What I Care About This Week | 2021 Feb 15

by Franklin J. Parker, CFA

The Summary

  • Investors will be closely watching the progress of the latest stimulus package. The current proposal is worth around $1.9 trillion. Though Congress is out this week, the package has cleared initial negotiations and appears to be on track to pass via the reconciliation method, which only requires a simple majority. The bill is expected to be assembled by the House Budget Committee this week, with passage in the House expected next week. Markets are likely to trade on news, pricing the likelihood and timing of passage.

  • Wednesday has a couple of important data drops: the Fed minutes, and the producer price index. The Fed minutes will be parsed by market participants looking for clues to when/if policy normalization is to begin. Producer price indexes are usually viewed as an early indicator of inflation, though some of that link has been weaker lately. Either of these could move markets.

  • Earnings have been generally good (with about 75% of companies having reported): more companies are beating their estimates than average, and they are beating these estimates by a larger margin than average. No big surprise, tech and financials have posted the largest percentage of “beats” across sectors, while energy and real estate have posted the fewest percentage of “beats”. Still, 67% of energy companies have beaten earnings expectations, which is still quite good. Interested folks can read more at FactSet.

The Details

As we’ve discussed before, extreme market valuations are being supported by the central banks. Low interest rates and continued expansion of the money supply (printing money) serve to keep financial markets up. The latest round of stimulus proposals, then, are an important component of this continued market rally, and investors are likely to push prices around in response to any news surrounding it.

To fund stimulus, Congress authorizes the US Treasury to borrow money. In the past, it was investors (both domestic and international) who lent that money to the United States. In recent years, however, a significant percentage of that money is lent by the Federal Reserve. The Fed creates the money and then lends it to the US Treasury. In this scenario inflation becomes the major constraint on spending–higher inflation limits the Fed’s ability to print money, which limits the Treasury’s ability to borrow, and ultimately hinders Congress’ ability to spend. In the end, this pushes investors to watch inflation data very closely.

This is why markets are heavily influenced by central bank commentary (hence the importance of Fed minutes scheduled to post on Wednesday) and inflation data. Hints of the Fed pulling back spending would lead investors to push down stock valuations.

On the upside, earnings are posting generally better than expected. Most companies in the S&P 500 have posted results, and most of those are better than anticipated. Even energy, the laggard over the past year, has seen 2/3rds of companies post earnings which are better than expected.

It is my view that markets will continue to be bolstered in the coming months by the Fed and Congressional stimulus. There are certainly risks facing investors, and ultimately your goals and objectives will determine your course, but I see more upside than downside risk in the coming months. In my view (which can change in a moment, by the way), investors can use market dips as entry points.

Chart of the Week

As frigid temperatures grip the Southern US this week (parts of Texas are colder than Alaska!), energy markets have been sent on a wild ride! This week’s chart comes from Bloomberg, and it shows the spot cost per megawatt-hour of Texas electricity–a 3400% jump within a few hours. Oil and natural gas prices are also getting a boost from the sudden cold snap.

Texas electricity prices soar past $9,000 cap amid record-setting cold

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