The back half of the year has officially started, and it has been off the races. Spurring forward optimism from the economic recovery, the S&P Index has once again legged higher. The S&P 500 rose +2.3% for the month of July and was up +8.2% in the second quarter of 2021. This has been the index’s fifth quarterly gain in a row, and all five of these gains have exceeded +5%! According to The Wall Street Journal, this is only the second time since 1945—the other time was in 1954—that the index has managed such a performance.
Beyond market performance, important economic data has been updated and contains positives and negatives.
Positives: U.S. manufacturing and services are still expanding (a reading above 50=expansionary), job openings within the U.S. haven’t been this high since 2001 (9.2 million job openings)1, and CEOs are confident and plan on hiring.
Negatives: Real quarter-over-quarter GDP % for Q2 came in at 6.5% vs. Bloomberg survey estimates of 9%. Personal savings rates have come down significantly, which the University of Michigan consumer sentiment report showed spending intentions on houses, cars, and large household durable goods have cratered to levels not seen since the 1980s. Year-over-year % core inflation (ex food & energy) remains elevated at 4.5% for the month of June; however, the Fed indicated that short-term interest rate hikes could begin sooner than many have anticipated.
Source: Bloomberg: July 30, 2021
2-year U.S. Treasury yields in June reflected higher inflation data and Fed jawboning, rising 13 basis points from 0.14% on May 28th to a high of 0.27% on June 24th. Not buying the sustained inflation story, 10-year U.S. Treasury yields fell from 1.58% on May 28th to a low of 1.19% on July 19th.
With the Delta variant causing a new flurry of worry, yields falling, and a potential peak in economic growth, long duration less cyclical businesses are nipping at the heels of their reopening play peers. A lower trending line indicates the Russell 1000 Value Index is underperforming the Russell 1000 Growth Index.
Source: Bloomberg. July 30, 2021
In other news, the chickens have come home to roost (for some)….
Nikola Corporation (NKLA) started trading on the NASDAQ through a reverse merger with a special purpose acquisition company (SPAC) on June 4, 2020 with a valuation of roughly $1 billion. Less than a week later the market was valuing the company just shy of $29 billion. The company’s business model is the development and commercialization of battery electric vehicles and hydrogen fuel cell electric vehicles. Ex-Founder and CEO Trevor Milton was essentially trying to be the Elon Musk of electric vehicles (but for trucks instead).
Unknown to Trevor, a research firm named Hindenburg Research actually decided to look where the market clearly wasn’t. Hindenburg Research believed Nikola and Trevor Milton was a fraud, and they supposedly had enough damning evidence to prove it. In fact, a staged video from the company titled “Nikola One in Motion”, which showed a semi-truck cruising on a road at an exceptional rate of speed, ended up being fake.2
Trevor Milton resigned after the fraud allegations surrounding the company’s questionable technology claims, and he has been charged by federal prosecutors for misleading investors. Nikola Corporation remains a $4.8 billion company with only $18 million in estimated revenue for 2021.
With SPAC issuance still high, a market at all-time highs, cheap money, and trillions in dry powder for private investors, we may just be at the tip of the iceberg for fraud and deception as money chases future promises of large addressable markets and seemingly irreplaceable CEOs.
1 Bureau of Labor Statistics