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Green Shoots Emerge

It was a good week for stocks as all the indexes headed a bit higher into the start of the second quarter.  Signs of economic activity reaffirmed the coming acceleration of growth while inflation remains subdued (ex-energy).  That’s not to say inflation isn’t coming, it most assuredly is, but that maybe investors’ fear got a little exaggerated in the short term.  Rebounding strongly are the technology sector companies that have lagged year-to-date.  What previously was a seven-point return spread between the Nasdaq and the S&P is now only a two-point spread.

Perhaps the biggest indicator of recovery is nonfarm payrolls which grew by 916K new jobs in March versus expectations for 650K.  More importantly, 780K of those jobs are in the private sector, with 280K of those in leisure and hospitality, 176K coming from food services, and 64K coming from arts and entertainment.  The unemployment rate dropped from 6.2% to 6% and economists are now revising the speed at which we return to full employment.

Aside from the unemployment rate, two other economic indicators also came in stronger than expected.  The PMI composite index shows the fastest growth in seven years.  The PMI index is an economic indicator for the health of the manufacturing and service sectors.  The other economic indicator is the ISM Non-Manufacturing Index which jumped to the highest reading since its inception in 1997.  Furthermore, the ISM Service index is considered a leading indicator which measures business activity, new orders, employment trends, inventories, and prices.  All signs point to an accelerating recovery.

Which brings us to the elephant in the room – the Federal Reserve.  Fortunately, we don’t have to guess what it plans on doing since it is transparent with its intentions.  However, its message has change in subtle ways.  Let me explain.  Last year the mantra was, we want to spark inflation via monetary and preferably fiscal policy.  That message slowly morphed into, we expect inflation given loose monetary policy.  Before long that message changed to, not only do we expect inflation but we want it to exceed our goal for an extended period.  Interestingly, this week we saw a subtle shift again to suggest that while inflation could go as high as 2.5%, it will be transitory in nature.  Put another way, the Fed believes inflation will spike at some point this year, but then expects it to disappear as quickly as it appeared.  I can’t help but wonder if they are being a bit too optimistic in thinking they won’t have to reign it in.  I guess time will tell, but seeing as it has changed its message several times already, another change wouldn’t be out of character.

In company news, we learned that LG Electronics is getting out of the smartphone business.  I can’t help but be reminded of Blackberry, as this once top smartphone maker is calling it quits.  Facebook revealed that it leaked the data of 533 million of its users, including Mark Zuckerberg, but stands firm that it won’t inform those whose data was leaked.  General Motors revealed an EV Hummer topping $110,000. Carnival Corp threatened to move ships outside of U.S. ports due to the CDC extending the suspension.  The very next day the CDC backed down and Carnival now expects to start back up at the beginning of July.  And lastly, BioNTech believes that to maintain protection against COVID-19, individuals may require a booster vaccination six to nine months after their second dose with subsequent doses every 12 to 18 months after that, while Pfizer is lobbying for vaccinations for those twelve years old and above.  I shudder to think this is the new norm.

In closing, I came across a story this week regarding masks.  It seems Will.i.am, an American rapper and founding member of the Black Eyed Peas, has partnered with Honeywell on a new N95 smart mask dubbed the Xupermask.  In many ways it reminds me of the post-apocalyptic world of Mad Max, where the mask is both intimidating and ridiculous at the same time.  As for features, it includes LED lights, 3-speed fans, Bluetooth-capable noise-cancelling headphones, and Honeywell HEPA-certified filters.  At $299 it sounds like a bargain.  Now you know.

Bruce J. Mason, MBA