Stock Market The Last Week – Stocks bounced back from last week’s bond scare; inside Warren Buffett’s annual investor letter; why the US vaccine flick might be good for the Canadian market; and others.
Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and provides context for Canadian investors.
Stock Market The Last Week
On March 1, the bond scare appeared to be over, stocks returned to their higher habit. In fact, on Monday the S&P 500 had its best day since June.
Stock Market Forecast For The Week Ahead: The Summer Doldrums Approach
It appears to be a game of cat and mouse – one that the market is still trying to figure out. A stronger economy is a good thing right? No, wait a minute, that economic growth can lead to higher inflation and higher bond yields that drive stocks. Inflation is scary and real—and eternal inflation, we hardly know. It’s been a while since we’ve seen real inflation. This is a US link, but Canada will generally follow the trend.
Last week, I covered how bonds are a threat to stocks. Are we really in store for a continuous and useful rise in rates? Of course, that is not good for bond investors as higher rates lead to lower bond prices (there is an inverse relationship between the two).
I really enjoy being an armchair economist and have spent a lot of time researching this topic of inflation and rates lately. One of the most prominent voices on the topic is Lacy Hunt, economist and executive vice president of Hoisington Investment Management Company. This is an outstanding post from August 2020, on BNN Bloomberg.
“Technological change today is more evolutionary, not revolutionary. The production function is one of the most fundamental relationships in all economies, and tells us that we are facing a period of difficult growth. Due to other circumstances, this will be one of the inflation rates that will decrease , there may be a greater risk of deflation than inflation.
Movers & Shakers
Cut to Thursday, February 3, 2021: The chairman of the US Federal Reserve takes questions for the summit of the Wall Street Journal project. The event is highly anticipated and closely watched. On the inflation front, Powell offered…
“We may see prices go up, but they won’t stay up. We’re seeing global disinflationary pressures and they’re not going to go away overnight.
I wouldn’t argue with that basic framework. The two sources somewhat agree on common themes. And from my collective research, I made the same opinion that we could see “explosive inflation” and then return to slow growth disinflation. Hunt and others have pointed out that excessive government debt creates an additional slow growth effect over time.
Markets did not like Chairman Powell’s comments. Stock and bond markets took an early hit.
Stock Market Today: Live Updates
And it has been an uncomfortable week. The stock turned negative on Wednesday and continued to slide on Thursday, March 4. Stock and bond markets don’t know how to turn around this inflation and bond issue.
“‘Investor psychology has shown a bias towards optimism,’ said Keith Buchanan, portfolio manager for GLOBALT Investments in Atlanta. ‘The animal spirits, if you will, have played out in the last 11 months in this rally. There is a lot of liquidity left, and have found a home’.
Remember, no one knows what will happen with inflation or rates. We should not invest based on forecasts, but we may be prepared for various possibilities and economic conditions.
Many investors can’t wait to see Warren Buffett’s annual letter. In each edition, the world’s biggest investors offer their thoughts on the stock market, the economy, their own company Berkshire Hathaway and more.
Weekly Note, April 5, 2020: A Lot Of Bad News Starting To Become The Norm (sp500)
In recent years, the letter has been opened by comparing the returns of Berkshire Hathaway vs the returns of the S&P 500, year after year. Buffett and his team have a long-term track record of beating the returns of the market (S&P 500) by a huge margin. But Berkshire Hathaway shares have lagged the market since the end of the Great Financial Crisis, from 2009. Buffet and his team usually take advantage of serious and prolonged market corrections to buy companies at a discount. They don’t stand a chance in 2020, as Buffett is uncomfortable investing amid the uncertainty of the COVID-19 pandemic.
Berkshire Hathaway still has more than $130 billion in cash and, with a vicious market correction, they are ready to invest. Last year, he invested heavily in “himself” by buying back his own shares on behalf of investors. (We discussed Warren Buffett and his stock buyback process in this space, back in August 2020.)
“Last year we demonstrated our passion for diversifying Berkshire’s assets by repurchasing the equivalent of 80,998 ‘A’ shares, spending $24.7 billion in the process. This action increased your ownership of all Berkshire businesses by 5.2% without requiring you to touch your wallet .
The letter provides a good demonstration of how investors can sell shares for profit—and, because they represent buybacks, maintain ownership of the company’s profits.
Stock Market Outlook Remains Bullish As Volatility Lowest Since Last October
“Berkshire’s investment in Apple clearly reflects its buyback power. We started buying Apple shares in late 2016 and at the beginning of July 2018, we owned more than one billion Apple shares (split adjusted).… When we completed the purchase in mid-2018, the public account Berkshire owns 5.2% of Apple. Our cost for the stock is $ 36 billion. Since then, we both enjoy regular dividends, with an average of $ 775 million per year, and also – in 2020 – an additional pocket of $ 11 billion by selling a small part of our position. Despite the sale – voila! – Berkshire now owns 5.4% of Apple.
I still like holding Berkshire Hathaway (BRK.B). It hedges market corrections. And, looking at the big picture, this is an investment in the world’s biggest investors, who hold huge piles of cash. This is part of the risk management strategy.
Statistics Canada says real gross domestic product (GDP) shrank 5.4% in 2020, the steepest annual decline since comparable data were first recorded in 1961. Yikes.
That shouldn’t be too surprising, of course. In 2020, we have our first modern pandemic. The year-on-year decline was due to major economic shutdowns in March and April during the first wave of the economic-destroying COVID-19 pandemic.
Morgan Stanley Sees Near Term Us Stock Market Rally
But this low bar sets the stage for big percentage gains later in the year. From that Advisor’s Edge post, quoting BMO chief economist Douglas Porter…
“‘Find new growth drivers to come as the economy gradually reopens so far this year, leading to roughly (six percent) growth – a nice mirror image of last year’s deep dive.… It’s not exactly a V-shaped recovery, but it’s close. too’.
The Bank of Canada has predicted a 2.5% decline in GDP in the first quarter of 2021. We may be able to beat that cautious forecast, as the COVID restrictions are being relaxed in many areas across the country.
The rapid delivery of vaccines is a key driver of economic optimism and investment in Canada. However, continued slow delivery could drag down economic recovery and market performance.
Chinese Stocks Soar After A Week Of Government Rescue Efforts
Just a hunch, but barring a black swan event, I think the economy and the market have a good chance of beating the low bar in the second, third and fourth quarters of 2021.
As you can see, Canada is lagging behind the US, UK and other developed countries in terms of national vaccination rates. Scroll down on that CTV link (it’s a great free vaccine tracker) and you’ll see global vaccination rates. Canada is currently at 5.4% (population vaccination rate) and we are lagging behind more than 50 other developed and developing countries. The UK is at 31.8% and the US is at 24%.
The US is likely to increase its advantage over Canada: President Joe Biden announced the completion of the national vaccination program is expected in May.
That’s good news on many fronts. First, there is massive vaccine production in the US. It is possible that many of these doses, after the completion of the American program, may go to neighboring countries, Mexico and Canada. In fact, Canada also announced (coincidence?) this week that we could finish in August, an improvement from the recent prediction in September.
Can The Stock Market Hold Up If Commodities Soar?
We know that small businesses and many sectors have been crushed by the pandemic. Many low-wage retail and service sector workers are not being targeted by the pandemic. These sectors may return to work sooner than on either side of the border. That’s big news on a human scale.
We are all suffering from pandemic fatigue. We can’t wait to travel, go to the movies and live theater, and book and visit restaurants with family and friends. We want the “experience”.
What does it mean for the market? This all supports the “recovery stock” theme. And we are seeing changes in investor sentiment and money flows.
And with greater and real economic growth, greater demand for oil and other commodities. That has become a constant theme and is tracked
