Markets declined this week with high CPI data bringing renewed inflation fears. Growth stocks continued their downtrend and look to remain choppy until the inflation situation is resolved. A COVID resurgence is threatening additional lock downs, putting further pressure on the market. Uncertainty is high and markets are going to wait for clarity before moving forward. I’d be hesitant to buy in this environment.
Richard Branson became the first billionaire in space aboard Virgin Galactic’s successful flight on July 11th. Upon reaching space, the astronauts experienced four minutes of weightlessness before safely gliding back to Earth. The whole launch day was quite the spectacle, with the company taking full advantage to market their product amidst media attention. Jeff Bezos goes to space next, launching with Blue Origin on July 20th. I’m happy to see space exploration getting the attention it deserves. I wish Mr. Bezos the best in his travels.
There’s not much safe space in the market at the moment. Growth stocks continue to show weakness as they try to find support to bounce. Big tech is beginning to sell off of recent highs ahead of earnings, which might prove to be an opportunity. I’m expecting a positive earnings season after the economic reopening, which could serve as a catalyst to kickstart the market again. Gains will be hard fought for the next few months until inflation fears subside, but I don’t see a crash coming either. More than likely is a slow bleed until more positive news.
Let’s Talk Inflation
Inflation fears are back after the June CPI data showed a 0.9% month over month increase. Inflation is running hotter than I predicted but still within the high end of what I thought was plausible. I expect the numbers to slow sometime around October or September; if it goes longer then there is cause for concern. Growth stocks would suffer considerably in that situation and would remain beat down for an extended period of time. Still, I expect things to cool off by the years end. High inflation was expected through the summer, and the markets are reacting with an understandable nervousness.
Used car prices continue to soar, accounting for over a third of the measured price increases. Supply chain shortages have combined with the reopening of the economy to create the perfect environment for high inflation following the Fed’s spending. These factors should remain temporary as supply catches up with demand over time. Inflation is indeed high, but not insanely so. I’m still not overly concerned in the long run. In fact, I’m more concerned about demand not coming back strong enough.
Marijuana Bill Gains Traction
Senate Leader Chuck Schumer unveiled a marijuana legalization bill on Wednesday. While still in the early stages, this is a positive development regarding the legalization of marijuana nonetheless. 37 states already allow legal marijuana in some form, with a federal decision likely to come within the next couple years. This has created a once in a lifetime investment opportunity in the space. Nationwide marijuana sales hit $17.5B in 2020, up 46% year over year. The growth runway is long, and barring any unexpected developments, quite certain. Imagine investing in draft beer companies towards the end of the prohibition. I would not miss this opportunity.
Due to marijuana being federally illegal, American companies must trade on the OTC market. This has the downside of being less liquid and transparent. Canadian companies such as Tilray (TLRY) or Canopy Growth (CGC) are available, but I forsee difficulties for foreign companies penetrating the American market. My top picks in this space are industry leaders Green Thumb (GTBIF) and Curaleaf (CURLF). Both companies are vertically integrated, operating production facilities, dispensaries, and various marijuana brands. They have solid financials and have been growing at an insane rate. For diversification, the AdvisorShares Cannabis ETF (MSOS) offers exposure to the entire industry. Either way, you want a piece of this marijuana pie.
It’s Earnings Season
Investors will be looking to earnings for hope in this uncertain market. Significant beats across the board could distract from inflation concerns and serve as a positive catalyst for a move upward. Underwhelming earnings, on the other hand, would further confirm any doubts, leading to continued selling.
This week is dominated by financials, with Netflix being the largest tech company to report. Intel is also of note, which will give insight into the semiconductor space. Airlines will provide a look into the travel sector, but the recovery there will still take some time. This week could serve to put some life into the market if everything goes well. Aside from earnings, investors will be looking towards home sales data for an insight into our economy.
That’s all for this week, not much going on besides inflation concerns. Markets will remain choppy until more clarity is given. Earnings could give stocks a much needed boost, but inflation fears may also prevail. We’re currently in a time of transition, and I’m hesitant to make any big moves at the moment. I’ll likely be selling into any strength to reallocate some cash. Growth stocks are beginning to look more attractive as they fall from lofty valuations, but they still have some room to go. High inflation will benefit large, cash-flowing companies most. We’ll see how earnings look.
See you next week,