The Opening Trade Revisited

The Delta variant, Hurricane Ida, shortages, and supply line issues are penalizing growth in the third quarter but not our view of the other side. It may ensure higher growth in 2022 than previously estimated as governments boost spending from previous plans and monetary authorities remain overly accommodative longer, with the Fed postponing tapering until next year. We expect our economy to regain momentum in the fall and the global economy to pick up steam next year. Recent economic data points here and abroad confirm the near-term slowdown, but the solid underlying longer-term fundamentals have not changed.?

The financial markets continue to hit new highs, but there has been constant rotation from growth to value and back to growth again. We believe that the next move will be back to value/economically sensitive companies as governments react to the slowdowns by accelerating spending plans, mainly infrastructure, while monetary bodies maintain their overly accommodative policies longer delaying tapering, pointing to the recent pause in growth. While we will continue to own an outsized technology position as we are still in the early innings of elevated spending levels as companies must boost productivity to control costs and remain globally competitive, we have begun to add to economically sensitive/value companies who will benefit from accelerating global growth and trillions of new infrastructure spending. Liquidity trends remain strong, so we would take advantage of any corrections by adding to positions.?

The key to the economy reaccelerating remains to getting our arms around the Delta variant by vaccinating all the unvaccinated. It appears that Dr. Gottlieb may be right as the number of cases/deaths is peaking in the south, where the outbreak occurred first. Unfortunately, cases/deaths are still increasing in the North and West, but he expects them to peak in a few weeks. More than 5.39 billion doses have been administered across 182 countries at a rate of roughly 41.6 million per day. In the U.S., 372 million doses have been given so far at an average rate of 918,000 doses per day. It will take less than five months to vaccinate 75% of the world population fully. Moderna filed for U.S authorization for a booster shot, indicating that it raised antibody levels 40-fold in clinical studies. We expect the FDA to approve booster shots within a few weeks, and Pfizer, Moderna, and J&J will have over 7 billion doses available worldwide to handle everyone and all contingencies. Even if a new variant pops up, we expect vaccine modifications could be completed very quickly. We see no reason that vaccines should not be mandated for all, as we have done in the past for other pandemics.?

While we did not hear from Fed members this week, they face challenges ahead. In the last few weeks, the economy has softened considerably as the Delta variant spread. Also, pandemic unemployment benefits end in September for 7.5 million people. They will not even discuss tapering until the delta variant spike is under control and they see the impact of reduced government support on spending. While we do believe that most of the inflationary pressures will be transitory, shortages and supply line issues may extend well into 2022, testing the Fed’s resolve.?

We are getting more confident that the $1 trillion-dollar plus traditional infrastructure bill will be on President Biden’s desk within a month as it will be political insanity for Pelosi and the Dems to hold it hostage to the $3 trillion plus social infrastructure bill after all the damage caused by Hurricane Ida. Here is what is included in the traditional infrastructure package: $110 billion for roads, bridges, and major projects; $39 billion to modernize public transit; $66 billion for passenger and freight rail; $65 billion for broadband infrastructure; $17 billion for ports; $25 billion for airports; $7.5 billion for zero and low emission buses and ferries; $7.5 billion for electric chargers; $65 billion to rebuild to grid plus another $50 billion to make it more resilient; and $21 billion to clean up Superfund and brownfield sites. The House will address the larger bill under reconciliation. And suppose Democratic Senator Joe Manchin sticks to his guns, urging a “strategic pause” on the $3.5 trillion bills wanting a far smaller reconciliation bill that America can afford and needs to spend. In that case, it is dead in the water as is. We expect a far smaller bill with less tax bite to keep America competitive and the entrepreneurial spirit alive.?

Economic data points have been a mixed bag over the last few weeks: employment rose only 235,000 compared to an estimate close to 750,000; TSA airport screenings dropped to the lowest level since March as travel and fares are dropping; high-frequency charts show a weakening economy from Delta; pending home sales fell 1.9%; the Dallas Fed Manufacturing Survey fell to +9 from +25; airline booking for Labor Day is 19% below 2019 levels; consumer confidence fell to a six month low, and total productivity increased by only 2.1% while manufacturing productivity increased a more robust 8% in the second quarter.??On the other hand, U.S manufacturer's gauge of factory activity rose to 59.9 as the backlogs index increased to 68.2; the new orders index stood at 66.7; unemployment insurance claims fell to 340,000, and construction spending increased by 0.3%.

Economic data points abroad also show weakening trends due to the Delta variant, shortages, and supply line issues. China’s weakness stood out as the government took extreme actions to eradicate the virus: the non-manufacturers purchasing managers index fell to 47.5 in August from 53.3 with specific weakness in services down to 46.7; the manufacturers' index slipped 49.2, down from 50.3. In addition, Japan’s August Manufacturing PMI fell t0 52.7 while confidence in the Eurozone economy dropped to 117.5 as order books deteriorated and retail sales weakened. On the other hand, Europe’s factory backlog hit a record high as companies struggled to meet demand due to shortages and supply line constraints. India’s economy grew 20.1% in the second quarter but has slowed since then due to covid such that growth forecasts have been reduced to 9.5% for the fiscal year ending March 2022. Finally, Australia’s final Markit Manufacturing came in at 52.0 vs. 56.9 last month.

Investment Conclusions

Global growth has slowed over the last month due to the outbreak of the Delta variant, shortages, and supply line issues. We believe that governments and monetary authorities will respond quickly to support their economies just as the variant peaks. Growth, on the other side, will be more robust than initially projected. The market remains one step behind emphasizing growth over value/economic sensitivity. It is time to rotate again and invest in the re-reopening trade, as we did late last summer. We will continue to hold most of our tech positions as we remain in the early innings of above-average tech spending that we discussed last week. We also added to defense positions after Afghanistan.?

The time has come for our government to pass a much-needed traditional infrastructure bill that strengthens the very core of America and rewards investment/risk-taking.??If we have learned anything from the pandemic, we need to shorten supply lines and support research to remain an economic powerhouse. And we must always be there for our friends.?