01 Jun WELCOME TO JUNE
Welcome to June. It is widely accepted interest rates are the primary determinate of asset valuations. Treasury yields fell in May and the high growth tech names declined the most since October as per Bloomberg. Moreover, as an aggregate the tech sector reported a 44% surge in first quarter profits according to Bloomberg, far eclipsing forecasted amounts.
What gives? Lower interest rates and higher profits should dictate higher prices, not the worst month for technology since October.
I believe it was a number of different factors including inflationary expectations, companies priced to perfection to massive ownership which by definition requires massive sums of monies to continue move higher. Quite simply, in order for a stock to move higher more buyers than sellers is required and if everyone already owns the name or sector, who is left to buy when prices fall? No one. This creates an environment of nominal selling can cause prices to fall.
Many times, I have referenced the lack of liquidity in the markets. Goldman opines a potential liquidity crisis could be a systemic risk for the markets.
Commenting about Friday’s data, the core personal consumption expenditure index (PCE), the primary inflation index utilized by the Fed, posted its biggest increase since 2001. The data was largely ignored under the widely known premise inflationary pressures are “transitory.”
Late Friday, the President formerly presented his budget. Much was already known.
Bloomberg’s headline read “Biden Budget Shows Focus on Wealth Redistribution, Not Growth.” “Equity” is mentioned over 40 times in the budget, quadruple the number of times “growth” was mentioned, thus inferring “equity” as the primary objective of the proposed budget.
As stated several times the biggest surprise is the retroactive increase in the capital gains tax. The Administration stated the reason for such policy was “to prevent wealthy people from quickly selling off their assets before the end of the year to avoid the hike.”
When it was discovered earlier in the week that such a proposed increase was indeed retroactive, many commented that such is just political theater, necessary to create an environment conducive for perceived compromise, similar to the concept of campaign to the left and then govern in the center.
I believe the verbiage for justifying this retroactive increase in the capital gains tax is one of spite, punishment and retribution. How will this unfold?
This week’s economic calendar is comprised of top tier statistics such as both the ISM Manufacturing and Non-Manufacturing Indices, several employment surveys including May’s BLS Report as well as the release of the Fed’s Beige Book or the statistical compilation utilized at the upcoming Fed meeting.
All can greatly influence opinions.
Last night the foreign markets were up. London was up 1.19%, Paris up 0.99% and Frankfurt up 1.58%. China was up 0.26%, Japan down 0.16% and Hang Seng up 1.08%.
The Dow should open moderately higher on economic optimism. Oil is at a 2 year high on a bullish outlook. The 10-year is off 6/32 to yield 1.62%.