:02:22] I know that last week on the video and I do watch them myself. You mentioned that we have trimmed back some equity in our clients portfolios. Are you considering thinking that that’s going to continue?

Justin Hahn: [00:02:35] Yes. Last week, we did make some big moves in our portfolios, we moved quite a bit of equities off the table into cash because of our models changing. But we’re comfortable with the moves that we made during the last week and where we’re at given all of our model signals. This next month will be a telling sign of what’s going to happen. A lot of our signals did move quite significantly. So we’re going to see if we get any reaffirmation or confirmation from the signals that which continue in that same path or if we get a bit of a reversal. And this month was a one off month based on some of the economic numbers coming out.

Mary Lou Miles: [00:03:13] Yeah, it’s an interesting few weeks. So, given the bailout, the federal government is giving Air Canada two questions here. So what does that signal to the market? And do we own airline stocks in clients portfolios?

Justin Hahn: [00:03:27] Yeah. So the recent five point four billion dollar bailout for Air Canada signals to the markets that air travel and vacation travel through airlines is not yet ready. It’s still in the pre covid levels. People are still very reluctant to go into that space. With the five point four dollars billion includes some some restrictions where the airlines must rehire again, as well as increase some of the regional travel as well. For our portfolio while we’re on the same boat. A lot of our models still give these companies quite low scores. So we haven’t stepped back at the airlines to space yet and we still believe it’s still premature to enter into the space, maybe give it another few quarters or even a year until the whole economy and borders open up again.

Mary Lou Miles: [00:04:17] Now, part of that long and equity bailout package, which included being able for consumers to get some of their air credits back online applying for that weekend. So what although Jay Powell and the Federal Reserve have indicated they plan to stay the course over the next three years, actually, inflation pressures still abound, like you were mentioning earlier. So what does that mean to the bonds in our clients’ portfolio?

Justin Hahn: [00:04:42] So we saw the bond market currently pricing in the first rate hike to be about twenty, twenty three versus the Federal Reserve, which had planned it to be about twenty twenty four. This saw bond yields rise during the last quarter and through the end of last year as well. And in turn that caused prices to fall. In the short term if the Fed does hold steady at their twenty, twenty four projections, we expect bond yields to come back a bit and prices to rise as a result of that. But we still think that there’s still a lot of information that needs to come out on the economic side, such as inflation rates, to see if this is sustained at two point five percent level and see how the Fed will react. We have seen historically that the Fed does react sorry the bond market does react before the Fed, and it is a bit telling that investors are pricing in a stronger economic recovery.

Mary Lou Miles: [00:05:38] Yeah, it doesn’t feel like the inflation of the past few decades at all. Not perspective. So we don’t think we’re going to be seeing double digit interest rates anytime soon. As far as Coinbase, a cryptocurrency exchange opened this week with one hundred billion in market capitalization and all over the news on this subject. So what does that mean for our client? And do we own any of these cryptocurrencies?

Justin Hahn: [00:06:06] Yeah, so we don’t personally hold any cryptocurrency in any of our portfolios or our funds. We believe it’s quite a volatile stock or asset class persay, and it’s still a lot of risk there in terms of regulations. You could see some of these currencies rise 10, 15 percent per day in either direction, which is extremely volatile and impossible to predict. The recent IPO of Coinbase allows investors to get into the space. But indirectly, Coinbase is just a exchange similar to how the S&P global provides exchanges for people to trade in. So its current valuation of one hundred dollar, we think is a bit steep. But and it’s also higher than a lot of the other exchanges that we have seen that are more developed, such as the S&P Global.

Mary Lou Miles: [00:06:57] Right. Just seems a little speck, I sense, so that Bitcoin is not the number one currency being traded online exchange right now?

Justin Hahn: [00:07:04] Yep, that is that is the biggest coin out there. That’s in the news everywhere. And we see it continuously go up and then crash and then it’s in a little cycle

Mary Lou Miles: [00:07:14] Yeah, with day trading. Yeah, yeah. So that concludes our video for this week. Thanks, Justin. And as always, you’ve given us a lot to think about. Thank you all for watching. Please do reach out to your portfolio manager. If you’ve got any questions. For those of you new to Genus, please visit our newly updated website to find out more and connect with our team. And as we have the spring rolling out in full bloom, at least here in the lower mainland of BC, let us continue our hope for a successful vaccination rollout. I know we’re now over 20 percent of the population in BC. with one dose and longer days of sunlight and the possibility too of seeing each other in person later this year. Have a good week.

Justin Hahn: [00:07:56] Thanks, everyone.