May 2021 - DCA Market Outlook
LIQUIDITY IS ABUNDANT IN THE US; THE LENDING MECHANISM STILL ISN’T WORKING and EUROPE NEEDS HELP.
The US markets and exchanges around the world continue to advance, however, there are a few cautionary signs that could interrupt this unabated march higher.
The US has plenty of vaccine availability and could be moving toward herd immunity, unfortunately, much of the world has now entered a 4th phase of COVID 19. The ECB continues to refuse to change course and allow the European Banking System to cleanse and renew its balance sheets and thus its ability to lend. In the US, Main Street is still struggling to get a loan for its businesses and is therefore re-opening them in an uneven and slower pace than hoped for. The US is employing somewhere in the area of 9 million less people than it did a year ago before COVID struck the economy. SMALL BUSINESS remains the key to sustained economic advancement. We must do everything possible to get people back to work across the country and not just in selective sectors or geographic areas.
Wall Street continues to wring its hands over inflation and rising interest rates. It is hard not to notice the escalation of the price of agricultural products reflected at the food stores, industrial and housing materials pricing showing up in the cost of new and used cars as well as in home pricing. Bitcoin remains a phenomenon as are other digital currency alternatives (Alt coins). We are watchful, though, still skeptical of sustained inflation and significantly higher interest rates and the proposal to almost double capital gains taxation rates. We believe the enactment of the newly proposed levels could stifle long term investment. We know that we are raising several concerns and “What If’s”, yet we continue to believe an economic boom is in the early stages in the US. There are risks as our belief continues to be premised on the enormous flow of capital that is just entering the economy. Debt markets are stable and equity markets have broadened.
Tactically, the firm has reduced its public equity exposure. Our bond exposure continues to be reduced, though, we are close to re-investing and extending duration. Using the DJIA as a reference point, we are still of the belief that the market may move as low as 27,000 during 2021. Yes, that is almost 6000 Dow points down from the current DJIA level. It is our belief that for this to occur, there would have to be a confluence of negative events occurring close together. There is a more than small percentage chance, so we mention the possibility. Then, depending upon a continuation of COVID reduction progress and a stabilizing inflation/interest rate structure, we still may see 40,000 by year-end. This represents a near 50% swing from bottom to top, indicating heightened volatility through year-end. Craziness, right? We’re not so sure.
Our current belief is that this upper range DJIA target will prove elusive if the long-term capital gains tax rate discussion begins to coalesce above a 28% federal rate, which we believe is too high and will crowd out innovative investment. We believe interest rates have bottomed near term and might be heading to 2.10-2.25% on the US10Yr bond.
The VC/PE space remains robust and potentially, frothy as we move forward in 2021-2022. Innovation is alive and well and deal flow is very competitive. Capital raised by VC-backed companies in 1Q21 was up 117% y/y to $62B, though the number of deals closed y/y was only up 14% (source). Valuations are at premiums and round sizes are increasing. We continue to actively evaluate new companies across the technology landscape, especially with a software and services orientation. We have invested in and are evaluating a growing core of digital medical innovation companies that are both applying technology to the treatment of patients through enhanced science and monitoring patients remotely. We continue to also like the broader EdTech space where we think digital innovation will start to attract larger firms. Cybersecurity, ESG and several other sectors are also coming into focus.
DCA Asset Management, Inc.