Merck has a Cure for Covid & Stock Market - Your Money October 1st 2021

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Let’s face it folks, thank the lord September is over because we got out with just a minor haircut. However, if the last two Monday’s are any indication, October could be an even bumpier ride. A lot of stocks are priced to perfection, especially the high growth, momentum plays that rely on a never-ending supply of cash from Wall Street. But if inflationary pressures continue to build, the Fed will have no choice but to reduce its monthly bond buying program which in effect is like taking the punch bowl away from the party. Those supply disruptions are coming from a wide array of sources starting with shipping container prices in Asia, and over loaded ports in North America only add to the time and cost of stocking store shelves. Bed Bath and Beyond fell 26% on supply problems, and when I walked through Thrifty Foods yesterday, canned cranberries were nowhere to be seen. So forget Halloween in August, some retailers are trying to launch Christmas Shopping in October. At least the liquor stores are full, or so I am led to believe judging from the news story on Bordeaux offerings.

Meanwhile back on Wall and Bay Street, the perceived large market swings are not as bad as one might think. Its due to the law of large numbers. When the Dow was at 20,000 a 900 point drop was 4.5%. At 34,000, a 900 point drop is only 2.6%. Still, we are seeing a significant tick up in the VIX or volatility index which means investors are getting nervous. And by the way we usually get at least one five percent correction each year plus another 10% drop every 18 months. You need discipline to ride them out and at the lows’ provide great entry points.

Having said that, now might be the time to upgrade the quality of your holdings. In the latter part of Bull markets, value stocks give you better sleep at night conditions. And turning to next week, investors will digest Trade data, ISM Non Manufacturing, Jobless Claims and Non Farm Payrolls aka the all important jobs data. The street is looking for a pickup of 420K more Jobs for September which will confirm the ongoing progress in the economic recovery BUT, if Average Hourly Earnings come in higher than 0.4%, investors may take this as yet another indication the Fed needs to act sooner rather than later. They cannot afford to let cost push inflation set in. As you know, I believe the current inflation data is not transitory but will become imbedded even after Covid vaccination rates reach herd immunity and supply bottle necks ease off.

If nothing else, I see a long-term bull market in energy. We can’t build pipelines, yet we are only too happy in eastern Canada to import oil by tanker from the Middle East. I also question the wisdom of providing subsidies to electric vehicles without any consideration to how we are going to produce the electricity to power them. BC is generally a net importer of electricity (depends on if certain industrial mines are fully online) because we cannot build dams anymore and according to a document at the BC Utilities Commission, you would need 20 million solar panels to equal the potential production from the Site C dam. Something does not add up. In a worst-case scenario, given the huge push by US industry to join the electric vehicle revolution, we could see Americans refusing to sell us electricity at night because they have too much need themselves. Oops. Well at least there is Alberta and their natural gas generators.

Back in the USA, President Biden can’t get his infrastructure spending bill passed through Congress because its being held up by left leaning Democratic politicians. No wonder stock markets are jittery. Lastly, for those looking for some sign of a silver lining, look no further than Merck. The company has just released very good results with a treatment that greatly reduces the odds of death by Covid. Unfortunately, antivaxxers on both sides of the border may use it as an excuse not to get vaccinated. I am thinking Europe might be a better vacation choice than to Alberta or US destinations.

In the meantime, it looks like the reopening trades are back on, AKA planes, trains, automobiles, hotels, casinos and cruise ships.

Happy Trading and Stay Safe.

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Steve Bokor

Steve Bokor

Portfolio Manager