This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.
Materials Stocks Rock…
Morning Briefing
Yardeni Research
April 1: Stocks in the S&P 500 Materials and Industrials sectors didn’t wait for President Joe Biden’s $2.25 trillion infrastructure bill, unveiled yesterday, to start rallying. They are among the best-performing sectors, year to date, in the S&P 500 index, having anticipated both the post-Covid economic recovery and the trillions of dollars that might be funneled into infrastructure spending.
Investors’ optimism is evident in the performance derby for the S&P 500 sectors’ returns, year to date, through Tuesday’s close: Energy (30.5%), Financials (16.4), Industrials (11.4), Materials (9.1), Real Estate (8.9), Communication Services (7.4), S&P 500 (5.4), Health Care (2.6), Consumer Discretionary (2.1), Utilities (1.3), Consumer Staples (0.9), and Information Technology (0.2)….
To really see fireworks, look no further than the S&P 500 Steel stock-price index: It’s up 51.1% YTD through Tuesday’s close, making it the top-performing industry we track. Not far behind is Agricultural & Farm Machinery, up 39.0%. The S&P 500 Copper stock-price index has jumped 25.6% YTD, and the S&P 500 Construction Machinery & Heavy Trucks stock-price index has gained 20.9% in just the first three months of the year.
—Ed Yardeni
…As Manufacturing Rolls
Economic Update
Regions Financial
April 1: The ISM Manufacturing Index rose to 64.7% in March, above our forecast of 62.7% and the consensus forecast of 61.8%, marking the highest reading since December 1983. March was the 10th consecutive month in which the headline index was above the 50% break between contraction and expansion. Both new orders and backlogs of unfilled orders grew further in March, though further growth in order backlogs in part reflects shortages of key inputs to production and increasing supply- chain bottlenecks that could act as a drag on the pace of growth in the factory sector over coming months. Price pressures remain intense, and it remains to be seen whether, or to what extent, rising input prices and higher shipping costs will ultimately make their way into broader measures of inflation over coming months. Still, with order books expanding faster than firms can fill them, output and employment in the manufacturing sector are poised for further growth in the months ahead.
—Richard F. Moody
Offshore Wind Investments
Equity Research—Industry Update
Wells Fargo
March 31: We believe that offshore wind is making the jump from concept to reality in the U.S., driven by aggressive state clean-energy goals, declining resource costs, and economic development. Existing state offshore wind goals total 30 GW [gigawatts], representing an investment opportunity of $100 billion-plus, and over 10 GW are expected to achieve COD [commercial operation date] by the mid-2020s. On March 29, the Biden administration issued an offshore wind action plan that included a 30 GW target by 2030 and a 2050 ambition of 110 GW.
Offshore wind makes sense for coastal areas where onshore renewables are insufficient to meet state clean-energy goals (bearing in mind that transmission is difficult to site). However, we expect onshore wind and solar to remain far cheaper than offshore wind for the foreseeable future (currently, about 30% of the cost, on an unsubsidized basis), and many areas of the U.S. are blessed with abundant onshore renewable resources. [But] some states could embrace offshore wind due to economic development/port revitalization opportunities….
Within our coverage universe, developers Ørsted and, to a lesser extend, Avangrid offer the most exposure to the thematic, while Brookfield Renewable could become involved in the future. Other offshore wind plays include strategics ( Eversource Energy and Public Service Enterprise Group ), regulated utilities ( Dominion Energy and Duke Energy ), integrated energy companies ( BP and Royal Dutch Shell ), and derivative plays in the OFS capital-equipment sector ( NOV and TechnipFMC ).
We don’t foresee NextEra Energy entering the offshore-wind arena. While we would never say never, NextEra possesses substantial competitive advantages in onshore renewables, a market that is likely to remain meaningfully larger than offshore wind. We think NextEra will continue to steer capital toward these endeavors and not chase future offshore-lease-area auction opportunities.
—Neil Kalton and team
First-Quarter Earnings Themes
Strategy Spotlight
RBC Capital Markets
March 30: Though it’s still quite early, first-quarter 2021 results are trickling in for companies with February-quarter ends, along with a few leftovers with January-quarter ends. We’ve reviewed the earnings-call transcripts for 11 companies that reported from March 11 to 26 in the S&P 500 to gauge the tone and common themes so far.
Five things stand out: 1) Commentary on January and February has been surprisingly mixed. January is generally viewed as positive, but a few companies called out disruptions in February from extreme weather. Companies are also divided on trends in March and the outlook for the next few months, largely depending on what level of comparison they are lapping. 2) Some macro comments from restaurants and home builders suggest that mobility still varies considerably by region, while the housing market remains strong overall. 3) In terms of the outlook for 2021, the tone has been generally optimistic, with some flagging tough comps and expecting sales still lower than 2019 levels. 4) Most companies continue to see margin expansion. As we review earnings calls this quarter, we are keeping a close eye on what factors are weighing on or helping margins. So far, extreme weather has been highlighted, along with supply-chain disruptions, including transportation delays and low inventory levels. As expected, companies are also pointing to higher input/labor/logistics costs as headwinds for margins. 5) We noticed that companies are starting to compare their recent performance to pre-Covid levels. Most management comments on this topic are highlighting at least one (sub)segment returning to pre-Covid levels, while some others are still uncertain about the pace of return.
—Lori Calvasina
No Love for Treasuries
Weekly Technical Review
Macro Tides
March 29: Sentiment toward Treasury bonds is about as sour as it can be. The percentage of bond bulls fell to just 20% last week, according to the weekly survey of bond traders by Consensus. This is in the bottom 1.7% of all surveys during the past 34 years. In the majority of occurrences [when the percentage of bulls dropped below 30%], a low in Treasury bonds was coincidental with the low in bullish sentiment. There were instances in which Treasury bond prices fell to a lower low after bouncing. In early 2018, bullish sentiment fell below 30%, and TLT [the iShares 20+ Year Treasury Bond exchange-traded fund] entered a trading range between 116.50 and 122.90 from February until July. TLT then dropped to 111.90 in November 2018. A lower low is expected in the next few months.
—Jim Welsh
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