By: Stash Graham
Markets broke a two-month winning streak to produce losses in January. The S&P 500 was down 1% on the month, while the Dow Jones industrial average was down 2%. The last week of January brought significant weakness to the markets as the S&P 500, the Dow Jones Industrial Average, and the NASDAQ all lost more than 3% in the final five trading days. For the month, energy, healthcare, and real estate were outperformers. In comparison, consumer staples, industrials, and materials were laggards. Commodity prices were high to start the year, led by silver and copper. The month of January brought us many open-ended developments that we will need to monitor for at least the next few months. There was a new COVID-19 variant from South Africa and the United Kingdom. In early January, a “blue sweep” came as Democrats took both Senate seats from Georgia. A well-publicized rift between institutional and retail investors regarding distressed gaming retailer GameStop caused an outcry on Capitol Hill.
Federal Reserve Regional Bank reports are an efficient way to see how businesses within that region are doing. The Dallas Fed Manufacturing Survey is critical as Texas is one of the country’s major economic cogs. Most people associate Texas with energy, but the state is home to the United States’ most extensive exporting base. The Future Inventories Index for the Manufacturing Survey came in at a 4.0 for January (for December, the Index was 19.8). The fall in the Future Inventories Index was disappointing because this metric looks at what purchasing managers think they will be doing shortly. A low Future Inventories Index score guides to weak demand and orders for supplies over the coming months. Lastly, the survey provides direct comments from business owners in the region. A business owner within the housing sector commented, “We are seeing a decline in orders serving the direct builder market (residential housing) over the next three to nine months.” This statement gives us a sense of pause as this forecast is not consistent with the housing market’s recent performance. Less demand for goods that homebuilders would want when building a new home makes us ponder if we will start seeing a slowdown in the red hot housing market. Another remark from a business owner within the broader manufacturing sector has us thinking about industrial metals, “The main constraint to meeting customer needs is the lateness and increasing costs of raw material. All metals, but especially steel, stainless steel, and aluminum are difficult to get. Domestic mills are shipping orders late.” This comment supports our exposure and bullishness on commodities for the year.
Finally, U.S. consumers’ confidence in the economy continues to lag behind the actual rebound in the U.S. economy. We know that the economy started its rebound in the second half of 2020, but the consumer feels unmoved. The Bloomberg Consumer Comfort Index (seen on the next page) observes a randomized sampling of Americans’ views of the economy and their respective personal finances. Current sentiment levels continue to be below surveys from early September and November. We have seen a recent uptick in the last two weekly surveys of January, but levels continue to remain well below the end of 2019’s benchmark. We assume that the recent rise in the index is due to the most recent stimulus checks. In a consumption-based economy, the consumer is paramount. We will continue to watch the various consumer sentiment indices to look for a unified, positive shift in American purchaser’s opinion on the overall domestic economy.
Please see the following updates on existing positions held at the firm:
AT&T (Ticker: T)- The telecommunications/media giant reported fourth-quarter top and bottom-line estimate beats. HBO Max, their new streaming service, topped 41 million domestic subscribers and near 61 million subscribers worldwide. We have seen the continued migration from media entertainment companies with a large base of content looking to take advantage of people staying at home. The decision to stream some of Warner Media’s most prominent film franchises on the streaming service simultaneously as their movie theater release certainly helped HBO Max. For the upcoming year, AT&T expects to produce approximately $25 million in free cash flow and maintain a dividend payout ratio in the high 50% range.
PDBC (Invesco D.B. Optimum Yield Diversified Commodity ETF)- The broad basket commodity ETF enjoyed an excellent month to start the year. As mentioned in the opening paragraph, commodities outperformed all three of the major domestic indices. The Invesco Diversified Commodity ETF generated over a +3% return for the month. We continue to believe that the U.S. dollar will continue to weaken throughout the year. Downward pressures from the historic growth in U.S. Government and Corporate debt outstanding, declining interest from foreign investors to buy U.S. Treasuries, and the Federal Reserve’s intent to keep rates low for years are too much for the U.S. Dollar to withstand. Any asset priced in U.S. Dollars should benefit.
Intel Corporation (Ticker: INTC)- In the middle of the month, Intel made some significant changes. Headlines emerged that former CEO, Bob Swan, was fired and replaced the former VMWare chief, Pat Gelsinger. The markets loved this news, and Intel traded up more than +10% in the two trading days after the announcement. We used this positive development in markets to exit our position in the chip giant. Competitors have spent the last couple of years taking market share from Intel. This dynamic accelerated into the end of 2020. On average, we returned a +18% return over the five months that we owned the position.
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