Macro Brief with Six Themes for 2021

February 17, 2021 - 7:39 pm

We're well into 2021 as we’ve turned the page on a new year, and the events of 2020 are in the rear-view mirror. Markets are rotating very strongly in some area as we will outline below, and very gradually if at all on other areas. Key themes for this macro update are as follows:

Growth is still beating Value.
Allocations should lean into the two best performing sectors of 2021.
Gold doesn’t have a pulse, yet.
Commodities are surging and a ‘Supercycle’ is well under way.
Emerging Markets will lead in Growth.
Small-Caps are dominating Large-Caps.

Growth is still where it’s at.

The portended handoff for 2021 from growth stocks to value stocks may have begun, but we’re not seeing major signs that value stocks are poised to take off and outpace growth stocks just yet. The one month return for growth exceeds value by 2.4%, and the 3 month return is still better by 1.1%

1 Month Comparison of Vanguard Growth (IVW) and Vanguard Value (IVE):

3 Month Comparison of Vanguard Growth (IVW) and Vanguard Value (IVE):

Institutional research from Goldman Sachs and Morningstar suggests that this rotation will take hold, but it doesn’t make sense to abandon growth stocks yet. Large cap tech growth stocks have started to form near-term tops in names such as Apple, Amazon and Tesla and we wouldn’t be adding or entering into any of these positions right now.

The 12 month return on Growth has been 27.8% vs 2.7% for Value. It may be a no-brainer to say Value will close the gap because it has underperformed for many years now, but the Value bucket is home to many stocks that we wouldn’t want in our portfolios such as Verizon, Pfizer and Wells Fargo.

Retail and Energy are Surging.

The current rolling 12 month period captures the pre Covid-19 highs, the steep drop in Feb & March and the strong V-shaped recovery. Two sectors that stand out from the rest by a wide margin are energy and retail. The rebound in both sectors has been steady and gaining momentum as crude oil has risen from “negative” -$37/barrel to over $60 today. Covid vaccines are helping to reopen the economy with offices coming back online, increased mall traffic, and travel slowly recovering. The strong growth in online shopping will likely continue because of convenience, with an added boost in brick and mortar activity further advancing strong retail names.

The Biden administration is focusing on clean energy and continued independence on oil, which will keep the tailwind on energy going through 2021 and likely beyond. Stock picking in this sector will pay off as we’ve already seen massive gains in companies like Bloom Energy (BE) and Plug Power (PLUG). Traditional pure play oil companies have also rebounded from their troughs as they pivot to renewable energy sources for the future.

If you want to bet on an esoteric sector that is absolutely ripping, look no further than (DRIV) which is focused on autonomous driving and electric vehicles. This ETF looks fairly well constructed as we’ve studied the holdings, but we can’t figure out why they own shares of Blackberry and Harley Davidson. We are proponents of a small allocation to this ETF on a pullback. Considering it’s narrow concentration and Beta of 1.3, buy at your own risk.

Gold may have lost its shine

For the past 12 months gold is up 10.2%, but it’s also 15% off it’s highs back in August. It is well below its 50, 100 and 200 day moving averages, and we’re not seeing any reason why we’d want to own any of it at this point. If you want a shiny metal, try a virtual bitcoin. It has risen by 446% in the same time period, and shows no signs of slowing down as it notches new highs almost daily.

The number of people and companies that are getting into the crypto-currency market may be putting a slight dent into the demand for gold. The rally in Bitcoin won’t last forever and the parabolic nature of it’s ascent surely will face a symmetrical drop in the future. Nonetheless, it may hit six figures before that happens. Demand globally from investors, retail traders and companies seems to be fueling the rise of several cryptos, and it’s proved to be a better hedge and store of value than gold in recent times.

Don’t ignore Commodities, there’s a lot of GAS in this rally.

Get it, Gas? No, seriously – Gasoline futures better known as RBOB are up 35% year to date since Jan 1, and the US Gasoline ETF (UGA) is up 29%. Don’t run out and stock up on fuel hoping it goes up in value, you can also bet on Nat Gas (UNG) which is up 20%. Besides traditional energy commodities - Uranium, Rare Earth metals, Timber, Corn and Copper are all showing healthy gains.

An easy way to gain exposure to a basket of commodities is through the Invesco Commodity tracking index (DBC) which is up 13.5% year to date beating the S&P 500 by 7%. A portion of commodity exposure belongs in portfolios if your time horizon is long enough to weather short term volatility.

Miners are another way to gain exposure to commodities and our favorite pick here is Freeport McMoran which we’ve owned for almost 1 year now as a stock trade, and more recently as an option trade. Copper Miners stand out as the second largest 1 year gainers for the past twelve months at 101%, after rare earth metals at 127%. We don’t follow rare earth stuff enough to be able to comment on it, if you have thoughts on this let us know.

This chart over a 24 year period illustrates the "supercycle" like nature of commodities, and if you want further reading on this look no further any of Jim Roger's books. This chart is courtesy of JP Morgan:

Look outside the US for the best returns

As the S&P has returned 6.4% so far this year in less than 50 days, investors in the US are celebrating the returns like it’s 1999. The respectable returns rank among the best Q1 starts in recent years, however it pales in comparison to what’s happening around the world. Five countries have doubled the return of the US for the past 6 months, and year to date China is up almost 3X the S&P 500. One of the highest conviction themes we believe for 2021 is that Emerging Markets will outperform the US. In particular, these five countries are most attractive: India, South Korea, Israel, Turkey and South Africa.

China would be the sixth that should perform well as the world’s manufacturing engine, and it is accelerating its outperformance against the US. We will soon rebalance our Long Portfolio to include Emerging Market exposure, even though we’ve handily outperformed the broader index without it so far.

If interest rates in the US rise and the markets correct expect Emerging Markets to potentially selloff steeper. One short term strategy that makes a lot of sense is exploring paired trades with the Emerging Market ETFs. We expect countries like Greece, Saudi Arabia, Mexico and Russia to underperform the group.

Stock selection among Small Cap stocks will beat Large Caps

For the past 3 months small caps have returned 20% vs 10% for large cap stocks. We expect continued outperformance from this group, however it’s unlikely to be this this wide of a margin. Under covered companies in the right sectors with healthy balance sheets and growth prospects would be our initial screening criteria. Widely covered companies that have been discovered have likely already had a healthy run, and it could be tougher to generate returns on such companies.

There’s no shortage of small cap ETFs to choose from, but we prefer to select stocks individually for our trades such as Houghton Mifflin, Clear Channer Outdoor and Arlo Technologies which we recently traded.

Stock picking is easier when everything goes up, but we will face headwinds and tests of the bottom range of the trend channels. In these situations, defining risk, stops and layering in short strategies as hedges or outright positions will help provide a ballast against capital losses. Keep an eye on interest rates as they’re slowly ticking higher, unemployment and the real estate market. Six percent of home loans are delinquent, and that number has been rising, Twenty two percent of hotel/lodging loans are delinquent, and that figure is also rising month over month (reference).

For the time being, there are risks ahead but some of these macro ideas should help with investing decisions, and provide insights to yield higher returns.