By: Stash Graham
The month of May produced mixed results for the three major indexes, while the firm experienced relative outperformance across portfolios. The tech-heavy NASDAQ, which had been the outsized outperformer during the 2020 calendar year, continues to lag behind the S&P 500 and the Dow Jones industrial average. For May, the Nasdaq Composite Index fell -1. 3%. The S&P 500 and the Dow Jones Industrial Average produced modest positive returns generating +0.15% and +0.97%. Our Gold tracker position (Ticker: IAU) continued its recent outperformance by generating a +6.15% return for the month. Our commodity basket position (Ticker: PDBC) generated a +3.94% return for May. The 10-year United States Treasury ended the month as it began yielding approximately 1.59%.
The topic of de jour in financial markets over the last 60 days has been whether inflation is transitory or not. While we will not know the answer until the fall months, we can piece together data points variables that have a high correlation to sustainably high levels of inflation. A material increase in income/wages will need to be a necessary component, and a strong labor market generates higher salaries. The labor market in the United States will see some exciting developments over the Summer. Indiana became the 24th state to declare an end to the supplemental unemployment benefits publicly. Only four of the 24 states (Alaska, Mississippi, Texas, and Arizona) have opted out of the supplemental unemployment benefits exceed the national average for unemployment (6.1%). The remaining 20 states all have unemployment rates below the national average. There has been considerable debate surrounding the federal supplemental unemployment benefit that pays an extra $300 per week to recipients. By the middle of July, 42% of those currently unemployed and collecting unemployment benefits (approximately 6.5 million citizens) will lose a lot of cash flow relative to what they were pulling from the government. The average state unemployment benefit is roughly $330 per week, so to lose $300 per week, we feel, is material enough to see many people enter the job market and find employment. Indeed, one of the most popular jobs posting sites in the world started tracking job search activity beginning in the middle of April to see if there was a relationship between job search activity and a respective state’s announcement of federal unemployment benefits termination. Predictably the job site company saw a 5% increase on the day after a state’s announcement. Disappointingly, the job search increase starts to fall materially after one-week post announcement. The quick fall-off in job searches implies that we could see a month or two of meaningful employment increases after supplement benefits end, but the picture after that is cloudy at best.
On the income front, we notice a considerable decline in household income as the effects from the March stimulus checks subside. The income fall-off should not be surprising as we have witnessed these effects several times over the last year. What makes this different is that there is no expectation of further one-time checks from Capitol Hill. This dynamic has hidden many downside effects that the brief but deep COVID-19 recession brought. In no other recession in the history of the United States have we seen growth in household income. The University of Michigan consumer survey asks households about their finances. One of the crucial questions discusses their future financial situation. Since the late 1970s, only 6% of the time have there been months where more families stated their future financial situation would be worse than their current financial situation. During April and May, participants in the widely followed consumer survey said that their financial situation would worsen in the future and over the next year. Richard Curtin, the director of the University of Michigan consumer survey, stated that the May survey produced the lowest level in financial prospects in seven years. To bring this all full circle, we question whether inflationary will be sustainably strong over the next five years.
Please see the following updates on existing positions held at the firm:
CVS Health (Ticker: CVS)- The company reported a solid first quarter that sent the stock higher on earnings. CVS’s sharp upswing in profitability in its Pharmacy Services and Health Care Benefits groups allowed it to raise its Fiscal Year 2021 EPS guidance to $7.56-7.68 from $7.39-7.55, providing the critical catalyst for the stock today. The company also continues to distinguish itself from its peers with superior financial performance. Pockets of weakness remain, including some lingering softness on the retail side, but the reaffirmation of the year-end guidance that came at the end of the month calms most concerns right now. Since our initiation, it has been a fantastic holding producing an unrealized gain of approximately 15% over the 60-90 period that we have held CVS.
American Tower (Ticker: AMT)- The cell tower mega-REIT announced that its board of directors had declared its quarterly cash distribution of $1.27 per share on shares of the company’s common stock. The distribution is payable on July 9, 2021, to the stockholders of record at the close of business on June 18, 2021. This distribution represents a 2.4% increase in the quarterly dividend.
AT&T (Ticker: T)- The company announced a deal that will spin off their WarnerMedia assets to merge with Discovery, Inc (owner of channels HGTV, Animal Planet, etc.). AT&T leadership said that the WarnerMedia-Discovery transaction would significantly improve AT&T’s financial flexibility by providing $43 billion (subject to adjustment) for debt reduction through a combination of cash, debt securities, and WarnerMedia’s retention of certain debt. This debt reduction allows the company to progress toward the end-of-year 2023 leverage ratio target of less than 2.5x while increasing investment in 5G and fiber growth areas.
Dominion Energy (Ticker: D)- The mid-Atlantic-based utility had top and bottom beats when the company reported 1st quarter earnings during the first week in March. They reaffirmed the year-end guidance for the earnings ($3.70-$4 per share for 2021). The stock price for Dominion was down a couple of percentage points for the month, but we are comfortable with their growth pattern and their ability to achieve their targets. We attend to hold this regulated utility for the next several years and look forward to collecting the growing levels of dividends the corporate management team has committed to pay. We are encouraged by the performance of our investment positions over the last 3-4 months. As we enter the summer months, we will monitor several developments (chances of an infrastructure stimulus bill, a change in monetary policy due to inflationary pressures, the end of COVID-related Federal unemployment benefits, and many more) that could have a direct impact on investment portfolios. Your continued trust humbles us as we approach these events, and we will look to protect and grow your estate’s assets accordingly.
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Graham Capital Wealth Management, LLC (“Graham”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where Graham and its representatives are properly licensed or exempt from licensure.