This week in the podcast, we provide an end of summer update on our earnings transcript review and the high frequency economic, sentiment, and virus indicators that we track, and offer a few thoughts on what tapering means for US equity markets.
Three big things you need to know: (1) Last week’s earnings calls provided an important reminder about the strength of the consumer. (2) The reflation trades remain tethered to COVID trends. (3) We think equity investors have already priced in tapering to a significant degree.
If you’d like to hear more, here’s another 5 minutes. While you’re waiting, a quick reminder that you can subscribe to this podcast on Apple, Spotify, and other major podcast providers. Now, the details.
Takeaway #1: As we reviewed last week’s S&P 500 earnings call transcripts, we’d paid careful attention to the consumer companies – our impression is that the consumer is still in very good shape.
- Key points included a strong start to back to school, strong in store traffic trends, and the benefits of the child tax credit extension.
- The home improvement market was described as strong, though one company noted declining DIY demand.
y to last until the middle of:
- On COVID, a few comments stuck out in our minds.
o On cash deployment, one company noted they are keeping cash levels elevated due to the Delta variant for the time being.
o Several noted their guidance does not assume any new shutdowns.
o A couple indicated they’d seen negative impacts from the Delta variant but others said explicitly that they had not, while another said they expected back half volatility in trends because of it.
o There’s always one or two quotes that stick out for me each time we do one of these transcript reviews. This this time, we thought one Consumer company did a good job of capturing the particular moment companies find themselves in when they said: “The recovery has evolved unevenly and some markets are seeing their third or fourth waves of COVID, including increasing effects of new, more contagious strains of the virus hindering a return to normal life.”
Flip to slide 2
Takeaway #2: The reflation trades remain tethered to COVID trends, though the mechanics of how they are tied together changed slightly last week.
- This idea that the variants might hinder a return to normal life contributed to a risk off rotation in the major positioning trades last week – Value, Small Caps, and Cyclicals all underperformed even though the rate of change in new COVID cases, a trend these trades had been tied to since March, continued to decelerate.
Flip to slide 3
- Last week’s rotation wasn’t just about headlines. The high frequency economic indicators we’ve been tracking continue to show signs of deterioration in August, particularly on TSA flying and public transit usage. Opentable dining activity also remains in a stall.
Flip to slide 4
- At the same time, several important economic barometers deteriorated, as US economic surprises made a decisive move into negative territory.
Flip to slide 5
- Additionally, 2H21 and 1Q22 real US GDP growth forecasts on the sell-side slipped.
Flip to slide 6
- Individual investor sentiment also continued to erode, with bears in the weekly AAII survey rising and bulls moving lower.
- But the indicators aren’t uniformly negative, helping stocks get off to a good start this week sparked by Monday’s good vaccine approval news. Langer Consumer Comfort continues to show signs of a positive inflection.
Flip to slide 7
- Institutional investor positioning in US equities tracked by CFTC, remained stable at very high levels.
Flip to slide 8
- And on COVID, in addition to the deceleration in new case counts, growth in vaccinations is now outpacing growth in new cases
Flip to slide 9
- Meanwhile, several states are showing possible signs of a peak in cases including a number in the South.
he COVID backdrop. As long as:
Flip to slide 10
- I think getting through back to school will be a key event in terms of allowing those COVID clouds to clear, given rising questions and concerns about how the Delta variant impacts children and the lack of vaccine availability for children under 12.
Flip to slide 11
Takeaway #3: We suspect tapering has already been priced in to stocks to some degree.
- Over the past week, we’ve fielded a number of questions about what tapering means for US equity markets. We continue to believe that the primary impact will be on P/E multiples. In recent years, the rate of change in the size of the Fed’s balance sheet has been fairly correlated with the rate of change in bottom-up P/E’s. We don’t expect multiples to expand once tapering begins.
Flip to slide 12
teresting thing we see in the:
Flip to slide 13
- We think 2Q21 underperformance by these segments was driven in part by the pull forward of expectations on the tapering timeline that occurred at that time according to our investor survey work.
That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.
