What do you do when you have growth with no inflation coupled with an astonishing four million vaccines given in one day -- a Saturday?
You pretty much buy everything. And that's just what people did.
Friday we had one of the greatest job numbers for the stock market that you could possibly have. We got a gigantic number of jobs created -- 916,000 -- about 300,000 more jobs than we thought, yet wages didn't go up. Professional investors crave growth without inflation and that's just what we got.
This kind of report gives Fed Chairman Jay Powell the green light to continue to keep rates low. Think of it like this, Powell wants to return to the economy we had before the pandemic, where the jobless rate was the lowest in 50 years. It can happen if we get everyone vaccinated and we are well on the way to doing so.
Even better, oil got crushed falling more than $3, again, something that gives Powell cover on the inflation front.
I know that travel employment was way up, as was construction and you got a good reaction from the market in both. But then you have an economy that is opening with low inflation, like we have money flows to old reliables and away from the stocks of companies that did so well during the lockdown.
Let's analyze a couple of sectors to explain the strength.
First, let's take FAANG. I cannot believe that once again, we had a plethora of people writing off FAANG just a few weeks ago.
It's incredible to me that there can be so many traders who like to trash these stocks, but they are exactly what you buy when to safely put money to work.
What makes them so attractive? Simple: They haven't moved. They are behind the market. Facebook (FB) has become one of the least expensive growth stocks out there. The stock is selling for only only a 27 multiple with consistent growth that exceeds most companies in the S&P 500. Amazon's (AMZN) not cheap, but it has another characteristic the pros want in a stock: It is down for the year. That's not typical, especially when you have to presume that many of the new customers they picked up during the pandemic last year stayed with them, but at the same time the $4 billion in COVID precaution that it spent will not repeat themselves.
Remember it is FAANG, and that means Apple (AAPL) and Tim Cook, in an interview this weekend didn't throw cold water on the idea of getting into the car market. Tesla (TSLA) reported terrific numbers over the weekend, so anything that can give Tesla a rival from Apple can get the stock going. To me, though, once again it's the relative value that draws the attention. Apple's stock is down 5% for the year, even as the S&P is up 8%. That's just too juicy to pass up.
Finally there is the bizarre conundrum of Alphabet (GOOGL) . This one's up 26% for the year, but it's been so far behind the rest of FAANG that it makes sense for it to play catch-up, because I think that Google, along with Facebook, have become remarkable advertising vehicles that are surpassing pretty much every other way to reach consumers.
I know that "old tech" bores and nothing's more boring than Microsoft (MSFT) . I would note that, again, Microsoft if the quintessential growth with no inflation tech stocks.
FAANG and Microsoft, exactly what is supposed to go up when you have growth with no inflation.
Second group? Semiconductors. The semi shortage is showing no signs of abating. In fact, it seems to be getting worse. When that happens you are going to see estimates go higher. A shortage that started with autos is now being extended to all sorts of devices and in the internet of things.
Micron (MU) told us that not only are DRAMs in short supply, but so is NAND, or what you might know as flash. Demand for cellphone parts has become insatiable. All of these shortages come because of the lack of semiconductor capital equipment. Applied Materials (AMAT) has an analyst conference Tuesday, and the gigantic maker of machines that are indispensable to crafting semiconductors might explain how far ranging this shortage might be. This run up Monday in the entire industry may be in advance of that presentation.
I know that there might be a chip shortage, but there's another theme that's working: autos. It didn't take much to ignite Ford (F) and GM (GM) more than an analyst push, but the stocks of these companies are selling at just 11-times earnings. That gives them a lot of room to move. I like the Ford call, because the company is committed to making cars around the globe only where it can make money. I know that sounds silly, I mean who would make cars in areas where you are willing to lose money. But there had been an imperative at Ford to make cars everywhere. Jim Farley has scrapped that imperative and the hope is, despite the pretty severe impact from the chip shortage, the stock has become too cheap to ignore.
We know that the country is opened to travel and we see the stocks of the airlines soaring, but today's literal shoot across the bow by Frank Del Rio, from Norwegian Cruise Lines (NCLH) , saying that the Centers for Disease Control and Prevention should allow ships to sail in July, caused that group to take off.
So what happens now?
I think we will hear that it can't stay this good, that we can only go up so far on news that things are getting better. After a dearth of news, we are finally about to get to earnings season.
I think that record highs have come on the backs of the stay at home stocks that were almost making a come back. I say "almost," because we got a weaker Automatic Data report last week and the thought was that we would get weaker growth, which would mean that we are perhaps going back into some sort of slowdown because we saw what looked to be the end of the decline of COVID. But while there has been a jump in some places, we know that the vaccine inoculation is now ahead of the rest of the world and you couldn't get better than that.
Now we do have new money in the market. We have reports of declines in activity from individual investors, but I think we are seeing more money going into index funds, which can also explain why the FAANG names, such a huge part of the indexes might be moving up. I hate to think that individuals are giving up on individual stocks, but index buying once again seems like the default investment.
I do think that you have to be more circumspect after big up days. We trimmed a bunch of positions for my charitable trust, which you can follow by joining the Action Alerts PLUS club, but that's what we do on huge up says. I am also wary of markets that are straight up.
But it's so rare that we have low rates, money coming from the government to many families, and a Fed committed to creating jobs, that the market should rally. And that's just what it has done.