This article was penned by CAPIS
Last week we held our February research call, featuring Nicholas Colas, co-founder of DataTrek Research. Colas is a regular speaker on the CAPIS research call and respected commentator on financial markets.
Our own David Choate, COO & Executive Director of Sales and Trading, started the call with an update on CAPIS’ status given the effects of recent winter weather in Texas and the resultant power grid failure and disruptions. Choate explained to attendees CAPIS suffered no trading disruptions at its data centers and trading desk, emphasizing the firm’s technological and trading redundancy, as well as its commitment to having physical traders on the main Dallas trading desk.
Then Colas began his presentation that addressed the following questions:
What does history say when one party has all control of the legislative and executive branches?
- Using data collected since 1948, when Democrats control both the legislative and executive branches, the S&P 500 returned ~14%. When Republicans held control of both Congress and the Presidency, it returned ~16%. This led Colas to say that “parties have an incentive to get ‘everything’ right when in full control” — meaning the Democrats need to manage and handle the economy via a delicate balance of proper regulation and stimulus.
- Washington is already focusing on the 2022 elections, and should the economy continue to recover, it bodes well for the Democrats.
What can we expect for inflation?
- The Federal Reserve has signaled it will not raise short-term interest rates any time soon and that factor is accomodative of economic and labor force recovery. Also, should inflation begin to set in, the Fed will not hit or tap the brakes on the economy too soon – but we can expect the Fed to allow inflation to hit 2% and that the focus will be placed on employment.
- From a market perspective, Colas advocated not being long fixed income securities, especially longer duration bonds to which there are fewer and less efficient hedges: “They’re going to get smashed.”
What can we expect from Big Tech firms?
- Big Tech firms can neither avoid nor deflect regulatory scrutiny going forward. Public and Congressional favor breaking up some of the larger tech firms and therefore could be unavoidable. The firm and stock most at risk is Facebook. According to a survey conducted by DataTrek, readers said the social media goliath was most at risk ‘by a longshot’ to fall within the S&P 500.
What’s the big picture around this narrative regarding the capital markets?
- The big picture is a classic economic recovery scenario – if interest rates go up, then the cost of energy will rise and that will produce inflationary pressure.
- Compared to Europe, the United States is well-placed to come back strongly economically, fueled in part by successful COVID-19 inoculation efforts.
- The stock market can expect low to moderate returns in the short-term. Investors will turn their focus back to earnings as the year progresses and into 2022.
For more commentary and insights stay tuned for future research calls from CAPIS. The next scheduled research call is slated for Thursday, March 18th at 10 a.m. CST, featuring Katie Stockton of Fairleads Strategies.