Weekly Investment Update (07/16/2021)
Reopening Resilient Despite Delta Variant
Incremental COVID-19 headwinds related to the resurgence of the Delta variant do not appear to be weighing on travel, mobility and consumer data in the U.S. TSA passenger throughput remains at a post-pandemic high, hovering around two million passengers each day relative to 2.5 million pre-COVID-19 and supporting the notion that people are feeling comfortable flying again. Both American Airlines and Delta issued positive commentary during recent earnings releases. The airlines indicated that domestic leisure travel has fully recovered to 2019 levels and noted encouraging signs of increased business and international travel.
There are clear signs that pent-up demand is being released across service and consumer goods sectors. Credit card data in the U.S. indicates that current spending is 15% higher relative to 2019 levels, driven primarily by increased spending on clothing, transportation, and restaurants. Millennials and Gen Z are spending at 125% of pre-COVID-19 levels according to the American Express CEO. Many spending patterns are also reverting to historical norms. For example, restaurant spending has now surpassed grocery store sales for the first time since February 2020.
These positive reopening dynamics have driven continual increases in the Bessemer Reopening Index, which has now crossed the threshold of 100% of pre-COVID-19 activity. While not all areas of the economy have fully recovered, segments where pent-up demand is being unleashed are counterbalancing areas that have still not fully recovered. We remain optimistic that the economic recovery remains on track, and economic growth should continue to be propelled by service-sector and COVID-19-sensitive demand as consumers possess excess pandemic savings and stimulus checks.
Big Banks Turn Record Profit; Investors Wonder Whether Growth Drivers Can Persist
Many of the largest U.S. banks reported earnings this week, including JPMorgan Chase, Goldman Sachs, and Citigroup. While results exceeded Wall Street’s expectations, investors were concerned about future growth potential, as similar trends emerged across the industry. As a result, the KBW Bank Index fell -1.4% this week, lagging the -0.4% loss in the S&P 500.
The results showed continued strength in capital markets activity, as U.S. initial public offerings (IPOs) in the first six months of this year have already eclipsed the record amount in 2020 (see “IPOs and Shifting Market Trends”). Also, banks that set aside billions of dollars to prepare for nonperforming loans during the pandemic have started releasing reserves due to the improving economic environment.
Additionally, the trading boom that powered banks through the coronavirus pandemic is starting to normalize, as government stimulus, Federal Reserve intervention and heightened volatility have tempered off. As a result, investors have raised concerns about both loan and trading growth going forward, leading to the broad sector decline.
Despite recent underperformance relative to the S&P 500, the S&P 500 Banks Index has gained over 25% this year, making it one of the best-performing industries year-to-date. Bessemer’s equity portfolios hold positions in some of the financials reporting earnings this week (e.g., JPMorgan Chase, Bank of America, and Citigroup) and have benefited from the cyclical rally this year. Nonetheless, Bessemer client portfolios maintain an overall underweight to the financial sector due to the quality and growth bias that drives our long-term approach to investing.
Inflationary Pressures Build Alongside Robust Growth
The string of higher‐than‐expected inflation prints (CPI, PPI, and import prices) is well into its third month with gains that are surpassing elevated expectations. Fed Chair Powell noted in his testimony to Congress that “Inflation is being temporarily boosted by base effects, as the sharp pandemic related price declines from last spring drop out of the 12‐month calculation.”
However, when analyzing the June 2021 price reports, we can see that there were large monthly gains from April to June 2020, and they have dropped out of the year-over-year comparison. For example, final demand producer prices (PPI) rose at a 4.7% annualized rate from April 2020 to June 2020. This 2020 gain has dropped out of the year‐over‐year comparison, and yet the 12‐month inflation rate has risen from 6.2% in April 2021 to 7.3% in this week’s report.
The Fed is very clearly downplaying the momentum in inflation and the risk that it will have to play catchup on policy continues to grow. While we do not expect inflationary pressures to maintain this pace and extend dramatically to the upside over the medium term, we are mindful of the potential for elevated price pressures to be more persistent than the Fed is currently expecting. Please note that our reduction in fixed income holdings to fund incrementally higher cyclical exposure is a direct nod to this possibility.
The labor market continues to heal only slowly, which provides cover for the Fed to maintain a higher level of stimulus than price pressures on their own may dictate. We expect the remaining months of 2021 to exhibit a robust pace of growth as consumers remain in a very strong position, businesses are rebuilding inventories to address this, and interest-rate-sensitive parts of the economy continue to excel.
— Bessemer Investment Team
Past performance is no guarantee of future results. This material is provided for your general information. It does not take into account the particular investment objectives, financial situations, or needs of individual clients. This material has been prepared based on information that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. This presentation does not include a complete description of any portfolio mentioned herein and is not an offer to sell any securities. Investors should carefully consider the investment objectives, risks, charges, and expenses of each fund or portfolio before investing. Views expressed herein are current only as of the date indicated, and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. The mention of a particular security is not intended to represent a stock-specific or other investment recommendation, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference. Index information is included herein to show the general trend in the securities markets during the periods indicated and is not intended to imply that any referenced portfolio is similar to the indexes in either composition or volatility. Index returns are not an exact representation of any particular investment, as you cannot invest directly in an index.