the well-th report
the missing link
Optimism Remains
Summer is just about here, and things are starting to feel better: for our health, for our social lives and for our wallets. After over a year of difficulty, we’re beginning to see market momentum — just as Hightower Chief Investment Strategist Stephanie Link predicted.
“It’s been an interesting and fun quarter,” said Stephanie in early May. “It’s gone pretty much the way I thought it would.”
STEPHANIE LINK
Chief Investment Strategist and Portfolio Manager, Hightower
When we last spoke with Stephanie in Q1, she was bullish on 2021, and that optimism has remained — thanks largely to fiscal policies that have effectively stimulated the economy.
“The stimulus we put in place over the last year now totals 60% of U.S. GDP,” says Stephanie. She explains that it usually takes about eight to 12 months for fiscal and monetary stimulus to impact the economy. “What we’re seeing right now is a lot of nice momentum because of policies put in place a year ago,” she says.
Signs of a Recovery
Thanks to these policies, access to cash is abundant. “M2 (money supply) is up 28% year-over-year,” says Stephanie. “Liquidity is ample, and the economy is starting to show signs of this recovery.”
Companies that were economically sensitive several months ago now stand to realize the most benefit. Those kinds of companies may not necessarily have seen top-line revenue growth, explains Stephanie, but they’ve kept solid margins. “Now, you’re suddenly seeing a little bit better growth along with strong margins. That’s called positive operating leverage to earnings.”
What Goes up Must Come Down
Eventually, that robust growth will taper off. “You can’t run this hot for that long,” says Stephanie. “When you have that kind of growth and this kind of stimulus in place, you are going to see more inflation.”
Threat of inflation has stoked fears across the financial world, but Stephanie believes that particular worry is still premature. “I don’t think inflation is going to run rampant, especially not this year,” she says. “And a little bit of inflation is not a bad thing, because it does signal that you’re growing.”
She is keeping an eye, however, on inflation in the commodity environment — which she says is indicative of some inflation in the system. “The commodity piece of it is troublesome but manageable,” she says. “And the reason for the inflation is wage pressure. When you start seeing wages go higher, that’s when you need to really think and recalibrate.”
Enjoying What We Have
While Stephanie certainly believes we need to watch inflation closely, she also advocates enjoying the better growth we’re currently experiencing. “Typically, when you see better growth, a little more inflation and higher interest rates — which we haven’t seen yet, but we know the Fed has been manipulating the market — value outperforms growth,” she says. “Cyclicals and economically sensitive stocks do better. So that’s what we’re seeing.” People are trading their stock in high-growth tech companies for shares of materials, financials, industrials and discretionary companies.
“I’m overweight on all of those,” says Stephanie. “I think that’s really where you want to be.”
Does that mean tech’s heyday is over? Stephanie doesn’t think so. “I’m underweight on tech, but I don’t want to abandon it,” she says. “I do believe the total addressable market (TAM) for many categories within technology is huge. AI is a trillion-dollar TAM by the end of the decade. So is SaaS cloud. Wearables is going to be $55 billion next year. You have cybersecurity, almost $1 trillion by 2027. Retail e-commerce was about $4 trillion in 2019 and will be about $7 trillion by 2026. We have a lot of tailwinds in technology, and I don’t want to give up on that. But it’s very crowded.”
Stephanie recommends being selective in order to find the rare opportunity in tech. She posits that the leading indicator in semiconductors. “That’s the cyclical part of tech,” she explains. “Watch to see how they trade. We’re already seeing a correction in software and cloud and the really expensive technology stocks. Again: if you’ve got better growth, you don’t need to go find growth.”
A Robust Reopening
The abundant fiscal stimulus, combined with a successful vaccination campaign, has catalyzed a speedier reopening than even Stephanie had predicted. “We knew it was going to come, but it’s coming faster,” she says. “People just want to get out.” When we spoke, a gaming company had just announced that its Las Vegas locations were sold out on weekends for the foreseeable future. Similarly, traffic at a Macau-based casino company shot from 40%to 70% in one week following a reopening.
“As more of us get vaccinated and get more comfortable with reopening, the more progress we’ll see,” she says. “And that’s where I want to be in the market.”
Stephanie acknowledges that companies in some of the hardest-hit industries — including hospitality, travel and restaurants — are still struggling.
“They’re still in a world of hurt,” she says. “And this is why we just got $3 trillion of stimulus. It’s not perfect by any means, but you know that the markets are going to discount six, eight, 10 months ahead of time. I think travel is right up there with leisure, hospitality and restaurants. Those are the areas that you want to be a part of.”
Stephanie also notes that industrial companies are starting to see benefits and positive operating leverage as well. “All of a sudden, you see this revenue demand start to improve — and we haven’t even gotten Biden’s infrastructure bill yet,” she says. “If you add that on, there’s going to be huge positive operating leverage.”
The Impact of Labor and Supply Constraints
While many industries have rebounded even more quickly than expected, others are facing new challenges post-pandemic. Stephanie notes that both the auto sector and the semiconductor sector are facing supply constraints.
“Some of the big auto companies have beaten estimates, but they’re not raising estimates, because they can’t get semiconductors to put into the autos they’re producing,” she says. “It’s a very difficult business to suddenly restart, because it takes years to build a factory.”
Supply constraints can hamper growth in certain industries, just as a widespread labor shortage threatens others. “The labor shortages are a real thing,” says Stephanie. “So what is it going to take to get these people back? Either the fiscal to run out, which won’t happen until September at the earliest, or higher wages.” That concerns Stephanie, because higher wages could contribute to rising inflation.
Still, she remains positive. “I am very upbeat about where we are in the cycle,” she says. “We have plenty of time to worry in a couple years. I’m not worried in the short- or medium-term.”
A New Tax Plan
This quarter, President Biden released his tax plan, which would impose higher taxes on corporations and the country’s wealthiest individuals. “If you add it all up, everything on his wish list is about a 10% hit to corporate companies’ earnings,” says Stephanie. But despite that particular headwind, Stephanie does not pity those companies.
“I don’t feel sorry for those corporations — I really don’t,” she says. “I also don’t think the corporate tax rate’s going to go up to 28%. I think 25% is more the point, and I think it’s very manageable.”
Stephanie stresses that there’s still much about the tax plan that’s unknown — but ultimately, taxes will likely increase. That’s a headwind, Stephanie says, but the economy might ultimately benefit.
“Consumers are in a better position,” she says. “They’re getting jobs. The savings rate is 27%. I think the consumer can handle it. Higher taxes aren’t going to be great, but if the offset is a stronger economy, that’s important to consider.”
Back to Basics
Recent months have seen a flurry of news surrounding various types of investment vehicles: from Reddit stocks to NFTs to SPACs. As a long-term investor, Stephanie is largely uninterested in these trends.
“It’s very speculative,” she says. “It should never be this easy to raise money. There’s far less regulation in SPACs vs. IPOs.” Stephanie believes the rise of these investment vehicles is a function of having crazy-low interest rates.
“I’m a long-term investor,” Stephanie says. “I own blue-chip companies. I try to find companies that are mispriced somehow and have upside based on catalysts. And I’ve made money over the years that way more consistently than not, and also by staying pretty humble along the way.”
If she could offer any advice, it might be this: that valuations will always matter — in boom times and in bust.
“That’s why you need to do a lot of homework on the fundamentals of each company,” she explains. “Look at good companies, good management teams, a good bench, market share gains, balance sheets, cash flow generation. These are really important things for the long-term.”
In the short-term, Stephanie remains bullish on 2021. And she’s devised a clear process and strategy that will help protect her — and her clients — in the long-term.
For more information about Stephanie Link’s portfolio or to attend one of her monthly webinars, MarketLINK, please contact your financial advisor.