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May 11th, 2021

How the Machine Works

Last week, the Labor Department announced that only 266,000 jobs were added in the month of April, which was well below expectations of one million new jobs. Still, our base case outlook for economic growth is that the vaccine will prove successful at controlling the spread of the COVID-19 virus, and the economy will take steps to reopen over the summer, resulting in dramatic economic growth in the second half of the year. We believe the reopening of the economy will put pressure on wages as the service sector competes for employees, leading to a shortage of workers.  

The combination of the pandemic shutdowns and flood of fiscal stimulus has distorted the traditional economic cycle. A significant part of the economy remains shut down, eight million people remain out of work, and supply chain disruptions are forcing commodity prices higher. However, there appears to be a disconnect in the investment markets as equity assets are hitting all-time highs and interest rates remain relatively low.

Our views on the integration of economic activity and the capital markets have evolved since the Financial Crisis in 2008. In order to minimize the impact of the Financial Crisis on the economy, the Federal Reserve took dramatic steps to provide stimulus to the economy, including lowering short-term interest rates to nearly zero percent. The biggest contributor to the appreciation in asset prices has been the large amount of stimulus money injected into the system.

In response to the global spread of the pandemic in early 2020, the Federal Reserve again took dramatic steps to provide monetary stimulus to the markets. At the same time, the U.S. government provided fiscal support to businesses and households, including direct checks to qualified individuals to help support consumer spending and commerce. According to the Committee for a Responsible Federal Budget (CRFB), the U.S. government has appropriated $4.1 trillion in response to COVID-19. The total cost of the financial bailout stemming from the Financial Crisis was estimated at $498 billion by Deborah J. Lucas, MIT Sloan distinguished professor of finance and director of the MIT Golub Center for Finance and Policy. While the economic costs are closer to $2 trillion, the real cost is a mere fraction of the expenses incurred to fight pandemic.

There are both known and unknown impacts of massive amounts of monetary and fiscal stimulus on the economy and capital markets. Clearly, stock prices moved higher during the economic downturn in 2020, with the expectation that the stimulus would help companies to rebuild their lost revenue and profits.


First quarter earnings have been strong so far, as the full-year earnings per share (EPS) estimates continue to strengthen. We are over halfway through the earnings reports, and almost 80% of companies have beat their revenue estimates. Sales growth has improved in every sector except Utilities. Furthermore, 84% have beat EPS estimates with companies in the Financials, Information Technology, and Consumer Discretionary sectors providing beat rates over 90%. The overall S&P earnings growth rate has now improved to 34%, up from 31% last week.

In last week’s highlights, high growth Tech stocks reported solid revenue numbers and guidance.

Match Group [MTCH]

Match Group reported earnings of 57 cents, which beat the estimates by 19 cents. Revenue of $667 million also beat estimates and was up 23% year-over-year. Subscribers were in line at 11.1 million and up 12% year-over-year. Average revenue per user was up 9%. Shares were up 6% on the news due to a big spike in revenue. Revenue increases include solid performance across its non-Tinder brands. Tinder revenue rose by 18%, and the non-Tinder brands grew by 30%. Being able to monetize non-Tinder brands and build out the portfolio will continue to be a great catalyst moving forward, and we believe Match Group will continue to provide further upside.

Zillow Group [ZG]

Zillow shares were up about 4% on earnings and revenue beats. Revenue grew 8% to $1.22 billion, with all segments exceeding expectations. Traffic to its mobile apps and websites averaged 221 million unique users per month, up 15% from last year. By segment, Zillow Offers brought in the majority of revenues, at $701 million. Premier Agent revenues were $334 million, up 38% year-over-year. The Premier Agent segment includes a listing service search and advertising that agents can purchase within Zillow. The program helps agents by providing a CRM to track Zillow users who express interest. Given its recent underperformance with the rotation out of Tech, we like Zillow at current prices.

PayPal [PYPL]

PayPal reported earnings of $1.22, beating estimates by 20 cents. Revenue was $6.03 billion, up 31% year-over-year. PayPal raised 2021 EPS growth rate to 21% to $4.70, up from $4.57. The company also raised revenue guidance for 2021 to $25.75 billion. Total Payment Volume (TPV) of $285 billion was up 50%. Venmo processed $51 billion in the quarter, adding 14.5 million new accounts and ending the quarter with 392 million active accounts. PayPal sees 2021 TPV growth of 30%. Shares were up 3% due to its guidance boost and better than expected results. We see the surge in digital payments showing continued growth after the pandemic and believe PayPal is a core holding in a growth portfolio.

Fixed Income

Fixed income markets have continued to experience very low volatility and a tight trading range. The 10-year U.S. Treasury rate has remained between 1.60% and 1.55% over the past 10 trading days. The two-year to 30-year curve remains steep at 215 bps, a five-year high. The near-term direction of long- term rates and the yield curve will be driven by actual readings of inflation. The Fed has made it very clear that it has no intention of increasing short-term rates any time soon. The question is whether they will begin to buy longer-dated Treasuries if interest rates start to move meaningfully higher.

Credit spreads continue to tighten, and the reach for yield has led to a further move down in high yield rates to all-time lows. The yield to worst on the Bloomberg Barclays High Yield index now stands at 3.92%. Prior to the COVID-19 pandemic, this index traded at 5.20%. Investors have seemingly thrown caution to the wind, as income has become increasingly difficult to find. While credit markets are currently stable, companies become increasingly levered during the pandemic. We believe that the high yield market is becoming overvalued and would not move out the risk curve currently. We continue to move up in quality and are waiting for a market dislocation and more attractive valuations before buying high yield bonds in a portfolio.

This report is published solely for informational purposes and is not to be construed as specific tax, legal or investment advice.  Views should not be considered a recommendation to buy or sell nor should they be relied upon as investment advice.  It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors.  Information contained in this report is current as of the date of publication and has been obtained from third party sources believed to be reliable.  WCM does not warrant or make any representation regarding the use or results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and does not accept any responsibility for any loss or damage that results from its use.  You should assume that Winthrop Capital Management has a financial interest in one or more of the positions discussed.  Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.  Winthrop Capital Management has no obligation to provide recipients hereof with updates or changes to such data. 

© 2021 Winthrop Capital Management



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