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Investing

What’s trending in the markets this spring

Take a look at some of the best- and worst-performing areas across the global investment landscape.


 

Our Top Market Takeaways for April 23, 2021.

 

What is trending in markets this spring

 

Heading into Friday, the S&P 500 was -1.2% below the all-time high it made a week ago as the world focused its attention on record-high global COVID-19 cases, the conclusion of the George Floyd trial with the conviction of Derek Chauvin, climate concerns and Earth Day, and potential changes to U.S. tax policy. We’re not concerned about the slip, and we remind investors that volatility is normal—the average year sees a peak-to-trough selloff of around -14% in the S&P 500. This year, the deepest selloff has been only -5%. Instead of falling into the trap of trying to time a selloff, this week we try to assess the markets’ mood by taking a look at what’s trending right now.

 

1. Capital gains taxes

The S&P 500 dropped -1% after headlines that President Biden is seeking to raise the capital gains tax rate on top earners to ~43%. Higher taxes are certainly a headwind to equities, but it is our sense that the more meaningful change for equity investors to watch for would be one to the corporate tax rate, which could be a headwind to earnings growth in 2022. Capital gains taxes matter for planning and personal investing decisions, but a quick scan of history suggests that hikes in capital gains rates don’t leave a lasting impact on equity markets. Indeed, the average return in years when the capital gains rate increases isn’t noticeably different from any year (in fact, it’s actually slightly higher).

Now, this analysis has some shortfalls. There are only 12 examples of capital gains taxes being raised, and no examples of a change of this magnitude (effectively doubling the rate), but it is our view that the business cycle and earnings backdrop will be more important for markets.

What assets could face the most pressure? Probably the ones that are up the most. Right now, there are a lot of big winners. Out of the 505 stocks currently in the S&P 500, 115 are up more than 100% over the last year. But let’s not be too hasty—it takes a long time for a policy goal to become a bill, and then for a bill to become a law.  

 

2. Memes

For illustrative purposes, an investor who put $1,000 into the S&P on the first day of 1988 and reinvested all their dividends along the way would have around $33,515 today after the 32-year journey. Compounding, sticking with a plan and investing for the long term work wonders, right? Well this year, so have memes.

An investor who put $1,000 into an ironic joke cryptocurrency on the first day of this year now has $45,910, even after prices fell from their early-week highs.

In stocks, the S&P 500 has delivered a +10.6% total return this year. Not too shabby for a little more than four months, especially considering the average annual return is around +8% per year. However, the company that operates the ship that clogged the Suez Canal (remember those memes?) is up +80%, and the brick-and-mortar video game retailer has returned almost +700% year-to-date (diamond hands indeed).

 

Note: Cryptocurrencies are not a regulated form of currency. They can experience extreme volatility. An investor may lose all of their investment.

 

3. Brazilian stocks and the real

A persistent struggle with COVID-19. Too much debt fueling crisis response measures. Political instability and inflation woes. Brazil has been one of the world’s sore spots since the pandemic started, and its obstacles are making it one of the laggards of the recovery. While its currency and stock market haven’t retested their lows, they’ve reflected the pain. The real is among the world’s worst-performing currencies year-to-date (-5.4%), and the MSCI Brazil is down -5.4% (versus broad EM +4.4%). Its prospects may look up as case counts roll over and global demand continues to pick up, but only time will tell. 

 

4.    Lumber

Lumber futures are up over 50% year-to-date. They declined slightly this week to break a 17-day streak of gains. A perfect storm of demand (because housing inventories are historically low, because of home improvement projects during lockdown and, we have to imagine, from restaurants building those three-sided cabins for outdoor dining on New York City streets), as well as a lack of capacity from sawmills have sent prices soaring. It’s not the trees themselves that are pricey (timber hasn’t budged), it’s the 2x4s. That tells us that sawmills were simply caught flat-footed by the surge in demand.

 

5. Chinese tech stocks

Chinese technology stocks are down nearly -25% from mid-February peaks. Investors are worried that the government’s regulatory steps against Alibaba are merely a first step in a broader crackdown against monopolistic behavior. This may seem like a niche issue at face, but this complex is increasingly important to the broad emerging markets index. Indeed, just four big Chinese internet stocks (Tencent, Meituan, Alibaba and Baidu) have accounted for nearly half of the -7% decline in the MSCI Emerging Markets Index since the middle of February. It seems to us that there could still be opportunity in parts of China and broader emerging markets where we’re constructive in the near term, but the regulatory cloud could continue to hang over China’s tech complex for the foreseeable future.

 

6. Defensive sectors

Since the start of March, defensive sectors have been having a moment. Utilities (boosted by winter storm demand and perhaps some excitement around clean energy transitions), real estate (whose top-five performers are focused on either wireless communications infrastructure or storage solutions), and consumer staples (think supermarkets, pantry standbys and booze) have led the S&P 500. The broad index posted 13 of its 19 year-to-date all-time highs along the way. The takeaway? The rally continues to broaden out, but we still think healing dynamics will most heavily favor cyclical sectors such as financials, materials and industrials when the year is said and done. 

 

It doesn’t seem like financial markets have really found a sustained theme so far in the second quarter, so equity investors are just playing it safe by favoring high-quality companies while there are shenanigans going on elsewhere. We believe goals-based investors could be well served by ignoring these types of short-term trends, and focusing on investing for the long term.

 

 

 

 

All market and economic data as of April 2020 and sourced from Bloomberg, FactSet and Gavekal unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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