As the economic benefits of massive fiscal stimulus and businesses reopening reach their peak in the coming weeks, Goldman Sachs analysts are warning that U.S. economic growth will slow, leading to “paltry” stock returns over the next year and an end to the market’s massive pandemic rally.
U.S. economic growth will peak within the next two months, Goldman analysts said in a Thursday morning note, forecasting that gross domestic product will grow by an annualized 10.5% rate in the second quarter, the strongest expansion since 1978 aside from the economy’s stark mid-pandemic rebound in the third quarter of last year.
Economic growth will then “slow modestly” in the third quarter and continue to decelerate over the next several quarters, the analysts predicted, adding that such deceleration is typically associated with weaker stock returns and higher market volatility.
In a sign that fiscal stimulus effects and economic activity are peaking, the ISM Manufacturing index, a monthly economic indicator measuring industrial activity, registered at 65 in March—above the threshold of 60 that Goldman says typically represents peak economic growth.
Coming off the worst quarter in history, the U.S. economy grew at its fastest pace ever in the third quarter as a nation battered by an unprecedented pandemic put itself back together. Michelle Girard, chief U.S. economist at NatWest Markets, Stephanie Kelton, professor of economics and public policy at Stony Brook University, and Michael Strain, director of economic policy studies at the American Enterprise Institute, join “Squawk Box” to discuss. For access to live and exclusive video from CNBC subscribe to CNBC PRO: https://cnb.cx/2NGeIvi » Subscribe to CNBC TV: https://cnb.cx/SubscribeCNBCtelevision » Subscribe to CNBC: https://cnb.cx/SubscribeCNBC » Subscribe to CNBC Classic: https://cnb.cx/SubscribeCNBCclassic
According to Goldman, the S&P 500 has historically fallen an average of 1% in the month after the ISM Manufacturing index registers more than 60, and in the subsequent 12 months, it’s gained a “paltry” 3%—significantly less than the 14% annualized return over the last 10 years.
Goldman expects the S&P will end the year at 4,300 points—implying just a 4% increase from Thursday’s close, lower than some other market forecasters who expect the index could soar to as high as 5,000 points by year’s end.
“Equities often struggle in the short term when a strong rate of economic growth begins to slow,” a group of Goldman strategists led by Ben Snider said Thursday, noting that during the last 40 years. “It is not a coincidence that ISM readings have rarely exceeded 60 during the last few decades; investors buying U.S equities at those times were buying stocks at around the same time as strong economic growth was peaking—and starting to decelerate.”
The most recent ISM reading is the highest since a level of 70 in December 1983—after which the S&P inched up just 0.2% in the following 12 months.
Trillions of dollars in unprecedented fiscal stimulus during the pandemic have helped lift the stock market to new highs over the past year, and though President Joe Biden’s $2.3 trillion infrastructure plan could add even more fuel to the economy, Anu Gaggar, a senior investment analyst for Commonwealth Financial Network, said Thursday that “investors have been quick to recognize [that] much of the upside has already been priced.”
That’s evidenced by the growing divergence in performance between the broader market and growth stocks this year, Gaggar says, echoing the sentiment from Goldman analysts Thursday. The tech-heavy Nasdaq, which far outperformed the broader market by surging 44% last year, has climbed about 9% this year, underperforming the S&P and Dow Jones Industrial Average, which are up roughly 12% each.
I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at firstname.lastname@example.org.
“Economists predict 10.5% GDP growth for the second quarter, the strongest quarterly growth rate since 1978.”
“Growth in the third and fourth quarters of this year will clock in at 7.5% and 6.5%, respectively. Growth is then seen slowing in each quarter of 2022 — by the fourth quarter Goldman is modeling a mere 1.5% GDP increase.”
“Although our economists expect U.S. GDP growth will remain both above trend and above consensus forecasts through the next few quarters, they believe the pace of growth will peak within the next 1-2 months as the tailwinds from fiscal stimulus and economic reopening reach their maximum impact and then begin to fade.”
The US dollar index drops 0.10% to trade at 91.25, as of writing. The dollar gauge resumes its downside momentum after facing rejection just below 91.50 in the US last session.
Do financial traders make better returns in the stock market when they are well rested? You would intuitively assume that a trader’s level of sleep would affect their decision making.
Several studies have certainly shown that sleep affects the ability of people to make decisions in general. Though admittedly based on small samples of participants, these studies show that those who are short on sleep tend to have relatively low attention to detail, poor memory, poor performance and significant mood swings.
But when it comes to whether sleep affects financial decisions, the evidence has been mixed. The only measure of sleepiness that has been used is the annual clock changes for daylight saving that take place in many countries, since they disturb many people’s sleep. A few studies have used this to look at how stock market returns are affected on the Mondays directly after the clocks go back or forward by an hour.
One such study in 2000 concluded that returns were relatively low when traders lacked sleep, and suggested that the lack of sleep might make them more risk-averse because they were anxious and struggling to concentrate. But later studies, such as this one from 2002, suggested that the correlation between sleep and cautious investing might not be as strong empirically as initially thought.
Daylight-saving time changes have the advantage that we all have to adjust them, but they are far from an ideal proxy for sleep since they only occur twice a year, and the impact on people’s sleep is relatively small since the clock only changes by an hour. This might explain why the research evidence has been mixed in this area.
To try and improve our understanding in this area, I undertook a pilot study of a fund manager in England, analysing his investment transactions in the context of sleep data that he recorded in a diary.
I found that his sleep patterns did indeed influence his investment decisions. In line with the theory from the 2000 study, the fund manager made fewer transactions when he was short on sleep.
To see whether there was a wider correlation, I sought to develop a new proxy for sleep. We know that around 80% of people search for information online about their health issues, and there is no reason to believe that investors behave any differently. I also knew that Google data has been used by researchers to measure investor attention to individual stocks.
I therefore created a sleepiness index based on the extent to which people in the US were searching Google for 28 relevant terms including “sleep deprivation”, “sleeping pills” and “jet lag cure”. Some of these terms came from allowing the Google algorithm to offer up potential sleepiness terms based on suggested autocompletes.
The more that people searched for things to do with sleepiness, the greater the indication of sleep difficulties. Unlike the time changes from daylight saving, my index has the advantage of being based on daily data, and can measure a much wider range of sleepiness. To test its validity, I checked the index against times that we would normally associate with sleepiness, including daylight-saving time changes and also sunrises and sunsets. Sure enough, sleepiness-related Google searches increase at these times.
The index confirmed that stock-market returns are indeed quite low on days that traders are short on sleep. For every 1% daily increase in sleep difficulties across the population, stock-market returns fell by 0.14%. I also found that these patterns reversed on subsequent days, which may mean that traders realise that their initial decisions were poor and take steps to correct them.
What next from a research point of view? Researchers could potentially use the data from sleep apps to get more accurate measures of the relationship between stock market returns and the population’s sleepiness over time. No doubt the better we understand this, the more that traders will be able to use it to their advantage.
My work is another example of how online search data can shed new light on old research subjects. There are surely lots of other ways in which the academic community can use it to understand other factors that influence our decisions.
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Hershey’s (NYSE:HSY) became an attractive investment last year when the COVID-driven sell-off resulted in ultra-low prices for this consumer staple. The company was not only well-positioned to weather the storm internal efforts to reposition the portfolio for longer-term sustainable growth were beginningto pay off. Over the past year, the company has finalized three major divestitures that have it in leaner shape, with a healthier balance sheet, and accelerating business.
Hershey’s, A Triple-Dip Of Good News
Hershey’s reported a very solid quarter despite headwinds related to divestitures and FX. Divestitures and FX resulted in a 0.2% and 0.4% headwind to the topline results with the takeaway being these headwinds are largely behind the company. That said, the $2.19 in reported consolidated revenue is 5.8% higher than last year and beat the consensus by 330 basis points. The gains were made on a 6.3% increase in organic sales due to a 5.75% increase in volume and a 0.6% increase in pricing. The U.S. segment was strongest with a bain of 9.06% while International saw its sales fall 13.1%.
Moving down the report, the company’s volume increase and internal efforts resulted in a significant increase in both the growth and operating margins. At the operating level, the GAAP margin increased by 470 basis points to 18.5% while the adjusted margin widened 170 basis points to 19.6% and both ahead of the consensus. The increase in revenue and margin resulted in earnings leverage and adjusted EPS of $1.49 or $0.06 better than expected.
“We delivered a strong quarter with continued share gains and volume growth to finish the year. While the impact of key external factors on our business remains uncertain, we have good momentum going into 2021 with visibility into a strong start to the year. We anticipate we will deliver another year of balanced sales and earnings growth in 2021,” said Michele Buck, The Hershey Company President, and Chief Executive Officer.
If the first dip of good news is the earnings beat, and the second the company’s increasing margins and earnings leverage, the third is the guidance. The company was among the first to reinstate guidance at the end of the calendar 3rd quarter 2020 and it has upped that guidance now. The company’s new projection has F2021 revenue growth in the range of 2-4% versus the previously expected 2.0% and a more robust 6-8% increase in EPS versus the $4.54 previously announced.
Hershey’s Dividend Is The Sprinkles On Top
If accelerating business, improving profitability, and earnings leverage aren’t enough to get you interested in Hershy there is also the dividendto consider. The company pays about 2.2% in yield with shares near $147 and there is a high expectation of future distribution increases. The company is paying about 48% of its earnings but that is based on a consensus figure well-below current guidance. The company’s earnings picture is backed up by a very healthy balance sheet as well, one that carries a moderate amount of cash and debt has good coverage and ample FCF. If the company follows true to form the next increase will come in later summer and could be worth as much as 10% of the current payout.
The Technical Outlook: Hershey’s Is Struggling With Resistance
Shares of Hershey’s popped on the news but resistance at the short-term moving average threatens to keep price action range-bound or moving lower. If price action cannot get above the 30 EMA a retest of the $144 level or lower becomes the most likely scenario. If, however, the bulls can rally and get above the EMA a move up to $152 or $153 looks probable.
Eduard Perez-Mañanet Lozoya posted on LinkedInhttp://www.linkedin.com – October 19, 2020An omnichannel strategy means providing your customers with a fully integrated shopping experience from the physical store to the virtual store, including mobile applications and the full range of possibilities offered by the offline and online world. #marketingconsultancy #digitalmarketing #optimizationstrategies #omnichannelmarketing Like Comment Share To view or add a comment, sign in To view or add a comment, sign in Editor’s Picks 2,174 followers 1,617 Posts 0 Articles View Profile FollowN/A
The most unique feature of the modern market is how fast everything happens. As we wrote back in November, the 2020 stock market essentially plotted the entire seven-year journey investors endured around the financial crisis in just seven months.
And as markets have moved to more quickly and efficiently discount all future outcomes, a series of mini-bubbles have become a defining feature of market today. And it appears SPACs (Special Purpose Acquisition Company) are taking their seat at the table.
George Livadas, portfolio manager at Upslope Capital Management, wrote cautiously about the SPAC space in his fourth quarter investor letter published Wednesday. “In recent years we’ve seen a number of mini-bubbles come and go rapidly (pot stocks, short vol, blockchain, etc),” Livadas writes.
“We’ve also seen what looks like a general speeding up of broader market regimes (flash bear markets of late 2018 and early 2020). For the SPAC bubble to be exempt from this phenomenon, one must assume that SPACs really are a better, lasting mousetrap vs. traditional IPOs. This seems highly unlikely.”
Livadas also cites impending lock-up expirations and the first full run of detailed quarterly results from many companies taken public by SPAC sponsors as risks for the space. Livadas disclosed that as of the end of the fourth quarter, Upslope was short 11 SPACs and two electric vehicle stocks, all as-yet unnamed.
But even the discussion of SPACs as a sector or asset class unto itself proves the enthusiasm has gone too far. SPACs are, after all, just a financing scheme, an alternate route for companies to go public that requires fewer disclosures than a traditional IPO or direct listing process. In exchange for this easier process, the company being taken public offers a bigger part of itself for sale to the SPAC sponsor.
Traditionally, this higher level of dilution made SPACs attractive for turnaround stories. Existing shareholders in a business that is struggling are typically more willing to give up an ownership stake in exchange for fresh capital, or a new management team running the company.
Though as Goldman Sachs strategists noted back in December, the sectors now being targeted by SPAC sponsors are no longer beaten down turnaround stories but high growth areas like pharma, tech, and electric vehicles. The SPAC has shifted from being a last resort to a first choice for many companies.
What Is a Special Purpose Acquisition Company (SPAC)?
A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. Also known as “blank check companies,” SPACs have been around for decades. In recent years, they’ve become more popular, attracting big-name underwriters and investors and raising a record amount of IPO money in 2019. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.
A special purpose acquisition company is formed to raise money through an initial public offering to buy another company.
At the time of their IPOs, SPACs have no existing business operations or even stated targets for acquisition.
Investors in SPACs can range from well-known private equity funds to the general public.
SPACs have two years to complete an acquisition or they must return their funds to investors.
How a SPAC Works
SPACs are generally formed by investors, or sponsors, with expertise in a particular industry or business sector, with the intention of pursuing deals in that area. In creating a SPAC, the founders sometimes have at least one acquisition target in mind, but they don’t identify that target to avoid extensive disclosures during the IPO process. (This is why they are called “blank check companies.” IPO investors have no idea what company they ultimately will be investing in.) SPACs seek underwriters and institutional investors before offering shares to the public.
The money SPACs raise in an IPO is placed in an interest-bearing trust account. These funds cannot be disbursed except to complete an acquisition or to return the money to investors if the SPAC is liquidated. A SPAC generally has two years to complete a deal or face liquidation. In some cases, some of the interest earned from the trust can be used as the SPAC’s working capital. After an acquisition, a SPAC is usually listed on one of the major stock exchanges.
Advantages of a SPAC
Selling to a SPAC can be an attractive option for the owners of a smaller company, which are often private equity funds. First, selling to a SPAC can add up to 20% to the sale price compared to a typical private equity deal. Being acquired by a SPAC can also offer business owners what is essentially a faster IPO process under the guidance of an experienced partner, with less worry about the swings in broader market sentiment.
SPACs Make a Comeback
SPACs have become more common in recent years, with their IPO fundraising hitting a record $13.6 billion in 2019—more than four times the $3.2 billion they raised in 2016. They have also attracted big-name underwriters such as Goldman Sachs, Credit Suisse, and Deutsche Bank, as well as retired or semi-retired senior executives looking for a shorter-term opportunity.
Examples of High-Profile SPAC Deals
One of the most high-profile recent deals involving special purpose acquisition companies involved Richard Branson’s Virgin Galactic. Venture capitalist Chamath Palihapitiya’s SPAC Social Capital Hedosophia Holdings bought a 49% stake in Virgin Galactic for $800 million before listing the company in 2019.1
In 2020, Bill Ackman, founder of Pershing Square Capital Management, sponsored his own SPAC, Pershing Square Tontine Holdings, the largest-ever SPAC, raising $4 billion in its offering on July 22.
Blank Check Company Definition A blank check company is a developmental stage company that has no specific business plan or has the intent to merge or acquire another firm.
moreInitial Public Offering (IPO) An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance.
moreShares Shares are a unit of ownership of a company that may be purchased by an investor.
moreSponsor A sponsor can be a range of providers and entities supporting the goals and objectives of an individual or company. moreConditional Listing Application (CLA) A conditional listing application (CLA) is an interim step in the listing process for the Toronto Stock Exchange (TSX).
The Dow Jones Industrial Average closed at an all-time high on Wednesday and reached an intraday record on Thursday, despite pro-Trump insurrectionists violently storming the Capitol and disrupting the confirmation of President-elect Joe Biden’s victory.
The bullish mood on Wall Street has less to do with the riots and more to do with Democrats winning Georgia’s Senate runoff elections and taking control of Congress.
Stocks hinge on the prospects of corporate profit growth. The soft Democratic majority in the Senate lifts Biden’s chances of passing the fiscal stimulus that experts have urged Congress to enact for months.
A $1 trillion relief package could “easily” boost GDP expansion in 2021 by 1 point to 6%, Michelle Meyer, the head of US economics at Bank of America, said. That would all but certainly lift investors’ hopes for near-term profit growth.
While pro-Trump insurrectionists remained illegally perched on the steps of the US Capitol on Wednesday, the Dow Jones Industrial Average closed at a record high.
The market uptick has little to do with violence on Capitol Hill. Instead of fearing the chaos and President Donald Trump’s rhetoric, investors kept their sights set on Georgia’s runoff outcomes.
Raphael Warnock and Jon Ossoff’s victories in the Senate races push Democrats’ seat count in the body to 50, allowing for Vice President-elect Kamala Harris to break any ties. The soft majority paves the way for President-elect Joe Biden to pass more progressive policy, including fiscal relief meant to drive the US out of the coronavirus recession.
Stocks move – and always have moved – on the prospects of expanding corporate profits. Experts on Wall Street, at universities, and in the Federal Reserve have spent months telling Congress that sweeping fiscal stimulus is necessary to drive a faster and more equitable economic recovery. Climbing stock prices reflect investors’ beliefs that following Democrats’ wins in Georgia, such a relief package is more likely to reach Biden’s desk.
Another round of stimulus would be a game changer for economic growth and accelerate the rebound to pre-pandemic levels of activity, Michelle Meyer, the head of US economics at Bank of America, said in a Thursday note. The package would likely prioritize another round of direct payments, an extension of federal unemployment benefits, funds for state and local governments, and relief for healthcare workers.
A $1 trillion relief package could “easily” boost gross domestic product growth in 2021 by 1 percentage point to roughly 6%, according to the bank. The positive economic effect could be even larger, as the estimates hinge on conservative spending multipliers, Meyer added.
Economists at Morgan Stanley and Goldman Sachs similarly linked optimistic GDP projections to Democrats’ wins in Georgia. Credit Suisse raised its S&P 500 forecast on Thursday, saying the increased likelihood of new stimulus in early 2021 could drive the index 12% higher through the year.
Concerns that the Washington riots would create a lasting risk were largely alleviated Thursday morning. Congress certified Biden’s victory after hours of debate and failed efforts to object to Electoral College vote counts. Trump pledged to conduct “an orderly transition” soon after, reversing from previous claims that he won the election and would remain in office.
The ensuring of a peaceful transition further augmented bullish sentiments. All three major stock indexes notched record intraday highs on Thursday as investors viewed the certification as a return to business as usual.
“With the political tensions easing, more stimulus expected to help boost the economy, and coronavirus vaccines helping bring a measure of calm to investors and traders, it seems that the market can now focus on earnings season,” JJ Kinahan, the chief market strategist at TD Ameritrade, said.