Interesting observation last week from SocGen’s economist Brian Hilliard on the recent decline in unemployment. There’s been some discussion that this was a freak number or that the true situation is much worse than the data suggests but Hilliard is buoyed by these numbers, especially as it’s the third consecutive monthly increase in employment. He observes that whole “ there are some issues with data quality in some respects, we think the broad picture is correct. That is, the palpable improvement in business confidence caused by the successful roll-out of the vaccination program is leading companies to start hiring again. Nevertheless, we don’t think that is the end of the story. When, eventually, the government winds down its support programs, we still expect a fresh wave of redundancies, albeit a far less severe one than we feared in the dark days of last year. So we predict an increase in the unemployment rate from the current level of 5% to a peak of 7% in early-2022 but with an increasing hope of a lower peak.”
Over in the US by contrast, most commentators are becoming increasingly bullish about the recovery. Those stimulus cheques will help of course! Most numbers I’ve seen suggest that something between 5 and 10% of that cash will find its way into the US stock market though there is some evidence that most of the cash has already been deployed – or at least that’s what analysts at Deutsche Bank stateside reckon. They reckon that two-thirds of stimulus payments has already been distributed: “$276bn or more than two-thirds of the anticipated payments of $410bn have already been distributed as per US Treasury data. This means the incremental impact of stimulus payments should start to fade. This week also saw the first outflow from US equity funds (-$10bn) in 7 weeks, after averaging $23bn a week since early February.”
If that analysis is correct, then we should expect momentum to reverse in many hot tech stocks, with the first impact felt in options trading. Deutsche has been running a basket of stocks with the most exposure to call volumes relative to their market cap the previous week, and unsurprisingly it’s been rallying sharply since November. “The basket rose by a massive 160% in just over three months, outperforming the equal-weighted S&P 500 by 130pp. Since mid-February however, the basket is down -24%, even as the average stock in the S&P 500 is up slightly. The downturn in the basket’s performance has coincided with the decline in call volumes since mid-February.”
Expect more pain amongst frothy momentum-driven tech stocks!
Overall, I think this conclusion from Deutsche nicely sums up my own short-term outlook : “ … as retail investors have other things to do, the attention focused on the equity market will start to fade…. While retail investors are likely to put a good chunk of stimulus payments into stocks as per our survey, two-thirds of those payments have already been distributed, implying that the incremental impact should start to fade. “
Hurry up cranking out those SPACs, the window is closing fast.