This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
May 7: The total April payroll gain of 266,000 was far short of the +1,000,000 median forecast, particularly after factoring in a net 78,000 downward adjustment to gains in the preceding two months. The result was even further below loudly whispered guesstimates from many pundits that the gain could approach two million.
While disappointing, we caution that issues with seasonal adjustment could well be making things look far worse than they really are. Specifically, what is driving changes in employment right now is the reopening of broad swaths of the hard-hit service sector, rather than normal seasonal swings. This is occurring when the seasonal adjustment process “expects” strong gains in employment for seasonal reasons, and therefore aggressively reduces reported unadjusted gains in order to arrive at seasonally adjusted results…Specifically, the unadjusted gain in private nonfarm payrolls in April was 992,000, which included 884,000 of service-providing jobs. But, in seasonally adjusted terms, these were translated into gains of just 218,000 and 234,000, respectively.
The message here is that a single month of data is not of much use in an unprecedented economic environment. Most indicators point to strong demand for labor and a service sector that is gaining momentum as life begins to return to normal.
The Best Infrastructure Play
May 7: President Biden has hit the road running with his proposed $2.25 trillion infrastructure plan to reshape the economy. In his speech in Pittsburgh on March 31, Biden said it is a “once in a generation” investment in America, highlighting the opportunity to rebuild 20,000 miles of roads, repair 10 key bridges, and upgrade the electrical grid and basic infrastructure networks. The U.S.’s physical infrastructure is undoubtedly in need of upgrades—it is ranked only 16th globally by the World Economic Forum. The spending plan, which would be implemented over eight years, would return government investment in the real economy (as a % of GDP) to its highest levels since the 1960s, officials said…
The outline of the plan so far is focused on roads, bridges, and transportation infrastructure expenditure. Thus, building-material companies are anticipated to benefit the most, with accompanying sectors to participate in the spending multiplier. Not only are government funds likely to propel the opportunities in this space, but private funds are on standby and seeking opportunities. We therefore identify the
Global X US Infrastructure
ETF [ticker: PAVE] as the vehicle to express the infrastructure investment theme. It bodes superior metrics such as positive betas to upticks and downturns in the S&P 500, as well as a hedge to interest-rate rises, in addition to trading at a discount to the market’s valuation.
Bullish on China Tech Stocks
May 6: We have become more bullish on the outlook for China tech companies, which are leading the world with innovations in mobile payments, online-to-offline services, on-demand delivery, gaming, and more. Based on 2025 estimates, e-commerce leaders
[BABA] are now trading at 11 times earnings per share. This valuation implies more than 100% upside on a three-year view.
Let’s consider a comparison to
[AMZN], a very attractively priced company that we believe can double on a five-year view. It produces $26 billion in free cash flow and has a market cap of $1.7 billion. The market caps of
[TCEHY], Alibaba, JD.com, and
[BIDU] sum to $1.6 trillion. Together, they are expected to produce $44 billion of free cash flow—70% more.
Numbers alone don’t tell the story. Alibaba sells more goods than Amazon. Tencent has more than a billion customers who spend 2.5 hours a day on its platform. JD is a strong number two in e-commerce with diverse offerings in delivery and healthcare. Baidu, finally, is not only the leader in search, but also the leader in AI patents globally.
While Amazon is likely to continue to be a winning stock, in our view, we are buyers of China tech companies, a universe which is trading at nearly a 50% discount. We are bullish on China tech stocks and view the pullback in emerging-market equities more broadly as a buying opportunity.
Strong Technicals and Transports
The May 2021 Collopy Letter
Carl M. Hennig, Inc. Investment Securities
May 6: Although we have been casting shade on the market, there are plenty of reasons to maintain a positive attitude. Technically the indexes look great. As we write, 87.6% of NYSE Composite Index stocks are above their 200-day moving average, a condition that usually leads to more positive momentum but brings with it a modestly overbought condition. Of course, technically the market is never perfect—we are not impressed with either volume or the closing tick since mid-April.
Also, the strength of our favorite economic barometer, the Dow Transport index, implies the economy may have a long runway on which to operate. The Transports are at a new all-time high—35.5% above the index’s previous all-time high of September 2018. According to the Wall Street Journal, the last week of April marked the 13th straight week of gains, the longest wining streak since 15 successive weeks of gains for the index that ended in January 1899—that’s right, a record that has stood for 122 years.
—John F. Collopy
Inflation, Rates Trending Higher
The Sovereign Advisor
Sovereign Asset Management
April 30: With the Nasdaq still struggling to break above the high it set in mid-February, the other major indexes are trying to work their way forward without the leadership of the largest of the tech stocks. Failure of the Nasdaq to continue in its leadership role could spell trouble, as we are now moving into what is historically the weakest period for stocks, May-October, at a time when market momentum is slowing.
Longer term, the change in the investment landscape which I have been writing about is the secular change coming about in interest rates and inflation, both of which are trending steadily higher. This is contrary to the environment of the past 40 years when both were trending lower. This change has over the past year been put into overdrive as a result of the policies put into place stemming from the pandemic, as the money supply grows at an historically unprecedented rate, the supply chain of both goods and services is disrupted by the global economic shutdown, labor shortages continue as workers are paid more to stay at home than to work, the economy slowly reopens, and consumers begin spending again. These factors are all coinciding to create an environment for higher inflation, which translates into higher interest rates, both of which, if they persist, are a long-term negative for the economy and financial markets. They are, however, a decided positive for commodities and hard-asset sectors of the economy and market, such as industrials, agriculture, metals and mining, materials stocks, and the like.
—Donald L. Sazdanoff