Friday Market Insights – All time high markets driven by economically sensitive stocks

Grant Conroy: [00:00:04] Hi, everybody, and welcome to our Friday Market Insights this week, Wayne Wachell, founding partner, CIO and CEO of Genus is joining us. And I am Grant Conroy, portfolio manager at Genus. So, Wayne, jumping straight into it is a very strong week following a record November for many the stock markets around the world. Can you tell us a little around what happened this week and maybe twenty two times twenty, twenty one earnings on the S&P where you think we go from here, here?

Wayne Wachell: [00:00:35] Sure, it was a good week, more positive news on the on the back scene coming down the pike and on that news, bond rates back up you 10 year us in the 90s now. And so it’s come a long ways. And that got sort of the risk longing happening. And we had value stocks doing better than those stocks this week as well. So just more good news in place. Look at the PE based on twenty twenty one. It’s around twenty one and a half on twenty, twenty two, which is really post pandemic is after pandemic, right. So that’s about 18 and a half, which isn’t bad given the fact that we have these low, low interest rates, short term rates close to zero. So the discounted rate perspective, it’s not bad, not bad value here. There’s so many good things in the pipeline in terms of bad easing more government spending and vaccines on the late.

Grant Conroy: [00:01:23] And you mentioned the value trade, I think the Dow had its biggest month or its best ever November, the best ever for the Dow. So that’s saying something. On the economic side of things, we had sort of some mixed economic data. The jobs today a little bit better and kind of a bit underwhelming in the US. But Purchasing Managers Index around the world seemed to, for the most part, still be holding up and doing very well on expansionary territory. Can you just explain to us a little bit why they are important as a lead indicator and what we’re thinking for them going forward?

Wayne Wachell: [00:01:54] Yes, yes. The PMI is a corporate sentiment indicator and it tends to lead the real economy by about three months to three months. So it’s predictive of future stronger growth over the next two, three months in the world economy. As well, If you look at global money supply, the money supply leads PMI by nine months of global money supply, leads a real economy by 12 months and global supply is just through the roof. So that means this time next year or this time maybe in September of next year, PMI should be very strong and the economy should be very strong. And that’s what markets banking on, a stronger growth. That’s why we’re seeing the value street value trade starting to move and the economic sensitive stocks moving as well.

Grant Conroy: [00:02:38] That’s great. It all seems to feed into itself, I guess, in terms of the market and. On the pandemic front, it feels a little bit like the markets just move beyond the covid news now. We’ve had three weeks of vaccine announcements and that’s obviously helped. But the potential for sort of post US Thanksgiving surge, obviously case numbers, a high and then I think it was highest travel weekend since March. And the combination of Pfizer talking about logistical issues in rolling out the vaccine, could it be the markets dismissed the covid concerns a bit too early?

Wayne Wachell: [00:03:14] I don’t think so. I think the pendant is coming back hard here. It’s getting worse last spring, but the economies of the world have adapted dramatically to where they were last spring. Things are getting delivered now. Their economy is moving on except for certain areas like restaurants and cruise ships and airlines, for example. But there’s been a big adaptation. And then we’re looking at, you know, I would say the numbers right now, probably 20 percent for immunity and probably we’ll get to 50, 60 percent, which is enough to really clamp this thing down probably sometime in June of this year. And I would say if the deliveries actually improve, maybe the end of March, April, what I’m saying at least the end of June, we should have herd immunity. And that’s what the market is looking at, is looking at six to nine months in advance until it does. And there’s going to be some bumpy weather ahead. But let’s see sunshine leap on that. And I think that’s what it’s focusing on longer term. And I think if you as an investor play too much focusing on the stormy weather here, you’ll miss the opportunities when the sun comes out next June.

Grant Conroy: [00:04:22] Sure if there were a pullback, it might be an opportunity possibly as well.

Wayne Wachell: [00:04:26] And I think the thing here is to play the economic sensitive areas and areas that will do well as the economy opens up.

Grant Conroy: [00:04:35] Great. Moving on to stock from Tesla, the S&P 500 announced a Tesla will be added into the index on December 18th. The stock’s up around 600 percent this year, and it’s going to be a whopping seventy two billion dollar addition to the S&P 500. It’s the biggest ever index added, I guess. Can you explain some of the repercussions around that being added to the index? And we own Tesla for some of?

Wayne Wachell: [00:04:59] No only we do on Tesla it’s in our high impact is very impactful obviously.100%  of its revenues that’s what we look at things, are really focused on efficiency and electronic vehicle obviously. So that’s it’s very impactful the way you look at the world. And so we have a big impact portfolio. If you look at the breakdown of active investor vs. passive investors in the index funds, it’s probably about 50 50 right now. And so that means there’s going to be a big appetite just a lot of the passive investors index funds have to hold Tesla in their portfolio. So that’s there’s been whenever there’s flows coming into the marketplace, half of them are going to have some exposure at Tesla. So that’s the best of good news for Tesla, longer term discussion about valuation, but there’s going to be buying power from the past investors going forward for some for some time.

Grant Conroy: [00:05:53] I guess it’s always tricky for the passive funds and for the ETFs when it’s announced that they’ve got to buy 72 billion dollars of stock on a fixed date at a fixed time, the whole world knows how to make some money in terms of buying it ahead of that fixed date and takes time. So it’s a bit of a catch twenty two for.

Wayne Wachell: [00:06:10] Exactly.

Grant Conroy: [00:06:12] Well, great, I think that just about wraps it up and it seems that the economy is still on track, there might be some near-term chop in the markets with possibly some covid news, but the longer term outlook and the lead indicators will still remain positive. So long may continue again. Thank you very much and have a good weekend.

Wayne Wachell: [00:06:31] Thanks, guys.