Monthly Market Summary: May 2021

The CPI report released mid-May garnered a lot of attention. Most predicted that inflation was on the rise, and they were correct. April saw inflation rise year-over-year to a striking 4.2%. This jump was partially caused by how far prices fell this time last year, which served as the base figure for the calculation, but a few other factors did come into play. Manufacturers continue to face supply constraints, causing the cost of production to rise as increased input costs then translate into higher prices for consumers. This, combined with the excess cash still circulating in the economy thanks to government stimulus, has created a heating economy. 

At home in the U.S. we are edging away from “unprecedented times” and closer to normal times. Mask mandates and capacity restrictions are loosening each day, the vaccine continues to be administered well with new incentives being rolled out to increase inoculations, and Covid-19 cases are broadly under control. The number of people passing through TSA security checkpoints during the first weekend of May was enough to confirm the increased consumer confidence in the market. 4.8 million people boarded flights between May 7-9, compared to only 0.6M people during the same weekend last year. It should come as no surprise that consumers, who saved about 8% of GDP in 2020 (above what they usually put away), are looking for ways to spend it. The pent up demand for vacations as we enter the summer months is likely to continue. 

The same can not necessarily be said for the rest of the world. Headlines continue to be dominated by India and the struggle with their newest wave of the virus. Pressure on limited health infrastructure intensified and case fatality ratios grew by over 200% between mid-February and early May. Indian states imposed a new round of restrictions which curtailed mobility and will likely cause the economy to contract significantly in the second quarter. At this point only 4% of the globe is fully vaccinated, suggesting there is still a long way to go. 

The tech-heavy Nasdaq 100 pushed above its 50-day moving average in late May. This technical level is a key trend indicator for traders and suggests that some of the softness in the markets may be over as we wrap up May. On May 18, the U.S. Treasury Department called for stronger tax compliance sending cryptocurrencies, including Bitcoin, down as much as 30% during the session. Overall, the S&P 500 is up 0.6% for the MTD period and 10.7% for the YTD period. Investment grade and high yield corporate bond credit spreads, a measure of credit risk, widened slightly in May, but still remain tight relative to their historical levels (an indication of lowest credit risk). Average spreads are up. Sector performance was led by banks and energy, while autos lagged. The rise in treasury rates has shifted demand, especially overseas demand, to the U.S investment grade market as their higher rates became very attractive to those hunting for much needed yield. Select life insurers in Asia reportedly poured $3B into investment grade bonds during the middle of May, potentially signalling a bullish tone for the market for the weeks ahead.

Asset Class Summary

Single Family Rentals (SFR)

Suburban migration remains strong, with listings down 50% since last year. 

The average home is spending only 18 days on market before being sold. American Homes 4 Rent, a listed real estate investment trust that invests in single family homes, also reported that rents on their homes have increased 8.8% year-on-year, with the expectation that there is more room for further growth. However, across the broader industry the cost of inputs are on the rise so increased rents aren’t directly translating to increased profits. The price of lumber alone has increased 4x in comparison to its price 2 years ago.

SFR is still very hot but it’s a mixed bag of market conditions for the sector. Home prices are up 11.6% but some predict, including Fannie Mae, that home valuation growth will slow from 11% in 2021 to 4% in 2022. 

Art

Inflation is on the rise and investors are looking to allocate capital to physical assets such as art. On Mother’s Day weekend, the art market had its first in-person fair since the pandemic began last year, Frieze New York. Art fairs are a major sales channel for the private segment of the market as art enthusiasts remain very interested in viewing and assessing works in person. Frieze New York was a huge success, with the expectation that the return of in-person shows will continue to strengthen the private market. A number of notable auction results were reported throughout the month. Works by Basquiat took the top spots with an important piece selling through Christie’s for $93M, well over its $50M estimate. Sotheby’s also sold a large Basquiat painting for $50M, demonstrating that global demand, particularly in Asia, is fueling the market for black artists. The same is true for works by female artists as price growth continues to trend in a positive direction.

Marine

The dry bulk market continues to benefit from the substantial recovery in demand for transportation services of raw materials by sea, being the direct effect of more regions gradually moving out of the pandemic slowdown into a new era of growth. In addition, trade tensions between China and Australia, and solid demand for corn resulting in increased demand for long haul transportation, have also contributed to the strengthening dry bulk market lately. It is expected that the dry bulk market will continue to enjoy solid returns at least in the mid-term, with a number of market analysts suggesting that this trend may develop into a commodities super cycle.

Likewise, the container carrier market has been very strong since late 4Q2020. This growth trajectory has been fueled by increasing retail purchases around the globe. Container carriers are the obvious beneficiaries of the increasing demand as they are required to move finished products from the point of manufacture to the end consumer. 

The same cannot be said for the tanker market which remains weak since the onset of the pandemic thanks to reduced demand for oil. Ship prices are low as a reflection of poor freight rates, which have remained well below operating expenses for many months now. Conversely, this creates opportunity for buyers who seek to enter the market at the current depressed prices. Lenders participating in the counter cyclical financing of ship purchases are also reaping some of the benefit. In saying this, it is expected that prices will recover as the world emerges from the grips of the pandemic. As the world wakes up again, the use of petroleum products will likely rebound, ultimately driving up demand for tanker transportation.

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