- July 9, 2021
- Blog , The Trusted Navigator - Bernhard Koepp
Mid-Year Market Review and Outlook by Bernhard Koepp – C.J. Lawrence – July 7, 2021 – YouTube Video & Transcript
In this video, Bernhard Koepp, CEO of C.J. Lawrence reviews the markets at the mid-point of the year 2021. He covers the active sector shifts in the first half of the year, reviews the strong macro conditions underpinning the US economy, discusses the debate on inflation and gives an outlook.
Video Transcript
Bernhard Koepp:
Yeah hi there. This is Bernhard Koepp. It’s mid-year and I hope you had a good 4th of July weekend celebration. Certainly things here in New York city are opening up. People are outdoors, the weather wasn’t great but things are starting to certainly normalize. At least that’s what we’re seeing on the surface. So I wanted to give you an update mid-year of where we are in the markets, I’ll cover all the various sectors to give you a sense of this debate that’s going on about sector shifts, which is something we’ve been thinking about a lot. The question is, do you react to a lot of those sector shifts or do you stay the course with the dominant companies that where we’re finding all the growth? So if we look at the market, I mean it’s incredible to think that we are talking about double digit returns here at mid year.
Bernhard Koepp:
Interest rates have risen. They have peaked though. So typically markets do not do well when interest rates are rising. There’s a bit of a pause until typically the market figures out where the end point in the interest rate cycle is. The fed is still on hold. I mean they’ve told us they will be on hold until 2022, something we find unlikely given the inflation data. But nevertheless short rates are still near zero and the 10 year treasury today is actually around 1.3%. So if we go around the sectors within the market, energy is still year to date the best sector at 45% plus. Financials is second at 25% plus. Communications, which is the social media sites so that’s the Facebooks and the Googles, that’s up 21% year to date.
Bernhard Koepp:
Industrials, and this is new now for 2021 is up 16%. So it’s interesting you have quite a mix of cyclical stocks that are outperforming the S&P 500 at 15%. But there are still some areas of technology or the digital part of the economy that are certainly still outperforming. Technology stocks are up 14%. So that’s just 1% behind the index, behind the S&P 500. And we’re seeing now in the third quarter there’s quite a bit of movement back to some of these big dominant tech stocks. So if you think about stocks like Amazon and Apple, they’ve largely underperformed in the first part of the year. But we’re really seeing a bid under those names. If we look at things like healthcare up 12% for the year, consumer up 11% and then if we look at things like fixed income, there is no surprise to us that when rates or the expectation is that rates are rising you have things like the aggregate bond index and the corporate bond index, LQD.
Bernhard Koepp:
They’re down between one and 2% for the year. And another asset class that’s widely followed is gold. Gold is down 5.3%. If we just move to the international markets, it’s interesting to see the French market has also found a bid up 19% year to date. The German market the docks is up 13% underperforming the US slightly. And there’s a lot of talk these days about rotating into emerging markets. So the notion there is the valuations aren’t quite as extended there yet and the growth is quite good there. So emerging market year to date is up about 7%. So if we turn to macro briefly, we’re still in an incredibly strong macro environment. If we look at GDP growth, our expectation is for 2021 that we’ll have about 8% GDP growth.
Bernhard Koepp:
We’ve had two very strong quarters now back to back. And next year is the big question mark. A lot of the economists that we follow are using around three to 4%. It’s surprising if we look at the treasury market right now that if treasuries are starting to trend down, the question mark what does that mean? Is that predicting slower growth down the road or less inflation also down the road? There’s a big question mark around that. And frankly speaking, most economists don’t really know what the real answer is here. But our sense is that we should be more cautious about 2022 and we’re modeling about 2% GDP growth and trying to figure out what kind of companies can do well in a lower growth environment 2% in 2022. Second quarter earnings, I mean if we looked at the earnings that came out in the second quarter they continue to be explosive.
Bernhard Koepp:
So if you look at things like S&P earnings, S&P 500 earnings we’re tracking it around $210 now, that is a very high number. And the expectations are that that will continue to go up. Employment data, we got some more employment data last week. Employment continues to be very strong although there’s still a lot of repair to be done. We are missing at least 4 million workers in the workforce. So if you think about where we are in the economy, we have about the same output now in the economy, in the US economy that we had before the pandemic, but we’re doing it with a lot less workers. So something’s got to give here. Either it’s fantastic we have more productivity out of our workers and we don’t need these workers or there is something here that’s holding back the economy or there’s an inflationary pressure here in which we’re clearly seeing.
Bernhard Koepp:
If you drive around neighborhoods these days and you see your local grocery stores or department stores, you see a lot of help wanted signs. So the open jobs data is really high meaning there is a demand for workers, but they can’t find the workers. So some argue that there is still too much stimulus in the economy where the checks that many of the unemployed workers or furloughed workers were getting in the mail hasn’t run out yet. That will run its course around September. And that may be one of the reasons why people do not want to run back to their jobs at Costco or at Target or at Amazon. But we’ll see how that plays out. Inflation, something we watch very closely here that all the commodity indices are near record high, including oil. We see the wage data going up, that’s certainly good on the consumption side. When wages go up that means consumption can go up as well.
Bernhard Koepp:
The rents and house price data is also going up. House prices are actually making a brand new high in the United States. Rents are just about breaking even again to the pre pandemic levels, but you can see there’s a lot of pricing pressure here in the economy. So it is probably doubtful to say that inflation is not a problem. Certainly we have inflation right now. How long that will last in terms of all the supply chain disruptions that we’ve witnessed in the last year is something we have to watch very closely. In terms of savings there is about 2.1 trillion of excess savings in the economy right now. And that’s really the money that’s sitting in. People’s bank accounts that’s not moving. And part of that has to do with the stimulus, part of that has to do with pent up expenditures that people haven’t been able to spend their money in the last year.
Bernhard Koepp:
So there’s a lot of cash and liquidity in the market or in amongst the consumer. And it’s going to be interesting to see what happens with that money. Is it going to be put to use or not? On the stock side look, it’s interesting to see our top five sort of best performers for the year in our portfolio and see what’s the mix of sectors and industries in that group of stocks. So our top stock is a company that we follow for a while, which is called Generac. Generac is in the backup power business, so battery power and generators. That’s obviously a very hot segment of the industry right now given all of the various problems we’ve had because of climate, because of forest fires out west. And frankly speaking the aging grid that we have in our electrical systems.
Bernhard Koepp:
So the future of repairing some of these imbalances in our electric and power generation network is the answer is batteries. So Generac is one of these companies that has a solution there. It’s interesting to see that a company like Google is one of our best performers or the alphabet. There was this notion that we should rotate out of technology stocks and go more cyclical. But it’s interesting to see Google and Facebook are actually two of the best performers year to date. Google is up 44% year to date, Facebook is up 28%. Another company that we have been investing in for the past year is Zebra amongst our best performers. Zebra is in the supply chain side. They do the barcode scanning devices and tickets and stickers that you see on goods and services that you get shipped from Amazon or you see in stores. That has been an incredibly booming business.
Bernhard Koepp:
They are transforming how retail is done and how the logistics of the supply chains are monitored through barcode scanning and RFID devices. So in terms of style shifts, I mean we have found some very interesting opportunities on the more cyclical side. I mean these are also very dominant companies like Emerson Electric that we’ve added to the portfolio. So if you think about roughly in October of last year, roughly 15% of our equity allocation was what we would call more cyclical or value type exposure. Fast forward to today, we have about 30% of our portfolio in what is considered traditionally valued type exposure. That’s not because we did a top down kind of a decision, we want more value stocks. It’s just we’ve found interesting value, interesting valuations in that segment. And certainly when you have such an incredible tailwind in the economy, you want some of that exposure.
Bernhard Koepp:
And typically I mean that’s of course in the financial services sector and that’s the banking sector, payments. I mean that’s the part that’s really turbocharged at this point, but it’s also in stocks like Emerson that I mentioned or Rockwell Automation or Jacobs Engineering, Zebra Technologies is also in that space. We’re finding some very interesting ideas there. Our CJ Lawrence market monitor Terry, my partner, has given a lot of information on that model that we run pretty much every quarter on a regular basis. The CJ Lawrence market monitor is still in a buy territory. So equities are still the only game in town right now. And that’s as long as interest rates are at zero and there is an expectation that interest rates will rise in the future, there’s no real competition from the bond side. So we have to stick to our knitting, which is high quality equities that have sustainable growth. So that’s it for now, we’ll see you next quarter, all the best.
Bernhard Koepp:
Thank you for your support. If you have any questions, you could shoot me an email at bkoepp@cjlawrence.com or give me a call at (212) 888-6342. Thank you very much. Bye.
Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him a bkoepp@cjlawrence.com by telephone at 212-888-6342.