Welcome back to Nick Talks Stocks! A weekly newsletter where I cover financial news, stocks, and market trends.
Last week was dominated by Wednesday’s FOMC meeting, which went better than investors expected. The Fed committed to their easy money policy and eased investor concerns over premature action towards inflation. They also acknowledged the recent high inflation numbers, insisting that it be transitory. Retail spending slowed month over month, supporting the Fed’s claims.
Next week looks to be pretty uneventful news-wise. Chairman Powell speaks before Congress on Tuesday, which could move markets depending on his responses. Quarterly GDP numbers are set to come in on Thursday, with consumer sentiment data on Friday. The excitement next week should come from the market itself, as I’m expecting some big price movements. The Fed has made things clear: they will not be interfering with asset prices for the time being, and as a result markets are ready to fly.
Before we start, a few disclaimers. I am not a financial advisor and this is not financial advice. Do your own DD and always know what you own. Got it? Good.
Let's get started.
The rotation from value to growth stocks continued with the Dow Jones falling 3% on the week. Jerome Powell gave markets the clarity needed for a continued rally, confirming low interest rates until 2023. I expect the long term bullish trend to continue until the Fed takes definitive action towards inflation. The next major catalyst looks to be the tapering of bonds coming later this year. Until then, tech stocks should have room to run. I’ve been buying heavy in anticipation of a summer rally.
Bond yields and growth stocks tend to move in opposite directions. This is because bond yields rise with inflation, and high inflation eventually leads to a raising of interest rates. Higher interest rates increase the cost of borrowing, hurting the profitability of companies with high levels of debt. Additionally, higher yields make the bonds a more attractive investment, thus making them more competitive in the market. Value stocks generally outperform growth in this environment due to their lower levels of debt.
One sector I expect to see continued strength is home builders. Cities across America are facing a housing shortage, and the issue doesn’t look to be resolved anytime soon. Large population shifts are taking place within our country, which will lead to a boom in the number of new home sales. The rapid growth of states such as Texas and Florida, along with preexisting supply issues, will bring steady demand to the industry in the coming years. Lennar (LEN) is best positioned to take advantage of this demand as the largest home builder in America. They have a very attractive valuation at only 10x P/E, and the aforementioned demand will provide plenty of revenue potential. I’m bullish on home builders as long as the housing problem persists.
Powell Calms the Market
The Fed revised their inflation forecasts this past week, seeing 3% inflation in 2021 and around 2% thereafter. Despite these high forecasts I see this as a positive, as the Fed is seemingly aware and cautious of overheating the economy. Powell confirmed low interest rates until 2023, which leaves plenty of room for the economy to grow until then. This decision has sparked debate among critics who believe we are on the path to runaway inflation. I side with the Fed, however, and believe that long term inflation is under control.
Jerome Powell was more cautious than I expected as he was reluctant to even mention bond tapering. He said this meeting was the, “talking about talking about meeting,” and was unwilling to comment further—a good sign for investors. This is in line with my expectations for tapering to begin in the Fall, which will likely cause a short term selloff towards the end of the year. It’s possible that this will bring a repeat, “Taper tantrum,” which occurred in 2013 when the Fed slowed QE following the recession. The eventual dip should prove to be a buying opportunity, and asset markets should remain bullish until rate hikes in 2023.
The Fed’s cautious approach creates a bullish outlook for the markets, with many growth stocks poised to breakout in the coming weeks. The meeting gave clarity to investors who were unsure of the Fed’s current stance on inflation, and with all negative catalysts out of the way I expect a great summer for the economy overall. Tech should begin to rally as inflation fears continue to wane and markets align with the Fed’s plan. They’re being forced to walk a fine line between too much inflation and preemptive action, but thus far it’s been a success. Time will tell if Powell is right, but investors seem to be trusting his word for the time being.
Looking Ahead
Next week is lacking in any major catalysts, but I’m expecting some volatility over the coming month. Options volume has been consistently high and the VIX is rising off of it’s lows, both of which are indicative of large price swings. Investors are placing bets for a strong tech recovery, which is a sentiment I agree with. I’ve been going heavy into high P/E growth stocks that were beaten down to start the year. I’m expecting Tesla (TSLA) to rally anytime now, as the breakout above 600 was confirmed last week.
I’ll also be watching Arcimoto (FUV) for a possible short squeeze. The company has EVs already in production with actual sales, a good balance sheet, and plans to scale production further. A market cap of $500M is quite low relative to other EV companies, especially considering the fact that vehicles are already being made. The company has a unique take on the electric vehicle with a vision for a more efficient and sustainable future. It’s still early, but Arcimoto has the makings of a quality company. With over 40% of the float short I’m expecting a squeeze above $20 a share, but I also like the long term prospects. I’m long Arcimoto; play the squeeze at your own risk.
Quarterly GDP numbers come in on Thursday alongside consumer data on Friday. The GDP numbers will give insight into our economic growth so far, which is expected to hit 7% by the year end (a great year). The consumer reports will also give us an idea of current spending, which should show any adverse effects of inflation.
It’s been a pretty boring week all things considered. Volatility looks to be picking up which will bring some excitement to the markets. Next week is looking uneventful news wise, so I’ll be watching price movements closely. I expect a strong week after the last Fed meeting, we’ll see if investors agree.
Happy trading. Until next week,