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Good morning.
After a great week for stocks last week, U.S. futures are mixed, and Asian and European shares are under pressure. Bank and tech stocks led the gainers last week. The Nasdaq is holding up its end this morning even as Tesla shares falter pre-market on recall news.
The biggest gains can be found in crypto. Bitcoin is trading in a range below $35,000 after a strong weekend of gains. Yes, you read that correctly.
On the calendar this week is the June jobs report, which comes out on Friday. A reminder: the markets are particularly tuned to labor data right now.
In today’s essay, we explore some what-if scenarios. And in today’s Postscript I have a humble ode to the Romantics. No, not those Romantics.
Ok… moving on… let’s check in on the rest of the markets action.
Markets update
Asia
- The Asian markets start the week on a down note with the Shanghai Composite down nearly 0.1% in afternoon trade.
- Shares in Tesla are down 0.5% in pre-market trading after Chinese regulators announced the EV maker would be recalling nearly 300,000 Model 3 and Model Y cars—that’s nearly every car it’s sold in China—to perform an online software update related to its assisted driving feature.
- We may have a new IPO king: Chinese ride-hailing firm Didi Global is looking to fetch a $60 billion valuation for its NYSE listing as soon as next month. If it hits that lofty number it would more than double the Alibaba U.S. IPO from 2014.
Europe
- The European bourses were as flat as a farinata di ceci (a Ligurian flat-bread delicacy made of chick pea flour) out of the gates. The Stoxx Europe 600 was up nearly 0.1% in the opening minutes, before retreating. Chemicals, telecoms and healthcare stocks were in the group of gainers.
- This weekend’s crypto jolt came from the United Kingdom. Britain’s financial regulator effectively shut down Binance Markets, a trading affiliate of the world’s biggest crypto exchange, on Saturday.
- Shares in Airbus were up 0.4% at the open, and Boeing’s were off 0.9% in pre-market on news that United Airlines is expected to purchase 200 narrow-body planes from the duopoly, one of its biggest aircraft orders ever.
U.S.
- U.S. futures are trading sideways. That’s after the S&P 500 closed Friday at an all-time high, the 31st time—that’s not a typo—it’s hit a new record this year.
- You know what else is at an all-time high? The balance sheet of the Federal Reserve, topping $8.1 trillion last week. They’re hardly alone. As MarketEar reminds us, central banks around the world have purchased $900 million worth of assets every hour since the start of the COVID crisis 15 months ago.
- There’s a busy week of data on tap. We get reports on consumer confidence (tomorrow), PMI (Thursday) and the non-farm payrolls report (Friday). The consensus estimate is for 700,000 new jobs.
Elsewhere
- Gold is up, trading above $1,780/ounce.
- The dollar is up slightly after ceding some of its gains last week.
- Crude is flat, but not before Brent topped $76/barrel, before retreating.
- Crypto bulls shrugged off the Binance news, sending Bitcoin above $34,000 overnight.
***
What if?
The Fed is still buying, buying, buying securities. And that’s put a lid, for the most part, on real rates and bond yields. It’s also helped stocks rally, rally, rally. The S&P climbed 2.7% last week, its bests week of gains since February.
A bull would say don’t question the cards we’re dealt, just enjoy the gains while they come in.
Still, investors are starting to wonder: what if…?
What if inflation isn’t transitory? What if we get an interest rates surprise? What if there’s a big change in the tax code? What would any of the above do to stocks?
In an investor note over the weekend, Goldman Sachs tackles some of these questions for investors.
On inflation: Goldman reminds us that persistently higher prices typically hit corporates bottom line harder than revenues. That said, they stick with their view that inflation readings will come back to Earth by year-end or sooner as the labor supply normalizes and the more inflationary effects of the re-opening normalize.
And if that scenario doesn’t happen?
It’s hardly the end of the world. “The median annualized real S&P 500 return during periods of low inflation has been 15% vs. 9% in periods of high inflation,” Goldman writes. Translation: the good times would be a little less good in a period of sustained rising prices.
On interest rates…This one is a bit more of a headwind if it materializes. Goldman is sticking with a year-end print on the 10-year Treasury note of 1.9%. It’s 1.52% this morning. “All else equal,” Goldman writes, “if interest rates remain roughly flat through the end of this year, our S&P 500 dividend discount model (DDM) would suggest a fair value of 4700, or 9% above our current baseline price target of 4300.”
And a worse-case scenario? If the 10-year were to rise to 2.5% by year-end (would the Fed sit idle under such a scenario?, one wonders), then we’d be looking at a 3,550 fair market value on the S&P. That would be a big comedown—more than 15%— from where we finished on Friday.
On taxes…Goldman is banking that a Biden tax hike for corporates—from 21% to 25%—and on capital gains for wealthy—to 28%—will pass by year-end, and get enacted next year. Wall Street has modeled this in for some time so it shouldn’t throw markets out of whack too much, the thinking goes, if it happens as predicted.
If, for some reason, the tax hike were delayed (maybe the GOP kills or postpones it in infrastructure talks) it would add a few points to stock valuations.
The Goldman scorecard reads: no tax hike would equal year-on-year 2022 EPS growth of about 10%. A tax hike would slash that growth in half to 5% EPS growth.
The tax scenario is somewhat tricky. A tax increase would hurt growth stocks harder than others, which might trigger a sell-off in tech stocks just ahead of, say, a new capital gains tax rate going into effect.
But add it all up, and there’s plenty of reason to see why investors are still fairly bullish on stocks for the rest of the year.
***
Postscript
It’s Monday, and it’s summer in Italy, which mean I’m on the road again. This Bull Sheet comes to you from up north in Liguria—La Spezia, to be precise—the land of pesto and the white-marble mountains of Carrara (on the Tuscan-Ligurian border). The people here come from an ancient tradition of maritime supremacy.
I know. For most Bull Sheet readers, it’s Portofino (just up the coast) or bust. But the gulf of La Spezia is no slouch. As I type, I can see row upon row of super yachts docked next to, I’m not kidding, the YOLO bar. There’s one beauty called the “Black Swan,” which reminds me: I need to talk to the Fortune marketing and promotions department about getting us a “Bull Sheet” yacht for next summer—just for the summer.
We can cruise between Monte Carlo and here, maybe taking a detour to Sardinia’s Costa Smerelda. Who’s with me? (I’m going to need help convincing management this is a good idea. And to find a skipper.)
As any English Lit major will tell you, the gulf of La Spezia is also famous for something we don’t get enough of: poetry.
In Italian, this is the golfo dei poeti. Back in the early 19th Century, Byron lived in Portovenere and his good friend, the literary giant Percy Shelley, lived across the bay in Lerici. Legend has it that Byron would swim from Portovenere to Lerici, an Iron-Man-like 5-mile slog, to visit his friend, such was the daring spirit of the Romantics. These are not the roughest seas, but Shelley, as you’ll recall, perished in these waters in his boat, the Don Juan.
The Romantics lived hard and died young. Shelley passed away in his twenties, Byron in his thirties. (Arguably the greatest of all the Romantics, Mary Shelley, Percy’s wife, outlived them all). They practically invented YOLO two centuries ago. While today’s youths mine and trade crypto coins (I know you do other things; remind me what that is), these giants were producing priceless works of literature and poetry. In Byron’s case, he was also seducing a lot of married women and turned his villa in Ravenna into a zoo.
If the Bull Sheet yacht ever sets sail next summer, we’ll have to raise a toast to the Romantics.
***
There’s more news below.
Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com
As always, you can write to bullsheet@fortune.com or reply to this email with suggestions and feedback.
Today's reads
Swoosh, score! Sportswear behemoth Nike had one heckuva week last week, climbing more than 20% after releasing a big beat on Thursday after the bell, plus delivering a sterling sales forecast that could push its top line over $50 billion this year. The reason: women's fitnesswear sales and some guy named Michael Jordan.
Add it up. What do PubMatic, Criteo and The Trade Desk all have in common? They're ad-tech firms that saw their shares take off late last week when Google surprised the markets and announced it would be delaying by two years a major privacy overhaul of its Chrome browser. As Fortune's David Meyer explains, "this was fantastic news for the companies that make their money by tracking people across the web." Cue a major rally.
All fun and games. Shares in GameStop were down nearly 1% in pre-market as the meme stock is set to join the big(ger) league: the Russell 1000. There are all manner of predictions that could be bad news for the stock, which has lost nearly one-third of its value in the past three weeks.
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Market candy
13.5 trillion
Did you grow your wealth during the pandemic? You're hardly alone. Last year, Americans padded their savings, paid off debt, cut back on spending (with no place to go spend their dough), and poured their money into stocks and netted killer returns. All told, U.S. households added an astounding $13.5 trillion in wealth last year, the Wall Street Journal reports, citing Federal Reserve data. The last economic crisis, in 2008, Americans lost trillions.
