Nonplussed – Strategic Income Outlook, Second Quarter

Nonplussed is how we view market sentiment about some of the excesses cropping up today. When we last wrote to you, our opinion was that many parts of the markets were perhaps fully valued, albeit not yet priced for perfection. Fast forward three months and you wouldn’t be faulted for thinking the pandemic was over, economic growth was booming, and the excessive federal debt had subsided. You would be wrong. We are more constructive today on the economic outlook but would point out that speculative excesses seem to be multiplying. The reversal of some of these could hamper market progress in the future.

It’s been four months since the FDA approved the Pfizer and Moderna vaccines. Over 148mm doses of the vaccine have already been administered here and we have seen a rapid improvement in the trajectory of the pandemic in the U.S. There has been a significant drop in reported infections, hospitalizations, and deaths, which has allowed for regions to reopen a bit more and partly resume some activities, like limited indoor dining. Assuming we stay on this trajectory and avoid a fourth wave, we could see a return of jobs and potentially the unleashing of huge pent up consumer demand for services. The Conference Board Consumer Confidence Index, which hit a low of 85.70 a year ago April, has been steadily increasing and is currently at 109.70. Helping to drive this change in sentiment is the improvement in the job market. While we still have a way to go, after averaging about 812,000 a week since December, initial jobless claims dropped to 684,000 last week. Hopefully we see continued improvement. Healthy employment, coupled with the recently signed stimulus package, should give consumers more money to spend and should continue to propel the economic recovery. Given the Covid case spikes in Europe and renewed government actions to combat them, it is possible that the recovery could stall a bit longer. We will be watching developments there closely.

Of course, a continued recovery assumes that consumers do, in fact, spend their money. During the pandemic there has been a bifurcation of cash uses, as evidenced by the higher-than-average personal savings rate. While the long-term average back to 1980 is 9% of disposable income, last year it reached a high of 26% and is still hovering around 13%. The other subset of the population seems to want a more active use for their cash and appears to be “investing” it in non-traditional ways. This is one of the unintended consequences of the broad brush versus a more targeted approach to the stimulus packages.

One example is the spectacular growth of Robinhood, the retail stock trading platform. From the end of 2019 until today, the number of average weekly users has increased roughly 150%, from four million to over ten million. While the concept of more people trading stocks might be an indication of the democratization of trading, given the decline in overt trading costs to zero, evidence seems to indicate it may be the result of boredom and the search for a creative outlet, especially since professional sports has been limited during the pandemic. Another example we have talked about in the past is the cryptocurrency Bitcoin. It was trading at about $18,000 on the day the Pfizer vaccine was approved and rose to almost $29,000 three weeks later at year-end 2020. Subsequently a number of public companies, most notably Tesla, have touted their investments in Bitcoin and the price has continued its climb to over $59,000 as of 3/31. That’s more than a 200% increase in less than four months. Remember that this digital currency was created out of thin air by an unknown programmer and has no underlying government backing nor significant uses in commercial transactions. In other words, by limiting supply, it is a perfect speculative vehicle.