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Strategic Insights

Volume 10, Edition 12 | April 5 - April 9, 2021

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The Vaccination and Reopening Race

Doug_Walters Doug Walters | Articles

Read Time: 3:30 min

Vaccinations are accelerating, as are reopening efforts. With improvements in daily cases stalled, the race is on and we only need to look at the stock market to see who is currently in the lead.

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

It was an eerily quiet week for investors from a newsflow perspective. Even the Federal Reserves meeting notes provided little new information to digest. The headline void put focus on the two stories that have been with us for a while and will continue to be in the months ahead: covid and the infrastructure bill. Today we will focus on covid.

The good news is there has been an acceleration in vaccine distribution which has helped investor sentiment. Optimism is leading states and regions to reopen parts of their economies, increasing the virus’s spread. In the U.S., the U.K. variant, which spreads more quickly and is more apt to infect children, is now the dominant strain. The net impact of these two dynamics is that daily new covid case trends have stopped improving. It could be worse, though. In Europe, we see a genuine fourth wave in cases in some countries, like Italy, as vaccine distribution has not been quick enough to offset the rise of new variants. The bottom line is that the race between vaccination and reopening is on!

As investors, it often seems we need only look at the stock market to know how the covid battle is going. This week growth and momentum stocks were in favor. These are companies like Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Microsoft (MSFT) that have benefited from people staying at home during the pandemic. When concerns about reopening the economy increase, these stocks do well. On the other end of the spectrum, value and small-cap stocks meaningfully underperformed this week. These are the companies that the pandemic has hit the hardest and should benefit the most from normalization.

Our approach in this environment is a bit of a barbell strategy. We have tactical tilts in our strategies toward value, which we still see as a big opportunity in recovery, and momentum, which should continue to benefit in an expansionary environment.

Headlines This Week

Building Bridges 

  • President Joe Biden said he is open to negotiation with Republicans regarding the infrastructure bill, reiterating that the doing nothing option is off the table. 
  • Both parties will debate what type of spending should be included in the bill and how to finance the infrastructure spending.  
  • The proposals to spend $3 or $4 trillion on infrastructure quickly waned. Republicans said they would support the $2 trillion infrastructure bill as long as 2017 tax cuts remain intact and the bill targets traditional infrastructure projects like roads, bridges, and broadband. 

A Nice Jolt! 

  • Weekly U.S. initial unemployment claims rose to 744,000 claims, a sobering reality that the recovery of the U.S. economy will take some time. 
  • The four-week average of initial unemployment claims sits around 724,000 while the continuing unemployment claims remain around 3.8 million.   
  • The employment’s bright spots came from the JOLTS report, which measures job openings, and the measure is currently at two-year high. 

 Staying the Course 

  • The Federal Reserve released notes from its March meeting, reiterating its monetary policy position to support economic recovery. 
  • Last Friday’s job report gave Wall Street a glimpse of hope for a strong and quick recovery in the labor market.    
  • With that comes worries about overinflation and sudden raises in the overnight lending rate by the Federal Reserve. But the Federal Open Market Committee (FOMC) stated that they must see substantial progress towards maximum employment before they begin to unwind current monetary policy support. 

The Week Ahead

Inflation, Inflation, Inflation

Next week will see the headline Consumer Price Index (CPI) release for March, the country’s inflation barometer, alongside China’s Q1 GDP numbers.  

  • Year-over-year headline CPI is poised for a sharp increase to 2.4% from last month’s 1.7%. 
  • This would be the highest level that CPI has reached since the pandemic began last March. 
  • Markets are concerned with how high inflation will go due to expansive government spending and stimulus during the pandemic. 
  • China will release its 2021 Q1 GDP numbers next Friday. 
  • Some forecast that China could see around a 12% year-over-year growth for Q1 with an estimated 2021 GDP growth of 8.4%. 

Earnings Season is Back!

Q1 earnings season will kick off next week, with a handful of big names releasing their first earnings reports of the year. 

  • The financial sector will see the largest share of reporters next week, including JP Morgan Chase (JPM), Goldman Sachs (GS), Bank of America (BAC), Citigroup (C), Morgan Stanley (MS), and Blackrock (BLK).  
  • Other non-financial names such as PepsiCo (PEP), Delta Air Lines (DAL), and UnitedHealth Group (UNH) will also report next week.  
  • Many investors will use these earnings to gauge how the economic recovery is progressing as the economy reopens.  

Treasuries Up for Grabs

The US Treasury will auction $120B of long-term securities next week when the 3-Year, 10-year, and 30-year go up for sale on Monday and Tuesday.  

  • The auction will include $58B of 3-Year notes, $38B of 10-Year notes, and $24B of 30-Year bonds.  
  • All eyes will be analyzing the demand for these notes and bonds as last months auctions attracted strong demand for 3-Year notes but average and slightly below average demand for the 10- and 30-Year notes, respectively.  

Masters Weekend

The Masters Tournament is this weekend, with a competitive field all vying for the highly desirable Green Jacket.  

  • One notable exclusion on the list of entrants will be Tiger Woods, as he is still recovering from injuries sustained in a severe car crash in February.  

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