President Biden’s speech to Congress marked the end of the road for President Reagan’s economic policy. Noting that “trickle-down economics has never worked“, he added “It’s time to grow the economy from the bottom up and middle out”.
Oil
Brent had a quiet week, closing flat at $66.44/bbl. Traders bid prices higher as Goldman Sachs repeated its forecast of $80/bbl in Q3. But as we forecast last week, prices then reversed as they slowly began to wake up to the downside implications of India’s pandemic.
✦ HIGHLIGHTS
- Further negative news came from China, the world’s largest oil importer
- Leading chemicals market intelligence company, ICIS, reported that Q1 demand for key chemicals and polymers fell between 2% – 5% versus Q4
- This matters as the chemicals industry is the best leading indicator for the economy, due to its central position in the value chain
- Other indicators also suggest that many of today’s shortages are due to supply chain chaos, rather than a sudden and sustained surge in demand
- The EU, for example, fell into a double-dip recession in Q1 as lockdowns continued
WATCH FOR
WATCH FORMarkets to refocus on the reality of supply/demand as OPEC’s increased supply starts to impact.
S&P 500
The S&P plateaued for another week, ending up just 1 point at 4181, with the VIX volatility index up 2 points at 19. New margin data confirmed the current rally has been dependent on record levels of leverage.
✦ HIGHLIGHTS
- Downbeat global economic news challenged equity bulls, despite positive earnings reports
- Worrying news on Covid-19 in India and Brazil reminded markets that the pandemic remains far from defeated globally
- Biden’s Joint-Session speech qualitatively confirmed earlier leaks on tax reform
- Investors began to take money off the table, moving $57.3bn into cash over a week – the highest level since March last year
- Brokers have begun to worry that this may become a new trend, ahead of likely tax rises, as investors seek to crystallise gains ahead of tax changes
WATCH FOR
Investor caution to grow, with scope for substantial profit-taking
Interest rates
The yield on the 10-year rate recovered to 1.63%, with an intraday high of 1.69% on Thursday, whilst the MOVE volatility index slipped to 58.
✦ HIGHLIGHTS
- Bond markets remain in a back-and-forth state
- Inflation-bulls were cheered by strong US economic news, BUT…
- Fed Chair Powell reiterated ‘long way to go’ narrative on reaching economic targets
- Announcement of American Families Plan brings additional $1.8tn fiscal stimulus
- Market chatter on bearish short-term outlook for bond prices: “Sell in May and go away”
WATCH FOR
Inflation concerns to continue to return to prominence in bond markets
FAANMGs & Tesla
At $7.5 trillion, the combined market cap of Apple, Microsoft, Amazon, and Google is higher than the GDP of every country in the world with the exception of the US and China. This highlights the general vulnerability of the tech sector to any downturn in market sentiment.
✦ HIGHLIGHTS
- We update on developments with the FAANGMs & Tesla, using the Graham Value methodology to highlight their underlying values
- Tesla’s price has fallen from $709 on 1 February, but still remains the most over-valued, anticipating 353% growth/year to 2030
- Amazon has risen from $3206 and remains the second most over-valued, anticipating 29% growth/year
- Netflix has fallen from $532 but is still the third most over-valued, anticipating 28% growth/year
- Microsoft has risen from $232 and is next most over-valued, anticipating 13% growth/year
- Apple has plateaued from $132, and Google jumped from $1827, but both are anticipating 11% growth/year
- Facebook has risen from $258 and is the least over-valued, but is still anticipating an unrealistic 10% growth/year
WATCH FOR
Biden’s move to adopt minimum tax rates within the OECD will sharply increase taxation for most of these companies, whilst anti-trust cases are also gaining momentum.
Summary
Most investors still assume that Biden’s policies are a version of ‘business as usual’. But last week’s move into cash funds suggests that some are beginning to realise the best days of the rally may be in the past
Oil
S&P 500
Interest rates
Market view today
Some concerns
All news is good news
Expecting modest inflation
Our current view
Negative
Reversion to mean inevitable
Expect long-term deflation
Positioning began
March 2021
March 2021
December 2020
Confidence level
Initial
Today
.
.
.
Relevant positioning
Reality starting to dawn
Waiting for reality to dawn
Expecting higher rates for the 10-year and longer-dated Treasuries
Confidence level: 
= 100%, = 75%, = 50%, 
= 25%
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