Inflation/Interest Rates:

US yields steepened as the Fed reinforced their promise to stick to lower interest rates for a longer period of time. During their last meeting on March 16-17th, the Fed reassured investors that they would remain steadfast in their aim for full employment and 2% inflation. Powell plans to continue the use of Fed policy after the fact rather than preemptively acting on forecasted information. He specifically stated that “we're not going to act preemptively based on forecasts for the most part and we're going to wait to see actual data.” Inflation is expected to rise above 2% in 2021, but it is also expected to lower back to expectations by 2022-23. In light of this, long-term inflation risk is not a current worry of the Fed, as they are letting equity markets run freely for a comprehensive economic recovery over this year.  

News from the pandemic has been very positive as millions of more vaccines are distributed each day with warm weather on the horizon. Yet, one key question that is on many investors' minds and that no one fully knows the answer to, is what will happen to equity markets at the end of the pandemic? Will there be a major market correction, or will stocks continue to surge through 2022? With so much money being pumped into the economy right now, markets still have tremendous room to run. Roughly just $300 million of the $1 trillion stimulus package passed by the Trump administration in January has been spent. This is now in addition to the $1.9 trillion stimulus package that was recently passed as well as the initial stimulus package in the spring of 2020. The Biden administration is also proposing a $2 trillion infrastructure plan. There is going to be so much money circulating throughout the economy when the pandemic is over that it is more likely than not the stock market will continue to surge as it enters 2022.

Market Direction/CPI:

The market is not clear of the direction it intends to follow regarding direction, so let us help you. While the cyclical change in asset preference has become apparent over the risk, there remains serious follow-through risk to the downside. The battle between the bond traders and the Fed is not a worthwhile battle, as it will end in favor of the Fed. Perhaps if rates refrain from jumping intermittently through the week, we could see some continuation of a bottom and upside trend. Nonetheless, over the past few weeks, the Nasdaq had erased most of its gains from falling below its support levels at the 10- and 21-day moving averages. Meanwhile, the S&P 500 had similar parallels in contracting some with jobless claims but is still eking higher than expected and above its support levels of the 10- and 21-day moving averages. The government portraying the narrative of inflation being of no apparent threat in the near future leaves investors and the Fed in major cahoots surrounding the viability of the current macroeconomic fiscal policy enforced. The massive amounts of stimulus that have been granted to millions of Americans this week has remained over 90% unspent. The Fed has cornered itself into a position in which they need to continue buying the government debt on the open market to help keep rates low in this synthetic recession.  

A synthetic recession is in some fashion usually overemphasized from what the reality of the situation is. While we did experience a momentous halt in a lot of the economic activity we normally measure, we have neglected the new markets and industries that have been both born of this pandemic and the industries that have experienced a 5-year acceleration phase of their business models. A lot of service-based industries achieved long-term prospects of growth that they forecasted five years out in this year of the pandemic. Yet because of the shifting sentiment in how the economy is functioning in this diagram, it reveals the current restrictions in the ways in which we count certain economic measures are proving false.  

It is likely because the CPI core inflation rate is tracked from the core basket of goods that consumers utilize. However, the drawback in this measure is that the variables it includes in its count towards inflation are highly invariable as they don’t change much month to month. If you think about it logically, you probably did not notice a change in the average cost of a gallon of milk, which is a tenet included in the Fed’s basket of goods. However, in the same time period, subscription services have increased some 40-60% for existing customers! It’s no mistake that we are seeing abnormally high levels of net dollar retention for companies like Zoom Video, Netflix, and Disney. Net dollar retention is essentially a metric for all current subscribers, in how much more money they can churn out of the customer through other service offerings on their platform. This can come in the form of add-on subscriptions to increased prices set forth by management. Essentially, it’s the act of the company being able to convert its user base to be even more lucrative than they already are. They are doing quite well with this too as they are expanding their top-line revenues without sacrificing any risk to the bottom line. 

The fact that these companies can scale their customer base with a higher pricing model is something very important to pay attention to. While the Fed may not consider these items in a core basket of goods, I’d predict that the majority of consumers in America consider it essential to their everyday life. If it weren’t, these companies would not be able to scale their prices up incrementally throughout time while also attracting new customers/ revenue streams. This is a demonstration of the loyalty given to these companies surrounding their products that have been deemed essential by the birth of modern technology and some accelerated by the onset of the pandemic. 

Capital One (COF):

Capital One has been on a tear since July, up 114% over the time frame, and has continued the trend since beating its Q4 estimates by $2.55 (its actual EPS posting was $5.29). COF is a technology-focused bank and the third-largest credit card distributor in the country. Over the years, Central One has established strong relationships in the retail sector with co-branded credit cards including Kohls in 2011 and Walmart in 2019. Currently, the company’s credit card branch accounts for 75% of revenue while consumer and commercial banking rounds out its business model. The last thing you’ll need to know about Capital One is that they’re the second-largest auto financer in the nation. As you may be able to tell, Captial One is a consumer-driven bank.  

During times of economic uncertainty, financial institutions tend to fair well as they capitalize on low-interest rates. With our economy reopening in the near future, having your money in stocks with a consumption focus is a smart move. We must point out that profit margins have dropped to 13% this year, 10% lower than 2020. Additionally, insider selling over the last few weeks has increased. Still, from a momentum trader’s perspective, your window will still be open. Capital One has been in a solid uptrend since October, when the 50-day moving average overtook the 200-day, and in this low-interest-rate environment, we don’t see that changing anytime soon. Nearing the lower bounds of the channel as we speak, COF has a lot of room to run before a potential weak earnings report on April 29th.