by Franklin J. Parker, CFA
The Summary
- Retail sales, industrial production, and the usual weekly jobless claims post this week. Generally a light data week after last week’s all-important inflation print, but the peek into consumer spending will be important—especially in light of the surge in Covid cases. How consumers are responding is an important consideration in how we can interpret future case numbers. In keeping with the consumer spending theme, Target and Walmart report earnings this week.
- Earnings season is mostly behind us with over 90% of the S&P 500 companies having reported. According to FactSet, 87% of companies have reported earnings above estimates, and they have reported revenues 4.9% above their expectations, on average. This is the highest beat since FactSet began started tracking the figure in 2008. In short, earnings are very good. That prices haven’t moved much in response is a good sign, in my view, as it means investors are already shrinking stock valuations in expectation of the Fed withdrawing their support. As I have said before, this does not necessarily mean prices will fall so long as earnings growth makes up the difference.
- Last week was a busy data week. Inflation posted at 5.4%—much hotter than the Fed would like, but less than consensus expectations and less than last month’s print. The Fed is, so far, holding to their “high inflation is transitory” narrative, but many political leaders are sounding alarm bells. As I have said before, we need to watch the data as it comes in rather than hold to a specific narrative. And, exactly how this keeps the Fed in play (or takes them out of play) is yet to be seen. At the moment, I expect the Fed to announce their tapering program in September or October, then begin their tapering program in January of 2022, and conclude it (i.e. stop printing money) by September/October of 2022.
The Details
Let’s talk about growth themes.
In the coming decades, I see technological adoption accelerating in sectors that have been historically resistant or unable to adopt technological solutions. Livestock agriculture (part of my background) is my favorite example of this. While grain farmers have been eager and quick to adopt technology in both the harvesting and planting of crops—self-driving tractors are a real thing!—the crops themselves have also been technologically modified to increase yield.
Livestock agriculture is different, however. Livestock cannot be so readily modified by technology, and automating their growth and harvest is a non-trivial problem. Technology will find its way into the sector, but it has yet to make a significant dent. And, there are numerous sectors like this still out there. I see these late-tech sectors being the target of innovation and growth in the coming decades.
Cryptocurrencies are oft-talked about as part of the future. While I am skeptical of the specific currencies, I am quite bullish on the technology that underlies them. Blockchain technology is, at heart, a digitally stored and verified contract. Any agreement between people could be conducted on a blockchain, so the possibilities are genuinely endless. You can think of blockchain as a foundational technology—it is what other stuff is built upon. This is similar to the internet. While the internet itself is not an investible business, it is foundational to other investable businesses. I see the same as being true for blockchain, and the growth potential in the sector is enormous.
Biotechnology is sure to continue its advance in the coming decades. With the rapid growth of CRSPR’s gene-editing technology, genetic profiling, and bio-printing, there are sure to be breakthroughs in personalized medicine coming. Under a personalized medicine paradigm, therapies, medicines, and treatments are tailored to and built for your specific body and/or disease. One-size-fits-all pills and medical devices are likely to be a thing of the past as we become better able to 3D-print both. There is some ground to cover to get there, not to mention the regulatory hurdles to get clearance from the FDA, but I see innovation and growth in this subsector in the coming decades.
Finally, there appears to be a trend developing in re-shoring manufacturing. Note that these manufacturers will not look like they did in the 1970s. The trend in automation will augment this re-shoring trend, and the providers of manufacturing processes and robotics will likely see growth in the coming decades.
Of course, getting trends right is a separate issue from getting specific company bets right. All of the usual rules apply when we invest in a long-term growth thesis: only invest in companies you understand, and don’t get married to an idea. And none of this to say that buying long-lasting and proven companies is a bad strategy. Rather, an eye to emerging growth trends should only serve to augment what investors are already doing.
Chart of the Week
2021 has seen some talk of a global minimum corporate tax rate. Generally speaking, the G7 countries are now in agreement, at least in concept. Interestingly, this appears to simply be a shot at Ireland who has the only headline tax rate below the proposed minimum, as the first chart demonstrates. This, coupled with a proposed increase in US corporate taxes, has some investors worried.
However, as I have talked about before, the headline tax rate is not the relevant metric. What is relevant is the effective tax rate, which is mostly governed by the details of a nation’s tax code. As the second chart shows, (1) the Biden administration’s proposal keeps corporate tax rates below Obama-era rates (also well below Reagan’s tax rates), and (2) the effective tax rate of US corporations is well below the headline rate, and has been declining precipitously over the years.
In short, at least as so far discussed, a potential increase in corporate tax rates is largely a non-event for investors. While it will increase taxes paid, it will only do so on the margin—not a significant enough dent to make a difference, in my view.
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