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What a difference a week makes. You may recall last Friday’s shellacking in the market as investors raced for the exit on fears of rising interest rates. Over the weekend, calmer heads prevailed and on Monday we saw the Dow rally rose close to 500 points.  It seems more people believe Jay Powell’s vision for interest rate policy changes than some of the more hawkish members of the Federal Reserve Board. In fact both the S&P500 and the Nasdaq have hit record highs this week. Part of the euphoria stems from the recently announced Infrastructure spending bill that could ignite a rally for companies like Caterpillar and Vulcan materials as the US upgrades it roads and Bridges. Personally I am not holding my breath. The infrastructure bill has to be accompanied by a social spending bill something a few Democratic senators and likely all of the Republican senators won’t agree to.

On a positive note, the price of oil continues to climb higher. It is now over $73 dollar per barrel which could be the tip of the iceberg should summer driving demand drain available supplies combined with a supply bottleneck coming from OPEC. Don’t get me wrong, crude could easily fall back to $50 later this year if just one “black swan” event takes place.  You may recall a few years back, the price of fertilizer plunged after their oligopoly fell apart and it is still not back to their pre break up price. (Nutrien has announced two production increases this year so maybe their bear market is finally over.)

Longer term though I think we are at the early stages of a secular bull market for energy. I know fossil fuels have become the poster child for climate change and governments in many parts of the world continue to support the switch over to electric vehicles for a lower carbon economy. However, it will take decades to switch and in the meantime, our transportation systems still run on gas and diesel.  As an aside, even if we could wave a magic wand and miraculously have everyone park their gasoline vehicles and commence with electric vehicles, no one talks about where we will get the necessary electricity. At best we would see a massive surge in Natural gas fired power plants to meet the electricity needs. Wind and solar plus battery storage solutions are not there yet. In the meantime shrinking oil reserves and curtailed pipeline capabilities will mean higher prices at the gas pump this summer. On the plus side it has led to rising energy stock prices as well as base metals including iron ore, copper and Metalurgical Coal (Teck Corp is back over $28 this week).

In other news, the “mega” banks all passed their annual stress test. It’s a make work project for Chief Financial Officers imposed by governments following the financial crisis back in 2008. Instead of blaming the regulators or the rating agencies, they continue to pound the banks for the misdeeds. However, their balance sheets are now in excellent shape and after passing the latest “doomsday scenarios” we should expect to see more stock buybacks and dividend increases. Meanwhile the regulators stand around looking at the rise of crypto currencies with half-hearted warnings to novice investors.

On the corporate front, Amazon Prime Days highlight the change in consumer buying patterns with even neophyte technology ludites choosing to do online shopping rather than risk their health in cash register line ups. Doesn’t seem to matter if it’s a loaf of bread or a new pair of shoes, many consumers fear the risk of standing next to an “anti vaxxer” and ending up in the hospital or worse. As an aside it is one of the reasons why I recommend buying both Pfizer and Gilead as a tandem trade. Pfizer makes the vaccine and Gilead makes Remdesivir, a leading treatment for those contracting the virus. Having said that, their performance has lagged many of the reopening stocks in our portfolios. Why use logic when emotion reigns.

Back to the broader markets, the best performing Dow stocks were Boeing, Caterpillar, American Express and Nike. Most can be logically explained by the big announcements this week. Boeing will be making more planes as economies reopen ditto with American Express, Caterpillar will be selling more iron to make roads and bridges and Nike…well with all of the government handouts, baby needs a new pair of shoes.

Turning to next week, keep an eye on Treasury yields especially if manufacturing surprises to the upside, more hawkish statements from Fed Presidents or the monthly employment stats surprise blow away expectations. On the earnings front, keep an eye out for Micron Technology, Walgreen Boots, and Couche Tard in Canada… well that and rising oil prices.

Happy trading and Stay Safe.

Cheers Steve and Michele.

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