Advisors in Focus- March 21, 2021 - InvestingChannel

Advisors in Focus- March 21, 2021

“I don’t believe in luck, I believe in preparation” – Bobby Knight

Dear Advisor,

March Madness filled the airwaves this weekend. Yet, it’s market participants who feel like they are deep into the tournament given the market volatility the past few weeks. 

Preparation precedes success.

In today’s Advisors in Focus, we prepare you for the upcoming week by highlighting key events scheduled for the week of March 22nd through the 26th.

Markets took their cues from the 10-year yield which hit 1.75% on Friday- a 14-month high. The rise in yields pressured markets last week as the Dow fell 0.5%, the S&P dropped -0.8% and the Nasdaq lost -0.8%. The Dow and S&P saw a two-week winning streak snapped while the Nasdaq declined for the fourth time in the past five weeks.

Rates remain in focus as we run into a busy week of Fed speakers- highlighted by a two-day testimony from Fed Chair Jerome Powell and Treasury Secretary Janet Yellen- and three more bond auctions. 

Interesting note – the correlation between the Nasdaq 100 ETF (QQQ) and the 20+ Year U.S. Treasury ETF (TLT) turned positive looking back over six months. This is exceptionally unusual as investors often flee to bonds for safety and into tech for risk. While the correlation isn’t strong (only +0.17 on a scale from -1 to +1), it confirms the storyline about higher rates driving flows away from tech stocks.

Earnings season hits a lull but one of the hottest names in the market- the “meme” poster child GameStop (GME)- posts its fourth quarter earnings. Markets will be glued to the results and subsequent trading activity. Get your “memes” ready!  

Let’s dig into the rate story a bit more as it holds more sway over equities than anything else at the moment.

The Fed speaks… like a lot…

Markets listened to last week’s Fed decision with caution. Powell and company reiterated its dovish monetary tone despite forecasting 2021 GDP growth of 6.5%. This marks the largest output growth since 1984! Yet the Fed continues to keep its zero interest rate policies and bond purchase programs at full steam ahead.

It is typical for the Fed to march out a parade of speakers following its decision. The goal is to “tweak” market perception of the Fed decision. This week is no exception. Every Fed voting member, save Fed Governor Chris Waller, speaks this week. Expect the members to offer support to Powell’s comments.

Will this be enough to settle rates is the primary question.

The big event is Tuesday when Chairman Powell and Treasury Secretary Janet Yellen testify in front of the House Financial Services Committee. The current and former Fed Chair provide plenty of attention-grabbing star power. This is the quarterly CARES Act testimony. Questions around yields, taxes fiscal, and monetary policy and reaction in the bond markets will keep participants on edge.

The second day of testimony comes Wednesday when Powell and Yellen face the Senate Banking Committee. Most of the good headlines would have already hit wires Tuesday.

Prior to his testimony, Mr. Powell provides comments at a Bank of International Settlements Monday morning. Fed Governor Mary Daly (voter), Richmond Fed President Thomas Barkin (voter), Fed Governor Randal Quarles (voter), and Fed Governor Michelle Bowman (voter) all speak on Monday. 

Tuesday, we get comments from Atlanta Fed President Raphael Bostic (non-voter), Fed Governor Lael Brainard (voter), and New York Fed President John Williams (voter).

Ms. Brainard should draw interest as she is viewed as a possible successor. Powell’s first term ends February 2022. People believe Powell bought himself a second term when the Fed announced on Friday that it would not extend the SLR. This put the central bank on the same page as Senate Finance Chair Sherrod Brown (D-OH). 

Wednesday Fed speakers include another round of Williams and Daly as well as Chicago Fed President Charles Evans (voter). 

Thursday Fed Vice Chair Richard Clarida (voter), Bostic, Evans, and Daly hit the mic.

The key takeaway- Powell and the Fed see any upcoming inflation as transitory, driven by a release of pent up pandemic demand. Yet, as he succinctly pointed out, Americans aren’t likely to order a year’s worth of missed dining in the span of 90 days.

More importantly, Powell views the lack of inflation over the last decade as license to exceed the normal 2% mark in pursuit of lower unemployment.

However, he has yet to address the supply chain issues from the pandemic that remain unresolved. While the Fed influences demand, they have near zero control over supply constraints.

TrackStarIQ Data

Here are some highlights from ETF searches this week –

RankTOP ETFs BY ALL FAs (Total Traffic) Last WeekTickerTOP ETFs BY FAs w/ AUM >$1 bln (Total Traffic) Last WeekTickerTOP ETFs BY RETAIL (Total Traffic) Last Week Ticker
2Invesco QQQQQQVanEck Vectors Gold Miners ETFGDXInvesco QQQQQQ
3ProShares Ultra VIX Short-Term FuturesUVXYInvesco QQQQQQARK Innovation ETFARKK
4ARK Innovation ETFARKKiShares Russell 2000 ETFIWMProShares Ultra VIX Short-Term FuturesUVXY
5ProShares UltraPro QQQTQQQKraneShares Electric Vehicles and Future Mobility Index ETFKARSProShares UltraPro QQQTQQQ
6VanEck Vectors Gold Miners ETFGDXProShares UltraShort MSCI BrazilBZQDirexion Daily Semiconductor Bull 3x SharesSOXL
7U.S. Global Jets ETFJETSGlobal X Autonomous & Electric Vehicles ETFDRIVVanEck Vectors Semiconductor ETFSMH
8First Trust ISE Cloud Computing Index FundSKYYETFMG Alternative Harvest ETFMJiShares 20+ Year Treasury Bond ETFTLT
9ARK Genomic Revolution ETFARKGAdvisorShares Pure Cannabis ETFYOLOMicroSectors FANG+? Index 3X Inverse Leveraged ETNFNGU
10First Trust Amex Biotechnology IndexFBTIndia Globalization Capital IncIGCARK Fintech Innovation ETFARKF
11iShares Silver TrustSLVARK Innovation ETFARKKEnergy Select Sector SPDR FundXLE
12ProShares UltraPro Short QQQSQQQS&P 500 Energy Sector SPDRXLEiShares Russell 2000 ETFIWM
13ProShares Ultra SilverAGQ Technology Select Sector SPDR FundXLK
14ARK Web x.0 ETFARKW Financial Select Sector SPDR FundXLF
15ARK Fintech Innovation ETFARKF SPDR Gold TrustGLD
16Global X Lithium ETFLIT iShares Silver TrustSLV
17SPDR Gold TrustGLD ProShares UltraPro Short QQQSQQQ
18First Trust Health Care AlphaDEX FundFXH ARK Genomic Revolution ETFARKG
19Financial Select Sector SPDR FundXLF SPDR Dow Jones Industrial Average ETFDIA
20iShares 20+ Year Treasury Bond ETFTLT iPath Series B S&P 500 VIX Short-Term Futures ETNVXX

A few economic reports to watch...

In addition to the Fed party, we have a couple of economic reports of intrigue. In particular some sentiment or “soft” data for global economies as well as the Fed’s key inflation indicator. 

Tuesday Night and Wednesday morning we get the preliminary March Manufacturing and Service Purchase Manager Indexes (“PMIs”) from Markit Services. The forward-looking sentiment data provides anecdotal commentary on the health of the global markets for the manufacturing and service sectors.  

This “soft” data represents the pulse of economies that produce approximately $50 trillion of global GDP. The preliminary survey results constitute 85% of responses.

Markets want to assess commentary on mounting pricing pressures. Concerns around rising input costs and the impact on margins are a key story for the upcoming earnings season.  

Australia (13th largest economy) and Japan (3rd) survey results are released Tuesday night. Germany (4th), France (7th) the U.K. (6th), and Eurozone numbers are out Wednesday morning before the U.S. markets open. The United States (1st) surveys post at 9:45 am ET. 

February Personal Income and Spending and the Personal Consumption Expenditures (“PCE”) are released on Friday. The PCE is the primary inflation indicator for the Fed. The numbers will be released after a landslide of Fed speak. The final figures will be important but may not have a big impact on trade given the Fed calendar. 

The February Durable Orders numbers hit wires on Wednesday at 8:30am ET. This tends to be a volatile number. Of particular interest will be the impact of the supply chain disruptions and winter storms. 

Demand for treasury notes dominates market discussions. We have three auctions next week starting with the sale of $60 billion in 2-year notes on Tuesday; $61 billion of 5-year paper on Wednesday; and $62 billion of 7-years on Thursday. That is over $180 billion of shorter-term notes for markets to digest. These mark the first auctions since the Fed announced it would not expand the SLR exemption for financial institutions. 

Other notables include Existing and New Home Sales. Questions around the rise in rates and its impact on housing remain in focus. There is a third revision to the Q4 GDP but this will have little impact on markets. The second revision reflected GDP growth of 4.1%. Slight revision to inventory and trade numbers is not expected to have a large impact on the final revision.

The International calendar is relatively slow. There is an EU Economic Summit at the end of the week. The recent uptick in Covid cases and the fiscal response will be in focus. Germany releases economic and business sentiment. The country’s issues with the vaccine rollout are well-documented and may be reflected in this data.

On Sunday night, China decides on its Loan Prime Rate. Analysts expect the country to roll over its one year at 3.85% and it’s five year at 4.65%. We witnessed a slight tightening by Japan last week. Any move by China to tighten would grab the fixed income market’s attention. 

Earnings slow but GME provides fireworks

Earnings season hits a lull. 

Nike (NKE) and FedEx (FDX) provides us insight into the key questions for the upcoming Q1 earnings season. How did the winter storm and supply chain disruptions impact companies’ performance?

We will not get the final answer this week. However, there is one name that promises to garner plenty of attention – GameStop (GME). 

GME found itself at the center of market attention in January when it became the poster child for “meme” stocks. GME remains a top search according to TrackStar data.,

Tuesday, after the close, GME produces its fourth-quarter report card. Expectations increased after GME posted its holiday sales data on January 9. Comparable store sales for the nine-week holiday period increased 4.8%. E-commerce sales increased 309% from the prior-year period. This data ignited the squeeze in GME which was trading at $17 before it released this data.

On March 8 the company formed a Strategic Planning and Capital Allocation Committee. The committee will identify initiatives that can further accelerate the company’s transformation. Investors want an update on the panel’s progress.

How will it trade? That is the million-dollar question. We prefer not to hypothesize. GME’s float is 54 million, short interest 26%, and Average True Range- an indicator that shows how much an asset moves on an average day- is a whopping 40. We expect a volatile reaction to the news. The direction is anyone’s guess.

Other names of interest include Chinese tech plays Tencent Music (TME), DouYu (DOYU), Huya (HUYA), and Momo (MOMO). Chinese tech names trade poorly as concerns over increased regulation grow.

Work from Home winner Adobe (ADBE) posts its results on Tuesday. This will provide a gauge for a buy the dip appetite as the former tech darling has been under pressure after it failed to find buyers above the $500 level.

Consumer Staples play General Mills (GIS), home builder KB Home (KBH), cannabis and ag play Grow Generation (GRWG), and home furnishing play RH (RH) all report Wednesday.  

Thursday, Darden Restaurants (DRI) gives us insight into the re-opening trade for the hot restaurant crowd. GAN Limited (GAN), a gambling software-as-a-service to casino play, provides an update on the online gambling space. 

We would put Intel (INTC) on your radar as the company hosts “Unleashed: Engineering the Future” event on Tuesday. INTC’s new CEO Pat Gelsinger stated the event will include a business update. Investors hope to get FY21 guidance from the chip giant as well.

Here are five questions Advisors may see from clients:

  • How should I interpret the GME results?
  • What is the Fed telling us?
  • What is the PCE and why should I care?
  • Is the impact from supply chain disruptions temporary?
  • Are weather concerns a legitimate excuse for companies missing earnings?

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