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Strategic Insights

Volume 10, Edition 4 | February 1 - February 5, 2021

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Perfectly Predictable

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min

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It did not take an experienced investment analyst to point out that the “retail squeeze” was going to end badly for some; and that it did. We add this to the growing list of lessons that the past 12 months have offered investors.

Contributed by Doug Walters , Max Berkovich , Aleksey Marchenko , Frederick Hole

Stocks rebounded this week as a sense of normalcy returned, and the “retail squeeze,” which dominated headlines last week, faded to the background. Investor attention returned to Washington, where a fiscal stimulus package was being debated.

Last week we broke with our usual mantra of “prepare, don’t predict” and boldly forecast that GameStop’s (GME) stock would fall as quickly as it rose. Okay, we were not really stepping that far out on the limb. In fact, we were probably still hugging the tree. It did not take an investment analyst to see that GameStop was unsustainably overvalued. Yet, that did not stop buyers from continuing to prop up its price for two weeks in search of a quick buck. Some will have profited handsomely from the whole affair. But after more than an 80% decline in the past few days, there will be more that jumped in too late and lost a lot or even everything.

The past 12 months have been an incredible education for anyone hoping to become a better investor. The “retail squeeze” is just another example, providing an opportunity to highlight the difference between gambling (i.e., chasing GameStop) and investing. Our year-end piece focused on some of those other important lessons that this unusual year offered (2020: Exit Smarter).

25%

of GDP

Congress’s fiscal response to the pandemic is approaching 25% of Gross Domestic Product (GDP).

Headlines This Week

Stimul-eye

  • The Senate passed a $1.9T budget plan, opening the door to push through another coronavirus relief package via the reconciliation process.
  • Eligibility for $1,400 stimulus checks will most likely be debated, excluding high earners from the stimulus checks.
  • The Senate’s $15 minimum wage proposal was not welcomed, leaving it in the air for the moment.
  • The overall fiscal response to lift the U.S. economy from the pandemic will be near 25% of GDP. Many economists argue that not doing enough is much worse than the alternative.

Work to be done!

  • The U.S. added 49,000 jobs in January, meaningfully below the Street consensus of 100,000 jobs.  
  • The impact of Covid is still being felt in the Leisure/Hospitality, Healthcare, and Retail Sectors. 
  • Job creation came from the Professional and Business Services and Government Sectors. 
  • The January unemployment number came in better than expected, dropping to 6.3%. 
  • However, the participation rate dipped slightly while average weekly work hours and average earnings ticked up slightly.

More than halfway there!  

  • Over 58% of S&P 500 companies reported their earnings. 
  • While it is still a bit early, thus far, the S&P 500 index grew earnings by over 4%. 
  • Most sectors beat earnings estimates; the holdouts are the Industrial and Energy sectors.  
  • Amazon (AMZN) and Alphabet’s (GOOG, GOOGL) Google were big, notable earnings winners this week.  
  • Jeff Bezos, founder and CEO of Amazon announced that he would be replaced by Andy Jassy, the current CEO of Amazon Web Services (also known as AWS). Bezos will stay on as chairman of the company. 
  • Alphabet’s Google saw a big rebound in advertising. 

The Week Ahead

Poised for Liftoff?

The Consumer Price Index (CPI) numbers for January will be released on Wednesday, giving the market insight into where inflation currently stands.   

  • Forecasts suggest that the rate will slightly increase to 1.5% in January, from 1.4% previously.
  • The Chair of the Fed, Jerome Powell, has repeatedly been clear in signaling that it is too soon to discuss tapering the Fed’s quantitative easing policy.
  • With the $1.9T in spending that Congress is proposing, inflation is poised to increase even more than previously forecasted.
  • Keeping an eye on the Fed will certainly be a theme this year to see whether they will stick to their promise to overlook high inflation or change their tune once the 3% level approaches.

Super Bowl Sunday! 

Next Sunday, Super Bowl LV will see the defending champions Kansas City Chiefs play the Tampa Bay Buccaneers.   

  • While this Superbowl will be like no other thanks to the pandemic, fans are in for a treat with six-time Super Bowl champion Tom Brady up against rising superstar Patrick Mahomes. 
  • The event will occur in Raymond James Stadium in Tampa, with fan attendance capped at roughly one-third of the venue’s capacity. 

Last Big Wave of Earnings

Earnings season is winding down, but several large players are set to announce next week before the season wraps up. 

  • Among those expected to catch investor attention are Twitter (TWTR), Uber (UBER), Cisco Systems (CSCO), PepsiCo, Inc. (PEP), Coca-Cola Company (KO), General Motors (GM), NVIDIA Corp. (NVDA), AstraZeneca (AZN), Roku (ROKU) and The Walt Disney Company (DIS).

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