| Daily Notes Markets Chop, But Falling Yields Spark a Growth Stock Breakout Although global geopolitical tensions escalated dramatically over the weekend due to the Russian invasion of Ukraine, stocks processed the developments quite well today. Across the board our growth stocks actually rallied -- thanks mostly to falling Treasury yields and shifting investor expectations as geopolitical turmoil turns the Federal Reserve more accommodative. Recall our original thesis: Although the Russia-Ukraine war is a societal, political, and humanitarian tragedy, the Fed remains a more important driver of the U.S. economy and stock market than the war at the current moment. Therefore, the most important economic impact of the Russia-Ukraine war is its impact on the Fed – and thus far, it appears that impact will be a benign one for U.S. equities. That is, it appears the situation in Eastern Europe will force the Fed into a more accommodative monetary policy stance for 2022. Heading into this crisis, the Fed was set for four or more rate hikes in 2022, with many expecting a 50-basis-point lift in March. However, the war creates enough geopolitical and global economic uncertainty that this historically dovish Fed will be very unlikely to move aggressively in the face of this conflict. To that extent, investor expectations have shifted. Just last week, the CME Group’s Fed Watch Tool was pricing in a 40% chance of a 50 basis-point move in March. Today, that probability sits around 10%. Meanwhile, the market was, pre-crisis, pricing in six or seven rate hikes for 2022. Now, the consensus expectation has shifted to five or six rate hikes, with a four-rate-hike outcome gaining traction. Concurrently, the 10-year Treasury yield – which has been soaring all year long – has dropped precipitously. 
Remember: More rate hikes and higher yields are bad for stocks because they dilute the net present value of a company’s future cash flows. Less rate hikes and lower yields, similarly, are positive for stocks. The Russia-Ukraine crisis has the market thinking that we will get less rate hikes and lower yields in 2022 than previously expected. Importantly, this will happen without U.S. corporate earnings growth in 2022 taking much of a hit, because the direct economic impacts of the Russia-Ukraine conflict on U.S. companies should remain very small. Mathematically, that means roughly the same level of earnings growth and a markedly higher valuation multiple for equities. The combination of those two means higher stock prices. We think the market is right here. Fed Chair Jerome Powell and company are a famously dovish bunch. Even if the direct economic impacts of the Russia-Ukraine conflict are small, the geopolitical uncertainty it creates is enough to move them toward a more dovish rate-hike path in 2022. And, because those direct impacts are small, we believe the trajectory of earnings growth in 2022 for most U.S. companies – especially those without international business exposure – will be unchanged. The big winners here will be U.S.-focused growth stocks, because they are the most rate-sensitive and the most shielded from global geopolitical uncertainties. Obviously, that’s good news for our portfolios. Having said all that, we would like to urge caution on two fronts. First, we have to acknowledge the “madman risk” here. Vladimir Putin has proved himself to be a madman with this invasion. At the same time, it increasingly appears that with the world rallying together against Russia, Putin is getting desperate, perhaps best evidenced by his very-purposefully-public proclamation yesterday that Russia was upping the alertness of its nuclear fleet. Desperate madmen have a tendency to do crazy things. We believe there are enough rational actors throughout the Russian government and economy to keep Putin “in check.” The “madman risk,” however, is that a desperate Putin does something crazy. We believe there is less than a 10% chance of this happening, but that is large enough to keep this risk on our radar. Second, we must similarly acknowledge that stocks will not resume their bull market run until the Fed actually pivots dovish and inflation decelerates. We’ve made this point abundantly clear in the Daily Notes for months now. Stocks will remain choppy until inflation cools and Fed pivots dovish. We believe the incoming data and developments continue to more strongly suggest both will happen by summer. But, this is a “show me” market, and until those two things actually do happen, we expect stocks to remain under pressure. Big rallies will likely meet consistent selling resistance. To that extent, our investment strategy amid these turbulent times remains simple and unchanged. On big down days, we suggest investors continue to buy the dip in world-changing, early-stage U.S.-focused growth stocks that have been hammered. On big up days, we suggest trimming some positions to add more firepower for those big down-days. All the while, we believe investors should be accumulating large positions in washed-out hypergrowth tech stocks. This market will change course soon, and when it does, hypergrowth tech stocks will soar. On that note, let's dive into today's Daily Notes on our portfolio: - Ginkgo Bioworks (DNA) partners with natural food colorant company Phytolon. The latter company aims to leverage Ginkgo's cell programming solutions to create vibrant, naturally produced food coloring. This partnership illustrates the wide-reaching applications of Ginkgo's core technology. We expect more partnerships like this to be announced in the coming months. Each new contract win should help boost Ginkgo stock.
- Toyota Motors (TM) halts production at its Japan plants after a potential cyberattack against a domestic supplier. Although not confirmed to be a cyberattack, a "malfunction" that has never occurred before has raised red flags for the company. As a result, Toyota has suspended production as it investigates the issue. While a minor issue, we do believe that this hack underscores the growing importance of cybersecurity solutions in today's geopolitically uncertain environment. We suggest investors over-index to cybersecurity stocks at the current moment.
- The Trade Desk (TTD) teams up with LiveRamp. The two companies will work with key European market leaders to develop privacy-focused identity solutions for advertising. The European Unified ID (EUID) standard will benefit not only advertisers and publishers, but also consumers, whose privacy will be protected. The whole digital advertising world is looking to the future of data-driven advertising in a data-conscious world, and The Trade Desk is pioneering next-gen solutions for this world. We believe these solutions will constitute the foundation of all advertising in the future, and as such, are incredibly bullish on The Trade Desk stock.
- Desktop Metal (DM) starts shipping P-50 systems to Stanley Black & Decker. The P-50 printer purports to have speeds 100X that of conventional industrial manufacturing techniques while remaining cost competitive. Stanley Black & Decker owns super notable brands like Dewalt and Craftsman and is sure to put these systems to the test, in the best way possible. This is a big commercial contract win for Desktop Metal, who – up to this point – has been largely focused on developing a robust underlying additive manufacturing IP. That IP is now so large that we expect the company to start rapidly winning some impressive commercial contracts like this one.
- Solar, wind, and EV stocks rally as the world focuses on energy independence amid the Russia/Ukraine conflict. Given Russia's standing as a major fossil fuel producer and exporter, the current war in Europe has sparked calls for countries to achieve energy independence via clean energies. These calls coupled with a disturbing report from the U.N. this morning that basically said we are at a "now or never" point in the fight against climate change. In response, many of our companies that will help the U.S. and other countries eventually establish clean energy independence rallied significantly today. We see this rally persisting in a multi-month and multi-year window, though caution on near-term headwinds via the Fed.
- Snowflake (SNOW) gets cut at Cowen. The firm lowered its price target from $450 to $410 but reiterated its "Outperform" rating. The reasoning behind its price cut is stated to be lower earnings multiples throughout the sector. This is a very run-of-the-mill downgrade that isn't worrisome at all. We remain bullish on Snowflake stock.
- BMO upgrades Block (SQ). The firm is bullish on the company's Cash App user growth, product monetization, and acquisition of Afterpay. For one, Cash App's customer-facing angle makes it a perfect match for Square's merchant-facing business. BMO has a $159 price target and upgraded SQ to "Outperform." We agree with this thesis but believe that Block stock will rally much higher than $159 over the next 12 months.
Sincerely, |
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