Welcome to A Brighter Future

Welcome to A Brighter Future

The Laidlaw Podcast Series where we discuss relevant and timely financial matters with leading experts in the field.

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Discussions With David Garrity (2021 Q1 & Q2)

In this ongoing series of interviews, renowned market strategist David Garrity and Richard Calhoun, CEO of Laidlaw Wealth Management discuss the 2020 market forecast and offer invaluable insights into the capital markets in light of current events and the resulting unprecedented volatility.

June 22, 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 50 – Investors Should Face Rising Market Volatility With Defiance.


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the current market environment following last week’s FOMC meeting and interviews Defiance ETFs’ CIO Sylvia Jablonski on the areas of growth investors should consider as the market is currently confronting a “growth scare.”

Please tune in for more timely insights.

Hashtags & Stock Symbols: #Economy #ETFs #Fed #StockMarket #SP500 $CRUZ $FIVG $HDRO $IBBJ $PSY $QTUM $SPAK


Hello and welcome to another episode of “A Brighter Future.”  I’m Rick Calhoun, CEO of Laidlaw Wealth Management and Naples Wealth Planning, and I am joined today by our Chief Market Strategist, David Garrity, and a special guest Sylvia Jablonski, Chief Investment Officer for Defiance ETFs. 


Welcome, Sylvia, we’re excited you could join us and looking forward to our discussion today.  


David, first let me wish a belated Happy Father’s Day.  I hope you had a nice weekend and someone else did the cooking out for you.


Rick, it was a wonderful weekend spent with extended family, so it was a celebration of multiple fathers across the generations. As Father’s Day coincided this year with the Summer Solstice all the dads have to get back to work to prepare for the shorter days ahead. Our moment in the sun is done for 2021. 


Question 1


In keeping with our normal Brighter Future “script,” David, let’s talk a little about last week’s market developments and then we’ll devote the bulk of this episode to getting to know Sylvia and Defiance ETFs better. 


David, if you only skimmed the headlines last week, you were likely left with a sense that the market has hit a rough patch, triggered by a shift in the Fed’s policy outlook.  Stocks did post a losing week, but it appears investors’ definition of volatility and pullbacks has been distorted by the tranquility of the past few months. 


For starters, coming into the week, it had been a month since the S&P 500 saw a +/-1% daily move, with the last -1% down day coming in early May. Over the last two months, nearly 40% of all trading days have seen the stock market move by less than one-fifth of a percent in either direction, reflecting a very calm environment.  Market volatility picked up a bit in reaction to the Fed announcement, and we expect market swings to pick up as we advance but higher volatility should be viewed more as a norm, not the exception.  Moreover, it should not be lost that the market is less than 2% from the all-time high and we haven’t experienced a -5% pullback in eight months.  For perspective, the market has historically averaged three -5% dips per year.


So, David, does this recent period of consolidation, represent a market growing into its optimistic valuations?  If so, should investors expect more moderate returns and more bumps ahead? 


Rick, in a word the answer to both questions is “YES” as the elements supporting the containment of COVID and the re-opening of the global economy continue to remain in place, but outlook going forward has become more mixed.


The monetary support from The Fed has become more qualified following last week’s FOMC meeting, something of which investors should be mindful was always a question of when, not if. 


On the fiscal front, Congress has not strayed from its partisan ways with governing becoming more a matter of obstruction than compromise, a development not supportive of prospects for further fiscal stimulus on which investors have very much relied since the March 2020 lows. 


Separately, the pace of vaccination in the U.S. is encountering challenges in meeting the Biden Administration’s goal of 70% by July 4th as states away from the East and West Coasts have not seen the necessary uptake, all this while the more infectious Delta COVID variant is becoming increasingly, and troublingly, prevalent. 


As indicated the outlook has become more mixed on a number of fronts. That said, earnings estimates for 2021 and 2022 continue to move higher, but remain at a level that should allow for solid outperformance in the upcoming 2Q 2021 and 3Q 2021 earnings periods. 


Nevertheless, the market has been overcome by a “growth scare” as seen in 10-year Treasury yields declining and the Russell 1000 Value ETF selling off -4.2% since the end of May as the Russell 1000 Growth ETF has gained +2.5% with investors increasingly concerned that the point of “peak reflation” is past. 


All of these developments serve well to introduce our guest today whose firm has established a record of finding pockets of growth in the stock market landscape and developing the investment vehicles in the form of ETFs to capitalize on the development of these growth themes.   


Question 2


Sylvia, let me bring you into the discussion.   You are the Chief Investment Officer for Defiance ETFs, one of the fastest growing ETF sponsors with a focus on thematic investing.  


You are considered a pioneer in the ETF space and regularly featured on CNBC, Bloomberg and in the Wall Street Journal. 


As a Chief Investment Officer, did anything about last week’s market movements catch your attention or potential cause any allocation changes?   


Question 3


Sylvia, as I mentioned, you are considered a pioneer in the ETF space and in your career you have worked to advance the education and strategy of the ETF sponsor industry, so what drew you to the opportunity at Defiance ? 


Question 4


Sylvia, at present, Defiance has seven (7) offerings on the platform that range from the emerging technology of 5G (FIVG) to one of your more recent offerings for the Travel/Re-Opening Trade (CRUZ). The seven ETFs are CRUZ, FIVG, HDRO, IBBJ, PSY, QTUM, SPAK.   


How do you come up with these themes and can you offer us some “inside baseball” to what your team is considering as new offerings? 


Question 5


As we bring today’s episode to close, I thought we could end on a more macro topic, as I think we would agree that the headliner last week was the Federal Reserve meeting. 


Expectations heading in were for some color on policymakers’ discussions on bond purchases and the introduction of a potential timeline for tapering those purchases. Instead, the Fed made no mention of a taper timeline and signaled that it anticipated the first rate hike in 2023.


In terms of tapering, my sense is that the Fed opted to leave out the taper talk to support consistency with its view that this recent spike in inflation is “transitory”  


Moreover, I think Chairman Powell is very aware of the market’s 2013 “Taper Tantrum” and intends to be as clear as possible about the Fed’s expectations in order to avoid mixed messages. 


I think our listeners would be interested in whether you believe the taper discussion will be broached this year.  Also, could the lack of its mention at this meeting be a way for the Fed to reinforce their view on transitory inflation forces as well as their commitment to supporting a robust economic rebound?

June 7, 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 49 – Will The Jetstream Of Rising Earnings Forecasts Push The Risk Of A Market Hurricane Out To Sea?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the risks and merits of exposure to the newly emerged cryptocurrency asset class, the inflation takeaways from the May Employment Report, the prospects for the Value sector to lead the market higher over the balance of 2021 along with how portfolios should be diversified between Growth and Value holdings, the outlook for oil prices given the likely return of Iran to the crude market, and the possibility that a financial market hurricane may unfold in light of high valuation levels and possible tax increases.

The topics discussed in this episode are: What needs to happen in order for cryptocurrencies such as Bitcoin to become an investable asset class?, Will inflation rise following on the employment market’s recovery?, Will Value stocks continue to outperform and should portfolios still hold Growth names?, What are the prospects for the oil market as Iran is likely to return as a supplier? and With valuation levels elevated and tax rates likely to rise, is there a financial market hurricane over the horizon? 

Please tune in for more timely insights.

Hashtags & Stock Symbols: #BTC #Cryptocurrencies #Economy #ETH #Fed #Inflation #Oil #StockMarket #SP500 $EWD $EWS $EWT $EWU $EZA $IVE $SPY $VTV $XLB $XLE $XLF $XLI



Hello and welcome to another episode of “A Brighter Future”.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management and Naples Wealth Planning, and I am joined once again by our Chief Market Strategist, David Garrity. 


David, what a difference a week can make, last week you were cooking out under an umbrella and doing some last-minute firewood shopping and this weekend we needed sunscreen and air conditioning.  Hopefully, you had a chance to get out and take advantage of the early summer sun. 


Rick, these are fickle times indeed and change is in the air as we transition to Summer from Spring and with hard-work and collaboration may work our way forward together from COVID. Personally, I’m moving into a new home, so not much time to enjoy the outdoors, but instead to pack up personal effects and in the process scratch my head in wonder at why I may have held onto some items longer than most clear-thinking people would. I mean, Rick, who really needs a ragged lacrosse jersey that hasn’t fit for decades? Time to focus on what is necessary and let the superfluous go as life is too short to tote about excess baggage.


David, in last week’s episode we started off by noting that the week prior was fairly muted, but this past week had plenty of theatrics in the market. Some of it was genuinely entertaining and some of it is right out of the theater of the absurd. 


While our listeners can decide which is which, we saw bitcoin trade off due ostensibly to an Elon Musk tweet with a picture of a couple breaking up and carrying a #bitcoin hashtag and broken heart emoji.


Separately, CNBC interviewed a guy who they referred to as the “Leader of the Apes”, who opined on AMC Entertainment’s prospects, observing that fundamental value is different from momentum trading (which is very true) and that one can take advantage of momentum trading, saying (in a very contradictory tone)  that it is the “new age of investing.”


Question 1


So, I thought maybe we could start our discussion there today.  Cryptocurrency volatility has spiked in recent weeks amid a confluence of events and headlines — from the aforementioned tweet to domestic and international regulatory actions to general market skittishness — that saw its total market capitalization drop nearly -40%, from $2.5 trillion to $1.6 trillion. The speed of the dislocation, which had the feeling of a liquidity squeeze, took many investors by surprise and may have left some to ponder what is next for cryptocurrencies.  


We have discussed the investment thesis and evolution of cryptocurrencies several times and I think we both believe that despite the risks inherent in digital assets — which include additional regulation, technology and operational failures, and (in some cases) high energy consumption —  a small allocation in a managed fund may be appropriate for qualified investors. 


However, despite the “Lord of the Apes” comments, it seems recent market action reminds us that these assets have much higher volatility than that typically occur in traditional asset classes. In fact, in our weekly meeting we discussed that on a technical chart, Bitcoin could be forming the right shoulder of a “Head and Shoulders” technical trading pattern. 


To paraphrase the late Senator Everett McKinley Dirksen, Rick, “a trillion here, a trillion there and pretty soon you’re talking about a real asset class.” While we may debate the merits of Bitcoin and other cryptocurrencies as stores of value or possible mediums of exchange, the fact remains that the flood of liquidity injected into the global economy since the onset of COVID in February 2020 has served to lift all boats, no matter how well-founded their value as investments. In this regard, one may consider Bitcoin’s negative technical trading pattern as a possible indication that as the world economy begins to reopen the liquidity up to now deployed in financial markets will be put to use in the real economy. 


This is not to say there are not real uses for cryptocurrencies in the sense that they can be deployed to speed transaction settlement and do so at a possibly lower cost, thereby serving to reduce friction in operation of the economy while also potentially serving to offer a more inclusive financial system. However, of late, the most salient corporate use for Bitcoin has been to make payments to cyber-criminal gangs that have staged ransomware attacks on their IT infrastructure and in doing so shut down their operations with wide-ranging effects on the economy, not something that is going to be tolerated by law enforcement, regulators or governments anywhere. So, that said, the clear need now is for cryptocurrencies to clean up their act before any further progress can be made. We expect advances in technology to be disruptive and require a tolerance for change, Rick, but not when they bring about such dystopian outcomes as helping to facilitate holding the global economy hostage.  


Question 2:


David, on Friday morning, we got the May employment report which was not as good as expected in terms of payroll growth, but it was better than what was seen in April.  


The unemployment rate dropped to 5.8%, yet the labor force participation rate dipped to 61.6%.  Leisure and hospitality jobs (+292,000) were once again the main driver of the job gains.  So, while the report showed job growth is improving, it’s not as quickly as anticipated.


It feels like we’ve reached a phase in the  recovery in which good news is, at times, interpreted as bad news:


  • Strong job growth = good news
  • Growth so strong it spurs persistently high inflation = not-so-good news


You also shared an article that stated “The unemployed aren’t leaving work, they are changing work and change takes time” 


As a kid, I was told that sugar in a gas tank will cause a car engine to seize up and I never wanted to find out if it was true or a myth but the risk inflation poses to the current investment narrative is no myth.  Good news is still good news, but do you think faster job gains ahead could be fuel or sugar to the economic engine? 


Rick, the employment recovery and inflation scenario is primarily a question of whether there is a secular upward shift in wage rates as the lower paying vacancies remain unfilled. For now, though, the shortfall relative to expectations from the disappointing May Employment Report lowered the odds of a 2022 Fed rate increase with Fed Funds Futures not giving 100% odds of a policy shift until 2023. Note that the report shows there are still 7.6 million jobs missing versus the peak pre-COVID workforce. With monthly job growth has averaged 478,000 so far in 2021, it will take until at least mid-2022 to see a full recovery.


Now, as has been cited elsewhere, the majority of the jobs that aren’t back to pre-COVID workforce levels are very low-income jobs, what the U.S. Private Sector Job Quality Index terms low-quality jobs. Through March 2021, most of the private sector jobs eliminated during COVID that haven’t been restored are production and “nonsupervisory” jobs which pre-COVID offered weekly pay averaging less than $750, a level representing an annual gross income of $39,000 or less. 


There are over 45 million low-paying jobs like these, which constitute about 43% of all production and nonsupervisory jobs in the country. Of these jobs, 23 million paid under $500 per week pre-COVID, an annual gross income of $26,000 or less. Not only are the wages low, but many of these jobs offer well below 30 hours of work per week. 


Since this segment of the workforce represents over 27% of the peak February 2020 U.S. workforce of 164.6 million workers, it is not just some unfortunate corner of the jobs market, but instead an area where meaningful improvement may and perhaps should be made in that will serve to strengthen the U.S. economy by bolstering household incomes. 


As such, it may very well take some time for the U.S. to return to something resembling full employment as employers and workers work to determine market-clearing rates of compensation. How inflation results from that remains to be seen, Rick, but investments in productivity enhancements could well offset the possible inflationary impact of higher wages.


Question 3


David, I want to revisit a topic that that is being debated in the financial press right now –   Growth or Value.  Over the past 40 years, when earnings growth is accelerating following a recession, value and cyclical investments have traditionally outperformed growth investments.   


Value is up more than +18% year-to-date, notably outpacing the returns for growth investments, does that reflect a rotation in leadership that should continue this year, and possibly into 2022, given growth has handily outperformed value over the past several years?  


Separately, will this economic expansion support strong enough earnings growth to provide the opportunity for value leadership to persist?  


And finally, given bouts of anxiety regarding the durability of the recovery, as well as the prospects for the pace of earnings gains to moderate, I think a case could still be made for growth investments. So does this warrant an allocation to both, possibly with a slight overweight to value at this stage? 


Rick, while Value has been demonstrating the market leadership we expected when putting together the “Laidlaw Five” 2021 forecast in December 2020, it is important to note that off the March 2020 market low that within the S&P 500 index’s +89.1% advance that Growth has gained +91.3% while Value has risen a lesser +82.3% so there has not been a clear rotation as yet. When looking at the smaller capitalization Russell 2000, the swing to Value is much clearer as while the index is up +128.1% from March 2020, the Value component has gained +137.4% while the Growth component has improved +114.4%.


As with previous market cycles, Value generally enjoys leadership as long as earnings estimates can rise faster than valuation measures compress. In this regard, you and I have discussed in previous episodes that Street estimates have started to rise faster than the market is appreciating. Coming off the 2021 Q1 earnings season, we are now seeing Street estimates for 2021 Q2 rising at a record rate. 


The latest Earnings Insight report from FactSet is titled, “Largest Increase in S&P 500 EPS Estimates for Q2 To Date Since 2002.” Rather than following the normal pattern of lowering earnings estimates by -3.7% during the first two months of the quarter, analysts are now raising 2021 Q2 forecasts by +5.8%. Compared with 2021 Q1 S&P 500 EPS of $49.08, the estimates for 2021 Q2 stand now at $44.47/share and 2021 Q3 at $47.19/share, respectively. As such, there is potential room for 2021 Q3 estimates to be raised following 2021 Q2 earnings season. Now, with US GDP growth in 2021 Q2 running at least +8% annualized, corporate earnings leverage should follow as in a recovery it has never before been negative.


Rick, the combination of low interest rates and rising earnings expectations driven by corporate operating leverage should provide a backdrop sufficient to see further outperformance by Value over the balance of 2021. The cautionary note here from a portfolio management perspective is that one year does not make the achievement of a wealth management goal. So, it is good to have the diversification that comes from holding both high quality Value and Growth names for superior long-term performance. 


Question 4:


David, Albert Einstein once said “In the middle of every difficulty lies opportunity.”   

I mention that quote as we are watching the negotiations between the US and Iran play out.  For our listeners unfamiliar with what is occurring, back in 2018, the U.S. withdrew from the Iran nuclear deal and reimposed sanctions.  As a result, Iran’s crude oil exports were severely constrained. Recently, oil price fluctuations have been influenced by news of progress, or lack thereof, toward a new deal between Iran and the U.S.


Iran historically has been a substantial oil market player. Prior to 2018 sanctions, Iran exported 2+ million barrels of crude oil per day, about 2% of world supply.


What would a deal mean for oil markets?

In addition, in a world trying to claw back to normal and still a long way away from pre-pandemic oil consumption levels, could bringing back this extra supply crash oil prices? 


Rick, the commodities market has been handicapping just the possibility of a return of additional supply to the oil market that might follow on a renewed U.S.-Iran nuclear agreement. However, given the possible delays involved in negotiations, it is unlikely Iranian crude will impact supply until 2021 Q4. Also, Iran is limited in how quickly it can bring oil back to the market since a lot of its stored barrels are condensate, a light and sulfurous liquid which may be harder to sell. 


The real slack in the oil market appears to be how quickly U.S. producers can come back online. With U.S. oil producers still employing only half the rigs they used before COVID struck, there is little competition to efforts by OPEC+ to manage markets as they agreed last week to continue easing production restraints in July but left markets guessing about what it will do for the rest of the year. After cutting production by some 10 million barrels a day, or 10% of daily global demand, OPEC+ still has about 6 million barrels a day of idle capacity. Under these circumstances, it is not surprising that last week Brent crude oil closed above the $70/barrel level for the first time in two years. 


As such, we continue to expect that Energy sector shares will continue to perform well as part of the Value advance, Rick. 


Question 5:


David, as we bring another episode of A Brighter Future to a close, I wanted to get your thoughts on a fairly negative research report I read recently.   The author suggested that the market is showing five stages of what could be a “financial hurricane”


He believes these five examples provide evidence of problems in the market:


  1. Sky-high stock market valuations
  2. Margin debt problems
  3. Corporate debt problems
  4. Stock buybacks
  5. President Biden’s corporate tax increase


While I am an optimist, he does offer some compelling data to back up his thoughts: 


  1. Using the Shiller price-to-earnings (PE) ratio of the S&P 500 (which takes inflation into account), stocks are trading at a higher earnings multiple (37x) than they were before the 1929, 1987, and 2008 crashes. The only time the Shiller PE ratio has been higher was before the dot-com crash.
  2. Archegos is one example of margin debt problems. Are there others?
  3. Corporate debt defaults for speculative companies are at 8.7%. That’s more than the 5.7% rate in 2016. And higher than the 3.8% rate prior to the 2008 crash.
  4. Stock buybacks are on the up again. S&P Global estimates buybacks will total $651 billion this year. That’s not far off the 2018 record of $806 billion. Is that a sign of trouble? Boosting stock prices through buybacks rather than through higher earnings?
  5. As for President Biden’s corporate tax increase, we’ll see if that goes through. 

Meanwhile, many investors seem oblivious to the risks like Dogecoin, AMC, and GameStop  that can cause you to ask if people believe there’s nothing to worry about.


What are your thoughts on his thesis? 


Rick, as mentioned earlier in our Bitcoin discussion, there are without doubt clear signs of market excess as the record tide of liquidity unleashed to dampen the impact of COVID on the global economy found its way into the pricing of all financial assets. Meanwhile though, we see signs of moderating valuation measures as company earnings estimates are rising faster than the market index. 


We expect as further employment gains are realized that the public’s attention will likely shift away from market speculation and that going into 2022 there may be some moderation in the pockets of the markets where excesses have occurred and bubbles will need to be deflated. 


Relative to the prospect of higher taxes, the G-7 finance minister meeting over the weekend raises the prospect that higher corporate taxes will unfold across developed economies globally. Meanwhile, in the U.S., President Biden appears to be ready to negotiate on possible tax rate increases so as to allow for the passage of a robust infrastructure spending plan. 


Rick, COVID has brought about much devastation and there are encouraging indications that globally it is being contained through vaccination campaigns. As such, we are on a good path towards recovery and not heading into a financial market hurricane as some might fear. Should these trends continue, we believe the global economy is on a path towards a brighter future.

June 1, 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 48 – Are International Markets Set To Outperform For The Balance Of 2021?


In this episode RICHARD CALHOUN, CEO of Laidlaw Wealth Management LLC, discusses the final take-aways from the 1Q 2021 earnings season and what it tells us about corporate earnings power, how with the U.S. Dollar weakening and COVID vaccine availability increasing International markets are beginning to outperform the S&P 500, as cybersecurity concerns are increasingly top of mind what are the implications of the recent White House Executive Order on cybersecurity, and with the Fed expected to move towards tapering QE over the balance of 2021 what sectors may provide stock market leadership.

The topics discussed in this episode are: Have we reached the point where Street estimates have caught up with corporate earnings power and valuation multiples begin to compress?, Will May 2021’s outperformance by International markets continue for the balance of 2021?, Will the recent White House Executive Order on Cybersecurity lead to a reduction in cyber attacks such as ransomware?, and With the Fed moving towards QE tapering, how might sector leadership change and what sectors are poised to outperform from here?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #Economy #Fed #Inflation #StockMarket #SP500

May 17th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 47 – With Further Employment Gains Depending On Rising COVID Vaccination Rates, What Is The Fed To Do?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses how The Fed is juggling its dual mandate of price stability and maximum sustainable employment, the question of where following the Colonial Pipeline ransomware attack steps can be taken to improve infrastructure cybersecurity, whether with market volatility likely to increase over the balance of 2021 should investors be adding to positions, and whether there is any benefit from tactical portfolio positioning based on seasonal trends.

The topics discussed in this episode are: Are inflation hawks right to criticize current Fed monetary policy?, What is the upshot of the Colonial Pipeline ransomware attack in considering infrastructure cybersecurity?, With equity market volatility expected to rise, should investors add to positions and in which sectors?, and Does it make good long-term investment sense to “sell in May and go away”?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #Economy #Fed #Inflation #StockMarket #SP500 $IVE $SPY $VTV $XLB $XLE $XLF $XLI

Episode 47 – With Further Employment Gains Depending On Rising COVID Vaccination Rates, What Is The Fed To Do?


Hello and welcome to another episode of “A Brighter Future.”  I’m Rick Calhoun, CEO of Laidlaw Wealth Management and Naples Wealth Planning, and I am joined once again by our Chief Market Strategist, David Garrity. 

David, we had another beautiful weekend and the second “leg” of the Triple Crown, The Preakness, was run with even more drama than normal after the winner of the Kentucky Derby was found to have an abnormally high amount of drugs in his bloodstream. Did you get a chance to watch any of the race, David?

Rick, unfortunately I did not watch the race live as instead of celebrating three year olds running at Pimlico I was celebrating a seventy year old’s birthday. However, watching the replay, I was impressed with how Medina Spirit led the field for the first three quarters of the race, but it was disappointing to see him fade to only show, not win or place. 

In a way, it was reminiscent of the market’s performance so far in May as the S&P 500 index has marked time after an +11.3% advance in the first four months of 2021 with former 2020 leader Growth fading -2.4% after a +9.0% gain and being outpaced by 2021 leader Value with a +2.3% gain coming on top of its +14.3% advance. The question here for investors is whether the stunning corporate profits recovery will give the market sufficient fuel for further gains or whether additional external stimulus is needed.  

David, I think much like Medina Spirit was running against more than the nine rivals on the track on Saturday, especially after an ex-president called him “a junkie,” our markets have been carrying a pretty heavy burden recently.


After being dormant for more than a decade, fast-rising inflation returned last month and, along with it, so did market volatility. The S&P 500 pulled back about -4% from the early May record high before rebounding some later in the week, with weakness concentrated in technology and high-growth stocks. 

The catalyst for the pullback was the release of the April Consumer Price Index (CPI) on  Wednesday, which rose +4.2% from a year ago and +0.8% from March. The directional change in prices was hardly a surprise to economists and investors, but the magnitude of the increase was well above expectations. 

Excluding food and energy, the so-called “core index” rose +0.9% from March, the biggest one-month increase since 1981, and three times more than analyst estimates!!    

Question 1:

And that is where I would like to start our discussion today. Inflation is a major threat to any economy, ours is no exception. As has been discussed, the April CPI (ex Food & Energy) was +3.0%, a significant jump on March’s +1.6% and consensus of +2.3%. The headline CPI number at +4.2% vs. March’s +2.6% well exceeded the +3.6% consensus for April.   

When we factor in the two events driving oil prices – first, the Suez Canal blockage by a grounded super cargo carrier and then this week’s Colonial Pipeline ransom-hacking shutdown, we can understand the visceral emotional reaction to the potential economic damage caused by a sudden jump in prices and diminished gasoline supply – especially in the industrial northeast region of our country.

Pump prices have increased in the last two weeks from a $2.20 national average to $3+/gallon! We can rationalize the temporary restrained supply caused by these two non-recurring events, but it is harder to ascertain the “emotional” damage to our consumer sentiment. 

There are significant voices on different sides of this economic debate. Larry Summers in February fired off a dissenting analysis against the size of stimulus and The Fed holding interest rates down to 0% via unfettered asset purchases and then this week Stanley Druckenmiller joined sides with Mr. Summer’s assessment in characterizing the Treasury market as a “bubble” in the making as The Fed remains committed to present QE policy through mid 2022. On the opposite side, of course we have Jerome Powell, The Fed Board, and Janet Yellen. Both sides of this debate carry “heavy-weight” credentials. So, who do you side with?

Rick, as F. Scott Fitzgerald once said, “the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” As we have discussed before, The Fed has a dual mandate, namely price stability and maximum sustainable employment, a relationship captured in the Phillips Curve which describes an inverse relationship between rates of unemployment and corresponding rates of rises in wages that result within an economy. The idea captured in the Phillips Curve is that there exists a non-accelerating inflation rate of unemployment that The Fed is attempting to sustain through the conduct of monetary policy.

Since Paul Volcker was Fed Chair, The Fed has been viewed as primarily focused on price stability and with the deflationary trends concomitantly unleashed by globalization inflation has been largely considered tamed. However, as also discussed previously, the shift in Fed inflation targeting policy announced in August 2020 to allowing inflation to average 2% over a period of time indicated that The Fed was concentrating instead on the maximum sustainable employment portion of the dual mandate, a development that made sense in light of the massive rise in unemployment stemming from the COVID-19 Recession.

While the price increases shown in recent CPI and PPI readings are concerning, the fact remains that U.S. employment levels are still down -8.2 million jobs since February 2020. The employment gains that have been taking place have not extended to women, a fact reflecting that COVID vaccination rates have not reached the levels necessary to allow for the resumption of childcare activities and the assurance of workplace safety. Simply put, if workers do not feel safe, they will be reluctant to return to work. Separately, with the return to the office being discussed, there is speculation that a wave of resignations is coming that may serve to limit further employment gains as the economy reopens. Unfortunately, The Fed is now in a position where further employment gains require continued progress in COVID vaccination levels, something that lies entirely outside its organizational purview. 

Bottom line, The Fed’s current view that price increases reflect prior-year base effects has some time to play out. Should price increases accelerate going into 3Q 2021, then it is likely financial markets will grow increasingly restive with long-term interest rates increasing. So, Fed policy may be criticized by inflation hawks, but further progress for the U.S. economy depends on there being continued recovery in employment levels and in that regard COVID vaccination rates must see further gains.     


Question 2:

David, the ransomware attack on Colonial Pipeline last week exemplifies the huge challenges the U.S. faces in shoring up its cyber defenses. 

The private company, which controls a significant component of the U.S. energy infrastructure and supplies nearly half of the East Coast’s liquid fuels, was vulnerable to an all-too-common type of cyber attack. The FBI attributed the attack to a Russian cybercrime gang. Similarly, the SolarWinds hack, one of the most devastating cyber attacks in history, which came to light in December 2020, exposed vulnerabilities in global software supply chains that affect government and private sector computer systems. It was a major breach of national security that revealed gaps in U.S. cyber defenses.

While the Biden administration appears to be taking the challenge seriously with the president appointing a national cybersecurity director to coordinate related government efforts, it remains to be seen whether and how the administration will address the problem of fragmented authorities and clarify how the government will protect companies that supply critical digital infrastructure.   

As someone who spends a considerable amount of time working in and researching technology, what are your thoughts on this topic since it seems unreasonable, at least to me, to expect any U.S. company to be able to fend for itself against a foreign nation’s cyberattack.

Rick, the implicit call for the U.S. government to have responsibility for private company cybersecurity raises the greater question of what constitutes necessary infrastructure in the context of a 21st-century economy which has become in an accelerating manner increasingly digital. Ideally, the Colonial Pipeline ransomware attack should underscore the need for the Biden Administration’s “Build Back Better” infrastructure program, especially as a confidential assessment prepared by the Energy and Homeland Security Departments found that the country could only afford another three to five days with the Colonial pipeline shut down before buses and other mass transit would have to limit operations because of a lack of diesel fuel. Chemical factories and refinery operations would also shut down because there would be no way to distribute what they produced. 

That said, the pressing issue now is how will companies address what is an increasingly active threat environment that is only likely to intensify in light of the $5 million payment made to DarkSide, the cybercriminal gang that shut down the Colonial Pipeline. The blood is in the water, Rick, and the sharks are circling, so expect to see more ransomware attacks targeting critical infrastructure as there are estimates that less than 25% of the U.S. oil and gas industry has adequate cybersecurity in place. 

In the case of the Colonial Pipeline, the company clearly underinvested in cybersecurity as over the past decade, Colonial distributed nearly all its profits, sometimes more, in the form of dividends. In 2018, for example, it paid nearly $670 million to its owners including privately-held Koch Enterprises and private equity firm KKR, even more than the $467 million net income. Last year, it returned to investors over 90% of its $421.6 million in profits. 

While it is tempting to judge after the fact, it is apparent that the emphasis on realizing short-term returns led to a failure to insure against future business risks, a failure that clearly spilled over to the harm of the broader U.S. economy. Rather than asking what the government can do to protect the private sector when it comes to cybersecurity, perhaps it is best to remember JFK’s statement, “Ask not what your country can do for you, but what you can do for your country.” 

Bottom line, Rick, there need to be efforts made on both sides, government and private sector, to step up cybersecurity investment. Meanwhile, with the Colonial Pipeline paying out to ransomware cybercriminals, look for cyber insurance policy premiums to increase. Costs are going up and the risks of infrastructure interruption are growing, Rick, so watch this space for further action on all fronts. 

Question 3:

Given that our audience is investors with “skin in the game” as they say, what are the market implications for this surprising news, David?  We have seen markets travel a long way since the new bull market emerged a little more than a year ago, with the S&P 500 rising +78% and recording 46 all-time highs. So, let’s address this as a multi-part question:

First, is it possible that higher inflation readings in the summer months could be the spark for higher volatility and a market pullback?  

Rick, as mentioned earlier, I think The Fed has a window during 2Q 2021 for price increases to be explained by prior year base effects. If these increases meaningfully spill over into 3Q 2021, then I expect that long-term interest rates will rise as financial markets view The Fed as falling behind the curve. This is a backdrop that will lead to higher volatility with the increased risk of a market pullback. 

Second, if so, given the strong economic and earnings growth, would you view any pullbacks as an opportunity to add to stocks at lower prices? 

Rick, the one thing that has consistently surprised the market positively has been the strength of the recovery in corporate profitability which now holds out the possibility that the earnings recession will be fully recovered by 2Q 2021, a remarkable performance. If COVID vaccination rates continue to improve such that employment recovers further, then chances are that the profit recovery becomes self-sustaining and that share prices will appreciate further. In that context, “buying the dip” makes good long-term investment sense.

The importance of earnings from here is underscored by a recent investor poll in which the leading answer had 25% of respondents indicating they would reduce U.S. equity exposure if future corporate earnings expectations start to flatline. This was followed by 13% indicating equity exposure reduction if future inflation indicators break out to +10-year highs, 12% if The Fed announces bond purchase tapering and 10% if the U.S. 10-year Treasury yield breaks 2.5%.  

Finally, with the market now transitioning, from the early recovery to the midcycle phase, should that change the focus to higher quality names and along with that a recalibration for lower rates of return expectations?  

Rick, the chances of three consecutive annual total returns of 10%+ for the S&P 500 index is statistically quite slim based on historical data. Given the +11.8% total return for 2021 through the end of April, it is reasonable to expect that the prospect for further gains over the course of 2021 will be hard-won with greater volatility expected. That said, long-term investors should be considering a focus on higher quality names, particularly in sectors such as Energy, Finance, Industrials and Materials that are leveraged to the re-opening trade.  

Question 4:

David, historically the month of May has marked the beginning of a seasonally weak period for U.S. equities. There is even an old adage associated with this underperformance that suggests investors should “sell in May and go away”  which refers to the May to October timeframe when the S&P 500 Index has produced lower (albeit positive) returns on average, compared to the November to April timeframe. 


Although there is some evidence of seasonality in the average numbers, it does not necessarily mean investors should sell their stocks based on the calendar.  So, David, as we bring another episode of “A Brighter Future” to a close today can I ask you to offer some insights on whether we should “Sell In May And Go Away”?

Rick, as tempting as it may be to step back given the historical trend of seasonally weaker performance in the May to October timeframe, such tactical portfolio moves run the risk of reducing long-term total returns as market-timing has not provided superior returns to a strategy of holding to a well-structured long-term investment plan. That said, realizing a brighter future requires practicing long-term investment discipline in which investors plan the work and then proceed to work the plan. 

May 3rd., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 46 – With Tech Earnings Failing To Impress, Should Investors Be Concerned?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses how the current stock market advance may appear extended and what is needed for earnings growth to support current levels, the outlook for Fed tapering asset purchase policy in the face of rising inflation readings, whether investors should consider taking profits in Tech sector stocks, and whether overseas markets can offer superior returns from here to investors and where to look now.

The topics discussed in this episode are: What earnings growth rates are necessary to support current stock market levels?, What is happening with inflation and will it prompt The Fed to taper asset purchases?, How should investors position themselves in the Tech sector as the economy re-opens?, and Is China an attractive overseas market now and where should investors look overseas for superior returns at better valuations now?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #AmericanRescuePlan #Congress #Economy #Fed #StockMarket #SP500 $EWU $IWN $XLE $XLF

Episode 46 –Episode 46 – With Tech Earnings Failing To Impress, Should Investors Be Concerned?


Hashtags & Stock Symbols: #Commodities #Cryptocurrency #EarningsSeason #Economy #Fed #Infrastructure #RareEarths #StockMarket #SP500 $IWN $RSP $XLB $XLE $XLF $XLI



n this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses how the current stock market advance may appear extended and what is needed for earnings growth to support current levels, the outlook for Fed tapering asset purchase policy in the face of rising inflation readings, whether investors should consider taking profits in Tech sector stocks, and whether overseas markets can offer superior returns from here to investors and where to look now.

The topics discussed in this episode are: What earnings growth rates are necessary to support current stock market levels?, What is happening with inflation and will it prompt The Fed to taper asset purchases?, How should investors position themselves in the Tech sector as the economy re-opens?, and Is China an attractive overseas market now and where should investors look overseas for superior returns at better valuations now? 

Please tune in for more timely insights.

Hashtags & Stock Symbols: #EarningsSeason #Economy #Fed #Inflation #StockMarket #SP500 $SPY $XLB $XLE $XLF $XLI $EWD $EWS $EWT $EWU $EZA



Hello and welcome to another episode of “A Brighter Future,” Laidlaw & Co’s podcast series.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined once again by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, I hope you enjoyed the weekend and the Kentucky Derby.  It was great to see those magnificent blue skies, which gave us a throwback to a time before lockdowns, quarantines and vaccines. For two minutes, it was a reminder that so much of what America loves about sports isn’t gone, just temporarily on hold and now we’re back…almost.


There was a lot to digest last week, so let’s jump right into it.  We had a veritable “cornucopia” of economic and corporate data last week that showcased the incredible progress the economy has made in a relatively short amount of time.  The fundamental backdrop continues to check all the boxes for a durable bull market, and investors have taken notice.  With conditions rapidly improving, expectations and the bar to exceed them keeps rising, and the pendulum of emotions is swinging towards optimism – but maybe too 


Question 1

And it’s that optimism or maybe “irrational exuberance for unduly escalated asset values ” to steal a phrase from Alan Greenspan where I would like to start our discussion today. 

While we are all enjoying this market environment, there is a growing chorus of strategists, prognosticators and pundits who are expressing concerns about valuations being “stretched”.   Last week, there was a research note I read that said US markets were valued at $44.2 trillion or 205.7% market cap vs. GDP and over the weekend you shared some eye opening data that suggested maybe we’re “walking on air” or performing without a net.   

Can you share that data with our listeners and offer some observations about our current market environment?

Rick, it was nice to have The Kentucky Derby last weekend and an exciting race it was with winner Medina Spirit upsetting the field, a case of snatching victory from the jaws of defeat. 

In some ways it reminded me that the month of April in stock market terms has seen some upsets as well with a strong overall performance with the S&P 500 gaining +5.2% to reach the 4,181 level for a year-to-date gain of +11.3%, but with a counter-rotation as Growth outpaced Value by +6.8% to +3.6% with Energy and Industrials fading and smaller-cap companies lagging (for more details, see table below with outperformers highlighted in yellow).


Relative Performance: YTD 2021 – Style, Market Cap & Sector Absolute
Index 1Q21 Apr-21 Yield
S&P500 (absolute change) 5.8% 5.2% 1.38%
  – Growth -3.8% 1.6% 0.77%
  – Value 4.6% -1.6% 2.19%
Russell 2000 6.7% -3.2% 0.92%
  – Growth -0.9% -3.3% 0.40%
  – Value 15.3% -3.4% 1.37%
S&P Real Estate 1.6% 2.6% 2.35%
S&P Financials 9.7% 1.2% 1.74%
S&P Consumer Discretionary -1.2% 1.2% 0.82%
S&P Communications Services 2.9% 1.2% 0.60%
S&P Materials 3.1% 0.1% 1.60%
S&P Technology -3.6% -0.1% 0.87%
S&P Utilities -3.6% -1.1% 3.24%
S&P Health Care -2.9% -1.3% 1.44%
S&P Industrials 5.4% -1.7% 1.47%
S&P Consumer Staples -4.5% -3.4% 2.62%
S&P Energy 23.7% -4.6% 4.39%

All this against the backdrop of another blow-out 1Q 2021 earnings season where, with 60% of S&P 500 companies now in, a record 86% have beaten EPS estimates by an average of +22.8% as 78% have blown past revenue estimates by an average of +3.7%. Note that if this trend holds for the remaining 40% of S&P 500 companies yet to report results, the 1Q 2021 earnings season will post year-to-year earnings growth of +45.8%, the best earnings growth since 1Q 2010’s +55.4%

Meanwhile, this outperformance shows that companies are realizing operating leverage off of better-than-expected revenue growth as profit margins expand, something critical to stock market performance as it indicates unexpected earnings power improvement. If sustainable, it should support further stock market gains, but therein lies the rub, Rick.

The observation giving us pause over the weekend is a quick review of current market levels versus historical norms. So, three quick observations: 1) on the upside, if the S&P 500 were to be valued at its previous peak P/E multiple of 27.2x, the market could on trailing EPS of $173 per share gain a further +13% to the 4,706 level, over our 4,500 forecast, 2) on the downside, were S&P 500 EPS to be valued in line with a historical average P/E of 17.2x, it would imply a -29% decline to the 2,976 level and 3) also to the downside, were the S&P 500’s dividend yield to rise to its historic mean of a 2.06% yield, it would imply a -28% decline to the 3,010 level. 

Under the “Average P/E” scenario, our 4,500 target requires S&P 500 EPS of $262, +52% over the $173.00 in S&P 500 EPS implied in the “Rally to Previous P/E Peak” scenario. Right now, S&P 500 2022 EPS estimates, while increasing +6% since the beginning of the year, stand at $207.

So, how soon might S&P 500 EPS reach $262? Maybe 2023, more likely 2024? Anybody feel as if we’re walking on air here? Now, to reach S&P 500 EPS of $262 by 2024 would require +12.3% compound earnings growth off 2021’s $185 estimate. Hoping S&P 500 earnings growth gets us there might be like betting on Medina Spirit to win at 12-1 odds. Just saying, Rick, but there could be a number of torn-up tickets littering the stands after this race is run.   

Question 2

David, last week also had an FOMC meeting and there really was nothing unusual or unexpected that came out of the meeting or Chairman Powell’s Press Conference.  However, there has been a lot of focus and discussion of when the Fed will acknowledge it plans to taper QE.

Last week in one of my AM Notes to the firm, I discussed that one of the biggest reasons is because of the likely market volatility the unwind of QE could cause.  I say that because the last time the Fed announced it was going to start to reduce QE, the market threw a “taper tantrum” and the S&P 500 dropped -6%, so it’s not unreasonable to expect a similar result this time when the Fed acknowledges it will be reducing its QE.  

So, David, why does it matter when the Fed Tapers its QE program?

Rick, as we have discussed in many of our prior conversations, especially as the stock market’s run-up from the March 2020 lows has grown extended, interest rates matter. We know that Fed Chairman Jay Powell has stated time and time again that interest rates will not rise until such time as U.S. employment returns to pre-COVID levels which means creating at least another 8 million jobs and that if in the meantime inflation has to run higher than the 2% threshold then that is just the way it is going to be. 

The winding down of the Fed’s current monthly $120 billion asset purchase program would be a sign that monetary policy is starting to tighten, but as Powell said last week in the post-FOMC meeting press conference it is not time to begin talking about tapering asset purchases. Now, despite Powell’s words to the contrary, the focus on when the Fed might move to contain inflation has put financial market participants in the mind frame of focusing more on the question of not if, but when, the Fed will raise interest rates and ahead of that start to taper asset purchases. Relative to the Fed Funds Futures, the December 2021 contract shows a 16% chance of a rate increase, up from 8% a month ago. Clearly, the perception of the Fed having to act is growing and the expectations for the June meeting are likely to be a source of some market volatility in the interim.

Now, Rick, a quick comment on inflation. We know that on prior year base effects that inflation readings in April and May 2021 are likely to come in around 2.5% on core CPI and 4.2% on headline CPI. Bear in mind that core CPI is already running 2.1% and headline CPI at 3.5% compared to the May 2020 reading. Meanwhile, relative to TIPS inflation break-evens, 5-year expectations (2.57%) are at 11 year highs and 10-year expectations (2.41%) are back to 2013 levels. 

Based on his comments last week Powell clearly sees this as the market doubting that the Fed can actually get to its 2% inflation goal and is therefore entirely comfortable that inflation breakevens are where they are. Quite possibly Powell would like them a little higher still so that when the Fed does start raising rates they can settle down to slightly above the Fed’s 2% policy goal level.

Two final comments on inflation from a stock analyst perspective. First, one man’s inflation is another man’s pricing power, something that is beneficial to incremental earnings power. As long as earnings growth rates including pricing power rise faster than interest rates, then valuation levels can improve. Second, for all the current mentions of inflation on corporate results conference calls, it is important to know that company management tailors their remarks for three constituencies: Wall Street analysts, major investors and competitors. As you know, it is illegal for companies to collude on pricing. However, as companies may have a narrow window right now to take some pricing actions, they can through conference call comments signal their intentions to competitors in a way that may not draw government scrutiny.  

Question 3

David, we got some truly “blow out” earnings this week from many of the big tech names  including many of the FAANG names.  

But it does feel like a bit of the “haves” and “have nots.”  In the “have’s” category, we have 

Amazon, reporting a record first-quarter profit. Their profits more than tripled to $8.1 billion and January-to-March sales soared +44% to $108 billion. The results blew past Wall Street’s expectations with the company earning $15.79 per share vs. the consensus estimate of $9.54!

In the “have nots” category, we have Twitter that plunged on user growth results and second-quarter revenue guidance that fell short of analysts’ forecasts. The social media platform said monetizable daily active users totaled 199 million during the three months ended March 31st and reported per-share earnings of $0.16 cents. Twitter fell -15.2% on Friday alone.

You did a great interview with Bloomberg this past Thursday, where you shared insights into what is going on in big tech, why you like semiconductors right now, and what is next for AMZN and AAPL.  Could you share your current thesis on Tech with our listeners?

Rick, thank you for your kind words on last week’s interview, but the facts are that despite putting up the strongest outperformance versus expectations the Tech sector sold off on the news. For example, Apple posted March 2021 quarter revenues of $90 billion, up +54% year-to-year and +16% better than forecast, with gross income of $38 billion, up +70% year-to-year and +24% better than forecast, and yet its shares were off -2% last week and is off -9% from its high. Here is a company that is in the early stages of its 5G iPhone12 handset product cycle, posting epic blow-out results and investors are selling the stock. To us, it looks as if investors see something on the horizon that they would rather not wait around for.

The tech sector has experienced great gains during COVID as “work from anywhere” has become the norm, but there are three near-term negatives for investors to consider when it comes to Tech stocks right now: 1) year-to-year growth will arguably slow as prior year comparisons narrow given the demand benefit the companies gained in 2020 as the world locked down from COVID, 2) as the global economy reopens, it will be those sectors that were locked down from COVID that will arguably see the greatest earnings gains and thus best stock market performance, and 3) the rise in regulatory oversight for the Tech sector that is being seen both in the U.S. and overseas in important markets such as the E.U. and China where the government is taking swift draconian actions against those companies who question political leadership. 

Relative to semiconductors, we were struck by Intel CEO comments that the current shortage may have two years to run. To our view, this offers significant pricing power to drive superior financial returns. Also, the fact that the return to the office is likely to be muted post-COVID indicates the need to continue to increase the investment being made in the equipment and services necessary to support “work from anywhere.” This makes both semiconductor companies and hardware vendors attractive in our view. 

Meanwhile, for Tech investors, it has been a great run, so why not take some money off the table near term, especially as earnings growth is likely to decelerate from here. The long-term investment case for Tech still remains intact as it is the source of disruption and growth not just for the sector, but for the economy at large. It is important to invest in systemic transformation and to that end one should be willing to embrace volatility.

Question 4:

David, as we bring another episode of “A Brighter Future” to a close, I’d like to touch on one of our Laidlaw Five 2021 topics and that’s the idea that non-US equities would outperform US Equities. 

In particular, I’d look to focus again on China  

As their weighting in the MSCI Emerging Market Index, has grown from 2% in 2001 to a sizable 36% today.  In fact, they were the only major emerging market economy that survived 2020 with a positive real GDP growth rate – in a pandemic year.  As well, they just reported a GDP increase of +18.3% year over year in the first quarter of 2021.  The astonishing increase reflects the country’s success in re-opening its economy as a year ago, the Chinese economy suffered a historic -6.8% contraction as Beijing ordered a shutdown of the country. 

So, while we have talked a great deal recently about “stretched valuations” for companies in our markets, are there still opportunities in China or other Emerging Markets where our listeners could and possibly should be looking to invest? 

Rick, in light of the earlier comments about China cracking down on its Tech sector, investors have to appreciate that China represents a market where the risk of regulatory intervention is quite real as it can materialize with no warning like a bolt out of the blue. As a result of recent moves on this front as well as monetary tightening, the China market has not been a stellar performer, being up only +1.2% year to date after posting a +27.8% advance in 2020. Overall, markets outside the U.S. so far in 2021 have advanced on average +8.4%, lagging the S&P 500’s +11.3% gain. For more details, please see the table below with Q1 2021 outperformers highlighted in yellow:

Relative Performance: YTD 2021 – Geographic   Absolute
Index 1Q21 Apr-21 Yield
S&P500 (absolute change) 5.8% 5.2% 1.38%
– U.S. Dollar Index ( ”   ” ) 3.7% -2.1% 1.63%
MSCI Taiwan 7.2% 2.4% 1.52%
MSCI Eurozone -0.4% -0.6% 2.00%
MSCI Frontier Markets -1.8% -0.7% 2.68%
MSCI Sweden 6.2% -1.1% 0.93%
MSCI UK 1.1% -1.3% 2.23%
MSCI EAFE -1.8% -2.3% 2.04%
MSCI Singapore 3.3% -3.1% 2.53%
MSCI Emerging Mkts ex-China -1.2% -3.6% 1.41%
MSCI Emerging Markets -2.5% -4.0% 1.38%
MSCI South Korea -1.5% -4.3% 0.70%
MSCI China -4.9% -4.9% 0.97%
MSCI South Africa 6.9% -5.3% 5.25%
MSCI Japan -4.4% -6.8% 1.06%
MSCI India -0.9% -8.0% 0.27%

That said there is outperformance to be had outside U.S. markets in 2021. We formed an equal-weighted composite of the five countries highlighted (i.e. Singapore, South Africa, Sweden, Taiwan, the United Kingdom) which have all shown price gains superior to the S&P 500, gaining +14.6%. The table below contrasts the composite’s statistics with the S&P 500:

Non-U.S. Outperformers – Sector Weightings, Valuation & Yield    
  5 Country      
  ETF Composite S&P 500 Difference Over/(Under)
Financials 28% 11% 16%  
Materials 10% 3% 8%  
Industrials 13% 9% 4%  
Real Estate 6% 2% 3%  
Consumer Staples 8% 6% 2%  
Energy & Utilities 3% 5% -2%  
Consumer Discretionary 9% 13% -3%  
Communications 4% 11% -7%  
Health Care 2% 13% -10%  
Technology 15% 27% -11%  
Cash/Derivatives 1% 0% 1%  
Total 100% 100% 0%  
P/E – Last 12-month EPS                       19.5         32.0           (12.5) -39.0%
Dividend Yield – TTM 2.45% 1.39% 1.06% 76.0%
YTD Performance (Price) 14.6% 11.3% 3.3% 29%


What is notable about the composite is that it is poised to benefit from rising interest rates with a 28% weighting in Financials as well as improving manufacturing activity and rising commodity prices with a 13% weighting in Industrials and a 10% weighting in Materials. Relative to the Technology and Health Care sectors the composite weightings are relatively low at 15% and 2%, respectively. 

Valuation is attractive at 19.5x trailing EPS, a -39% discount to the S&P 500 at 32.0x on a comparable basis, and dividend yield at 2.45% is superior to the S&P 500’s 1.39%. 

While there are always risks to consider in investing overseas, the Laidlaw 5 international composite offers superior performance at a lower valuation with higher yield, a winning combination from which to build a brighter future.

April 26th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 45 – Will Commodities And Rare Earth Elements Provide Investors Superior Returns?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the stock market’s current underpinnings, the outlook for Fed policy, the growing strategic importance of rare earth elements and, with the prospect of increased infrastructure investment, what are investors to do with commodities now?

The topics discussed in this episode are: What are the prospects for extending the stock market advance following last week’s choppy price action induced by talk of higher taxes?, Whither The Fed?, What are rare earth elements and why are they strategically important?, and With sustained growth in infrastructure spending likely, what should investors do with commodities now?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #AmericanRescuePlan #Congress #Economy #Fed #StockMarket #SP500 $EWU $IWN $XLE $XLF

Episode 44 –Will Earnings Growth Drive The S&P 500 Towards 4500?


Hashtags & Stock Symbols: #Commodities #Cryptocurrency #EarningsSeason #Economy #Fed #Infrastructure #RareEarths #StockMarket #SP500 $IWN $RSP $XLB $XLE $XLF $XLI



Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined once again by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, how are you? 

Rick, it was a pleasant weekend, thank you, with spring cleaning that resulted in the basement no longer being the cave it had become and the garden bed no longer being threatened by an onset of weeds and now ready for planting. Away from household chores, I had the chance with yesterday’s rain to pick up a new book. A family office friend suggested NYT cybersecurity journalist Nicole Perlroth’s “This Is How They Tell Me The World Ends” and for those with a mind interested in having a broader notion of the virtual risks that have built up as the world has become increasingly digital it is a timely read. So, all in all, a productive weekend with decks cleared to address the pitfalls that lie ahead.

Well, we had an interesting week, with markets zigzagging, reacting to headline media (some unrelated to financial topics – like the Derek Chauvin trial), and otherwise light calendar of economic calendar news. The fact that social issues have dominated public media reminds us markets and economy are not the same, and we still have some work left to do to address the “Wall-Street/Main Street” dichotomy. 

Staying away from political context does not mean staying away from socio-economic factors that impinge on consumer sentiment – the driver of economic growth. The reality is that with markets reaching all-time highs this past week and then seeing some profit taking following is not the exception, but the norm. It is also very normal to address concerns about markets topping off, and interest rates going up because of a build-up of inflationary pressures which is where I’d like to start today’s discussion.

Question 1:

David, the markets were perched at a record high on April 16th, supported by a foundation of a budding economic recovery, rising corporate profits, and Federal Reserve stimulus.  But glimmers of adversity emerged last week, with the S&P 500 falling 3 out of 5 days.  So, given the sharp and steady gains over the past year, even a little volatility might feel uncomfortable. After all, there have only been 28 days in the last twelve months in which stocks have dropped by more than 1%.  So while I know you and I remain bullish, let me ask you about a few potential spoilers: 

Tax Hikes – President Biden’s proposal to hike the capital gains tax rate rattled the equity markets last week. The proposal would hike the rate to 39.6% from the current 20% rate for those earning more than $1 million per year.  In addition, the new administration has also proposed raising the corporate tax rate to 28% from 21%, partially reversing the rate cut enacted in 2018.  What impact might increasing taxes have on the markets?

Rick, the initial reaction to the news that President Biden was following through on his campaign promise to raise taxes was that this would prompt investors to take profits given financial market gains over the past year and that it would serve to discourage capital formation and limit employment growth. However, Biden is not the first president to raise taxes and the stock market has nevertheless managed to show gains roughly 70% of the time. 

Despite the assumption that increasing tax rates might sink stocks, markets have produced better than average returns in the wake of changes because of other economic factors happening at the same time that influence subsequent market behavior. In the 13 previous instances of tax increases since 1950, the S&P 500 has produced higher average returns, and higher odds of an advance, in times when taxes are increasing. The S&P 500 sectors that outperform in a scenario of rising taxes are economically sensitive sectors, such as consumer discretionary, which suggests that the market either discounts the increase in advance or the economy has received stimulus to offset it.

Inflation – it remains muted, but not for long and personally I think it represents the most credible threat to the bull market.  What are your thoughts? 

Rick, grizzled Wall Street veterans remember the “stagflation” of the 1970s and how it took Paul Volcker as Fed Chair to implement monetary policy that took the Fed Funds rate to 22.36% in July 1981 and within two years drove inflation below 3.0% from its March 1980 peak of 14.8%. Volcker said that his focus was to change the expectations, and hence the actions, of people who believed prices would continue to rise rapidly. 

So, yes, I agree that inflation is a very credible threat and in taking the monetary policy actions that he did Paul Volcker fulfilled one of The Federal Reserve’s dual mandates, namely, price stability, the other being maximum sustainable employment. At present, however, The Fed under Chair Jay Powell is more focused on the employment mandate as evidenced by the August 2020 announcement of a policy shift to targeting an average inflation rate of 2% and as a result a willingness to allow inflation to run higher than 2% for an unspecified period of time. The questions investors are grappling with here are, “how high?,” and “for how long?”.    

The thing here for investors to track are Treasury Inflation-Protected Securities (TIPS) as an indicator of expected inflation rates. As of Friday April 23, the 5-year inflation break-even rate at 2.44% was higher than the 10-year inflation break-even rate of 2.34%. Also, the recent inflation rate break-even highs were reached in March with the 5-year at 2.59% (March 16) and the 10-year at 2.37% (March 31). Combined, the data indicate market expectations for a medium-term increase in inflation followed by a longer term decline and that inflation expectations have moderated slightly. 

Asset bubbles – “Reddit stocks,” cryptocurrencies and NFTs (non-fungible tokens) have all been the object of the market’s affection recently.  During the late ’90s, the bubble in dot-com stocks spilled over into excessive valuations and unsustainable price appreciation across the equity market, with stocks collectively trading at a record high price-to-earnings multiple.   Do you see this as limited “pockets of froth” vs. a system threat?

Rick, every market cycle has seen pockets of excess in which perpetual growth has been discounted and priced to perfection. What provided rocket fuel to the current cycle is the record amount of liquidity added to the global economy combined with the enforced inactivity of the investing public stemming from the extended lockdowns necessary to contain COVID. Under these unique circumstances, it should not come as a surprise that excess has come to the fore as COVID relief funds have found their way into the market. 

So, to the list you named I would add SPACs which have seen an issuance bubble in excess of $100 billion. All this speculative activity is certain to draw the attention of regulators, most specifically recently appointed SEC Chairman Gary Gensler who has a reputation for focusing on investor protection and is expected to bring greater regulatory scrutiny to the area of crypto-currencies.

Meanwhile, to the broader question of the market’s P/E multiple, low interest rates on the one hand and accelerating earnings growth on the other are both necessary to support valuation levels. As the Fed is not expected to start tapering soon and corporate earnings are coming in at record levels above expectations, we do not see multiple compression as something that presents an immediate threat to investors.

Question 2: 

David, this is a big week for the markets and the economy.   Not only are we in the midst of earnings season –  over 900 companies report this week – we also have the FOMC meeting on Tuesday & Wednesday for their April meeting. 

While most people expect no major changes to the FOMC’s policy, others are suggesting that the rapidly strengthening economic backdrop could prompt a similarly faster than currently telegraphed shift in Federal Reserve policy.

It makes sense as it could be both a response to an economy no longer in need of such immense support, and as a means of staving off a potential surge in inflation as demand outpaces supply during the recovery.

Given the size and scope of the Fed’s involvement in rate markets, its future actions are important for investors. Asset purchases by the Fed, also referred to as quantitative easing, have been critical to the economic recovery.  After all it was the Fed’s balance sheet expansion that helped significantly increase liquidity, helped mute interest rates, and helped fuel the rally in risk-sensitive assets. 

I think we both believe the Fed will not begin reducing asset purchases in the near term.  However, by later this year, is it possible the Fed could begin discussing the slow removal of easing purchases?    What’s your overall read on the Fed right now? 

Rick, as mentioned earlier, Fed Chair Powell is dovish on interest rate policy from which one might infer that he is focused more on the Fed’s employment mandate. Given the rise in long-term unemployment due to COVID lockdown, it is not surprising for Powell to be so focused at this time. 

Also, as global monetary policy hinges on The Fed and the global economy is lagging behind the US due in large part to the differentials in COVID vaccination rates, it would appear that the time for tightening interest rate policy still lies some ways off and may perhaps not be reached until such time as economies representing 65% or more of global GDP reach a point of adequate COVID vaccination.

The global economy hangs in a delicate balance now and any hastening by The Fed to contain domestic inflation by tightening monetary policy may likely have unintended long-term negative consequences for global economic growth. In light of the record amount of relief that has been made available to get through the crisis of COVID it is important that proper care be taken to maximize the chances the investment provides positive returns. 

Question 3:

David, recently the Investment Committee made a few changes and additions to our Disruptor Portfolio.  While we try to not use this platform as a place to market any product, I am very proud of the work our Asset Management team has done and particularly the Disruptor Portfolio. 

As a reminder to our listener’s, disruptors are companies that have the potential to change or entirely displace existing companies and industries.  They can entail innovative technologies or operations that are more efficient or make obsolete the old way of doing business—cloud computing, mobile payments, and autonomous driving to name a few.  

While the portfolio already had an allocation to all of the above, our recent addition of Rare Earth elements is what I wanted to talk about today.  

Can you share what Rare Earth elements are and why an allocation makes sense in a portfolio like the Laidlaw Disruptors ?

Rick, the shift to an increasingly digital economy along with moves towards clean energy has substantially raised the strategic importance of access to the inputs necessary to provide these goods. Rare earth elements play an integral role as the chart below of smartphone contents confirms:

We note that the increasing range of industrial uses of rare earth elements has raised concerns as to the structure of the supply chain and whether any one country has an inordinate share of the market as shown in the chart below:

The fact that China accounts for approximately 80% of U.S. rare earths supply represents a strategic risk much as OPEC did for U.S. energy supply starting in the 1970s. As a result of these economic trends and conditions, we expect that the demand for and price of rare earths elements will experience substantial growth over the medium term and as a result the vertical integration of the Disruptor portfolio to have a holding in the sector was a sensible move.   

Question 4:

David, as we bring another episode of “A Brighter Future” to a close, I want to revisit a topic we discussed on a previous episode and that’s what is going on in the commodities markets. 

We spoke about the idea of a Commodity “Super Cycle” on a previous episode and with what we are seeing with lumber prices and other commodities it appears that we may actually be in one.  Adding to that, a recent research report from Goldman Sachs said “Copper is the new oil” and now it’s getting interesting. 

Is it possible with massive stimulus spending by governments as they juice up their economies following pandemic lockdowns, that this could be just the start of a multi-year rally for raw materials across? 

Rick, the run-up in prices of various commodities such as copper, lumber and steel has prompted concerns that inflation in raw materials will find its way through intermediate goods and into the consumer price index. Couple this with the prospects for sustained infrastructure investment proposed under the Biden Administration’s $7 trillion “Build Back Better” plan and the foundations for a commodities super cycle are potentially being put in place. 

Now, the question for investors is, “are these developments not already priced into the market?” To that end, given the pricing of commodities relative to the S&P 500 shown in the chart below, it would appear that with relative pricing now at a 50-year low investors would be well advised to consider making some allocation towards the sector.


In sum, while the growth of the global economy has been skewed towards the digital, it is important for investors to bear in mind that investment in physical infrastructure is necessary to allow this digital growth trajectory to be sustained and to do so in a more carbon-efficient manner thereby allowing the realization of a brighter future.

April 13th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 44 –Will Earnings Growth Drive The S&P 500 Towards 4500?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the prospects for the S&P 500 after surpassing the 2021 “Laidlaw Five” target of 4000, the prospect for positive earnings estimate revisions during the upcoming 2021 Q1 earnings season, what factors drive corporate bond spreads and, with Bitcoin having hit the cover of Barron’s, what are investors to do now?

The topics discussed in this episode are: While market volatility likely to increase, is S&P 500 4500 possible?, Can 2021 Q1 earnings season lead to a +10% upward revision to Street estimates for 2021 and 2022? What factors drive corporate bond spreads and are they likely to widen from here?, and With Bitcoin on the cover of Barron’s, what should investors do with cryptocurrencies now?

Please tune in for more timely insights.

#Bitcoin #Crypto #EarningsSeason #Economy #Fed #StockMarket #SP500 $BTC $IWN $RSP $XLE $XLF $XLI

Episode 44 –Will Earnings Growth Drive The S&P 500 Towards 4500?


Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined once again by David Garrity, Chief Market Strategist for Laidlaw & Co.

David, it’s been a few weeks since we last spoke and we have a lot to discuss, so let’s get right into it…

Last week was a rather quiet week, allowing the markets to continue to be focused on the economic recovery outlook.  In what has become a common refrain, stocks hit new record highs as the S&P 500 posted a +2% gain for the week.  While this bull market is still quite young, it’s already logged some significant mileage, returning +87% in just over a year.

Question 1:

And that’s where I would like to start today, a formidable rally has propelled the S&P 500 up +9.9% this year to 20 record closes, keeping stock valuations at historic highs. However, the earnings yield on stocks (corporate profits divided by the price of the S&P 500), relative to the 10-year Treasury rate, currently sits just below 3%, the lowest level since 2018.

There are some that say shares may have more room to run as the rollout of Covid-19 vaccines and bountiful government spending strengthen the outlook for corporate profits, but with the S&P 500 now sitting above our 2021 Target, how should our listeners be positioned?

As you and I joked recently, we have had an expected year’s appreciation in 3 months!!

Rick, after posting a total return in 2021 Q1 of +6.2%, the S&P 500 ahead of the start of 2021 Q1 earnings season has rallied a further +4.0% on a total return basis bringing the year-to-date gain to +10.4%, a phenomenal gain driven by solid progress in the four market drivers of monetary support, fiscal relief, positive economic data indicators and COVID vaccinations. With enough momentum developing in the economy to support 2021 US GDP forecasts of +6.5% growth, the best growth seen so far in this millennium, it is understandable that U.S. interest rates have risen to as high as 1.75% due to both accelerating economic growth and, importantly, concerns that inflation is re-emerging. All of which leaves investors wondering whether the S&P 500 index has gotten ahead of itself. So, as was asked of Captain Miller on the Normandy beach in “Saving Private Ryan”, “what do we do now, sir?”

In considering the outlook, it is important to note that 2021 is not seeing a simultaneous global economic recovery as Europe is beset by challenges in rolling out COVID vaccination, China appears intent on not letting its economy run too hot and major developing countries such as India are confronting such high COVID infection rates that it is shutting off vaccine exports, quite something when a country is the world’s largest vaccine producer. In this setting, the U.S. is the world’s economic engine and when it comes to how the U.S. economy performs the U.S. consumer plays the pre-eminent role. Now, with all the fiscal stimulus and accumulated savings from working at home, the U.S. consumer is in a position to spend at record rates as COVID vaccinations proceed at a pace to allow herd immunity, something Dr. Anthony Fauci expects the U.S. will reach by July 2021, and thus raise the prospect of a full reopening of the U.S. in the second half of 2021.

Now, when we published the 2021 “Laidlaw Five” in December 2020, our forecast was for the U.S. Dollar to depreciate -10% versus other currencies in a pattern similar to previous economic cycles when in the earlier stages the U.S. Dollar had indeed weakened. However, with the U.S. economy’s performance, the U.S. Dollar index has instead strengthened +2.5% so far this year. One of the benefits this has offered is that with the strength of the U.S. Dollar it is now attractive for European and Japanese investors to buy U.S. bonds on a currency-hedged basis. The 10-year Treasury is yielding 1.94% hedged in euros, and 1.42% hedged in yen. The important takeaway here is that non-U.S. investors may now serve to limit further increases in U.S. interest rates, especially as the increase in inflation rates proves to be transitory due to prior-year base effects leading to +2.5% year/year price increases in 2021 Q2 CPI readings.

If further interest rate increases are indeed restrained by U.S. Dollar strength, then it is possible that current valuation levels on the S&P 500 index at 4129 of 23.4x 2021 EPS of $176.76 and 20.4x 2022 EPS of $202.83 could be sustained. While we will discuss this in further detail in the next question, note that so far in the recovery Wall Street earnings estimates have been surpassed by +10-15% over the past three earnings seasons. If we mark up the 2022 EPS estimate by +9% to $221 and keep the 20.4x P/E multiple, it is possible to see the S&P 500 index at the 4500 level, which would be a +9% increase from the Friday 4/9/21 close. Granted the road forward is likely to be more volatile than what the market has experienced from its March 2020 low, but we think this bull still has room to run to the upside from here.

Question 2:

David, 2021 Q1 earnings season kicks off this week, with results from America’s big banks—including JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co—and companies ranging from Delta Air Lines Inc. to PepsiCo Inc. and UnitedHealth Group Inc.

Investors will be watching for signs of confidence from executives that customer demand will keep rising and cost increases can be managed to help ease their concerns that stocks are looking expensive.

With the S&P 500 trading @ 22.6x projected earnings, above the five-year average of 18.1x according to FactSet, what will you be watching for as we enter the first “Earnings Season” of 2021?

Rick, as mentioned earlier, corporate earnings performance has consistently outperformed Wall Street expectations in the recovery to date with the last three quarters’ outperformance being +13% on average (2Q20 +12%, 3Q20 +15%, 4Q20 +13%). Right now, The Street is looking for +24.5% S&P 500 earnings growth in Q1 2021 versus Q1 2020, but the market likely has its eyes set on something closer to +30-35% growth.  

Note that there will be a very large gap in Q1 2021 sector earnings performance, something that lines up with the cyclical/growth stock divide. Based on FactSet data, analysts’ estimates for Materials and Financials, 2 key cyclical groups, are currently showing expected Q1 comparisons of +46% and +79% respectively. Expectations for Consumer Discretionary earnings, which includes Amazon, are for +103% growth over Q1 2020. Analysts’ estimate for AMZN sits at +89% expected growth, so excluding that “lockdown play” the group should still print very strong reopening-driven earnings growth. Classic growth groups like Technology, Health Care and Communication Services are expected to show +22%, +20% and +14% earnings growth. While this level of performance lags the S&P as a whole, it is nevertheless still quite strong. Worth noting, Communication Services earnings growth will mostly come from Google and Facebook, where analysts are looking for +38% and +60% growth from last year. Bringing up the rear are defensive groups like Utilities, Real Estate and Consumer Staples at just +3%, +2% and +0% year-over-year growth. Finally, there are Energy and Industrials. These 2 groups are expected to still post negative earnings comparisons to last year, down -15% and -17%.

Bottom line, this needs to be one very, very strong earnings season to justify current prices and give investors confidence that better still is yet to come. As discussed previously, corporate earnings leverage off a cyclical bottom is critical to supporting further increases in profit estimates. The sector overview above, however, is a good reminder that it will be unevenly distributed. Ultimately, all that matters is that the 2021 Q1 earnings season produces a +10% aggregate upside S&P earnings revision and company managements express confidence in further operating leverage as the US economy continues to heal.

Question 3:

David, many of our clients @ Laidlaw Wealth Management and Naples Wealth Planning are in need of income as they are at or nearing retirement, so fixed income and yields are a large part of their investment plans.

Recently there have been several downgrades to recommendations for high-yield (HY) and investment-grade (IG) corporate debt in the fixed income asset class primarily due to something known as “spread compression.”

Strategists often speak about spreads widening or narrowing and I think it’s important to understand concepts like this when investing in fixed income.   Can you share with our listener’s what “spread compression” is and how spreads typically move at any given point in the economic cycle?

Rick, fixed income securities are typically priced on a spread basis off of similar maturity “risk free” securities, namely U.S. Treasuries. Generally, the spread is a function of pricing the default risk that an issuer will not meet its repayment obligations. As such, spreads tend to increase, or widen out, when the economy goes into recession and then narrow, or tighten, going into recovery.  

Right now, US corporate bond markets are  embracing a “dash for trash”. Investment grade (IG) corporate spreads were unchanged last week, and at 0.95 percentage points over Treasuries are already very close to their 5-year lows of 0.90 (February 2018). High yield (HY) spreads did tighten last week to 3.21 points over Treasuries, and these are also very close to 5-year lows of 3.16 points (October 2018). Marginal investment grade corporate credit (i.e. BBB bonds) are now at their best post-pandemic levels (1.17 points over Treasuries) and just 2 basis points away from February 2018’s 10-year lows. Confirming this move in lower-quality corporates: CCC corporate credits (i.e. the lowest rated high-yield bonds aside from outright distressed paper) hit a new post-pandemic spread low last week and are just 5 basis points away from their June 2014 lows (6.32 now, 6.27 then). Most significantly, the 2018 lows were actually 30 basis points above last week’s levels. Bottom line, optimism over a strong US economic recovery continues to permeate many capital markets, not just equities.

With 10-year Treasury yields stalling out (see earlier discussion), spreads are not likely to widen out soon. One important benefit to narrow high-yield spreads is that it generally benefits small and mid-cap companies that rely heavily on external financing, something that will serve to support the Russell 2000 index.  

Question 4:

David, as we bring another episode of “A Brighter Future” to a close, I want to revisit a topic we have discussed several times on past episodes and that’s Bitcoin and Cryptocurrencies.

This weekend, Barron’s lead story was “Diving Into Bitcoin” and while it contained some very good information, there was a line that caught me:

“while stocks follow earning and bonds track interest rates, Bitcoin’s prices may simply be supported by the belief that it will one day give the dollar a strong run.  In other words, there’s no good reason to buy, unless you think the price is going up”

I would imagine we all would agree with the sentiment of “unless you think the price is going up, there’s no reason to buy” that’s what we try to figure out every day, but do you agree with the statement as relates to Bitcoin?

Separately, there has been a great deal of focus on Bitcoin, but I know you actually believe there is more value in Ethereum, which is a technology that lets people send cryptocurrency to anyone for a small fee. It also powers applications that everyone can use and no one can take down.  In essence, it’s the world’s programmable blockchain and builds on Bitcoin’s innovation, with some big differences.

Can you share with our listener’s your insights on the Barron’s feature, Ethereum and any additional insights on the topic?

Rick, it used to be said on Wall Street that as soon as a topic appeared on the cover of Time magazine, whatever positive investment return there was to be made from the topic of discussion had already been realized. While Barron’s is not Time, the fact that Bitcoin has made it to the cover perhaps indicates that it is time for investors to approach investing in Bitcoin with a bit more caution. Before saying anything that might be construed as a suggestion to take profits, I think it is useful to consider that the process of institutionalizing the marketplace for Bitcoin and cryptocurrencies is not yet complete in some very significant respects.

 In this regard, note that a specific Bitcoin trade offers the appearance of very easy money. At issue is the extreme contango in the Bitcoin futures curve. On the CME — one of the most straightforward avenues for institutional traders to go long Bitcoin exposure — prices trade at a significant premium to spot. For example, at the close of trading on Friday, Bitcoin spot was just over $58,300, whereas the December 2021 CME contract was over $63,000. This means one could go long spot Bitcoin, short the December 2021 future, and while waiting the two to converge earn roughly a +8% return in 12 months. Not a bad risk-free return for today’s market.

So, this raises the question that if markets are efficient, how can this be possible? Contango is a frequent feature in commodity futures curves due to factors such as storage costs, for example, in the case of oil. While Bitcoin has no storage costs, it has all kinds of other issues.

Most significantly, there is still not a great way for a regulated, big institution to just go long spot Bitcoin. How many shops can hold their own Bitcoin keys? How many are really in a position to trade on a cryptocurrency exchange such as Coinbase? Finally, even if there were a way of going long the spot in size to make the trade worth it, it is not easy to get leverage to really exploit the arbitrage in a big way. In this context, the approval of a Bitcoin ETF would allow the spread to theoretically compress significantly as it would offer institutions a straightforward way to go long spot and short the futures all in the same accounts, something making the execution much easier.

Meanwhile, away from Bitcoin, which is produced or “mined” from an energy-intensive “proof of work” blockchain protocol, the actual deployment of distributed applications off of blockchain will rely more on more energy-efficient “proof of stake” blockchain protocols such as Ethereum. While investors have been focused on the theoretical minimum number of Bitcoin tokens that can be produced (i.e. 21 million) as a possible hedge against currency debasement leading Bitcoin to be considered a digital asset substitute for gold, one should think of Ethereum with its greater industrial application as the digital asset substitute for silver.

 That said, cryptocurrencies and blockchain applications have come some way since the hype-driven boom in 2017, but we see the market as still being inefficient and may therefore offer investors the potential for attractive returns. However, in considering the potential, investors should always be in mind that not all that glitters is gold and that not every cloud has a silver lining.

Marth 29th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 43 – Are Inflation Expectations Overly Inflated?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses what factors are driving current expectations around rising inflation, the importance of PMI surveys as a window on the operation of the global supply chain, how lower-duration equities are faring against the backdrop of rising interest rates and how should investors consider investing the legalization of Cannabis.

The topics discussed in this episode are: What is more important to consider when viewing rising inflation expectations – increasing raw material costs or leverage levels globally?, Where were the surprises in last week’s PMI readings and what do they say about the global economy?, As rising interest rates underscore the importance of dividends to investors realizing total returns, how best to consider dividend policy?, and With Cannabis legalization gaining greater acceptance, how should investors approach a sector that has already been smoking hot?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #AmericanRescuePlan #Congress #Economy #Fed #StockMarket #SP500 $EWU $IWN $XLE $XLF

Episode 42 – “With ARP Now Law, Will U.S. Lead Global GDP Recovery From COVID?”


Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined once again by David Garrity, Chief Market Strategist for Laidlaw & Co.

David, I hope you’re well and were able to take advantage of the beautiful weather on Friday and Saturday…

Rick, the weekend was pleasant and afforded the chance to take on outdoor tasks around the home that had waited patiently during the colder winter months, such as putting up a new retainer wall in the backyard, turning eyesore into edifice and providing a much-needed bulwark against erosion.

Interestingly, I am no different than other Americans who have shown continued interest in sprucing up their homes even as signs are growing that COVID’s chokehold on daily life is beginning to ease with vaccination trends accelerating.

Last week saw retailers Home Depot (HD) and Loew’s (LOW) stock prices break-out to all-time highs as Google searches show consumer interest in home improvement is exceeding even 2020 levels. The stimulus checks from the recently passed America Rescue Plan should likely be finding their way into the economy through such activities as home improvement.

With the change in the season, things are indeed warming up on the home front.

David – last week marked the one-year anniversary of the market bottom. In that time, we have seen the S&P 500 gaining more than +75% since the March 23, 2020 low! The market’s performance over the last 12 months has been exceptionally strong. The rebound has been powered by expectations for the economic recovery and commensurate rebound in corporate profits.

Three primary factors have been in the driver’s seat: the vaccine (first development, then distribution), monetary-policy stimulus, and fiscal aid (PPP loans, stimulus checks, etc.). This trifecta has formed a solid foundation upon which the economic recovery commenced and from which the new bull market launched.

Question 1

It’s the last piece of that trifecta where I would like to start our discussion today. The latest round of $1,400 stimulus checks are hitting peoples’ accounts, hopefully filling the personal-income hole that would have otherwise been created by historically high unemployment. This has set the economy up for robust growth this year, but it has not come without tradeoffs. The specter of inflation has increased, and over the past year the U.S. national debt has risen by more than $4 trillion.
As we both know, the capital markets can be very impatient. When it comes to inflation, Fed Chair Powell is preaching to the capital markets that patience is going to be a virtue. In other words, “don’t freak out” when big inflation numbers start rolling in.

However, many are fixated on the inflation issue because it could very well become the defining issue for the stock market in coming months if market participants choose not to heed Chair Powell’s advice. One potential way for us to gauge if the market is following Chair Powell’s advice is the 5-year breakeven inflation rate. The 5-year breakeven inflation rate implies what the market thinks the inflation rate will be, on average, over the next five years. It sits at 2.53% today, the highest it has been since July 2008.

David – can you share some additional insights on this inflation gauge with our audience as well as discuss the potential implications on the Fed’s recent statement to be “committed to having inflation expectations anchored at 2 percent, not materially above or below 2 percent.”

Rick, in some ways the launch pad for the current concern about inflation was rolled out at the Fed’s August 2020 Jackson Hole conference where it was announced that policy would shift to targeting average inflation rates of 2% or more over a period of time from an absolute threshold of 2% in setting monetary policy to increase interest rates. The expressed interest then was to allow the economy to reach higher employment levels, especially in light of the record job losses taking place under COVID.

As you know the Fed has a dual mandate to promote employment and control inflation. The trade-off has been summed up in the Phillips Curve which contends that low unemployment rates lead to higher price levels as wages rise to attract and retain scarce labor. However, the experience under globalization is that wage levels have not risen with low unemployment due to wage arbitrage practices such as outsourcing and offshoring. To that extent, the Phillips Curve is thought to be broken as an analytical tool which may well have served to prompt the Fed to make its August 2020 policy shift.

The chart below shows that relative to the 5-year inflation break-evens embedded in TIPS Fed policy has actually well-exceeded the indicated levels in past interest rate tightening cycles. Also, the chart shows that the current rise in inflation expectations has only brought them back in line with the long-term average since 2006. To that end, the current run-up has not reached a level that is likely to prompt monetary tightening in our view. Last, we can say the Fed allowed inflation expectations to run at these levels from 2009 until 2016 before meaningfully raising interest rates.

FRED Screenshot

The discussion of inflation prospects has focused primarily on how the prices of various raw materials have risen significantly from prior-year levels. Note here that the comparison to the 2Q 2020 levels is against a global economy that was largely shut down to contain the first wave of COVID. As we will discuss in the next question, the global supply chain is opening up in 2021 and in the process will expose imbalances and bottlenecks that need to be addressed such as the global distribution of shipping containers. To that end, we continue to consider the increase in inflation expectations to be based on transitory and not secular considerations.

One major structural factor that is deflationary is the global level of indebtedness relative to GDP. The chart below how high this across major economies such as Japan and Canada. Clearly, the world is now comprised of highly leveraged, high duration economies as well as highly leveraged financial markets. Consequently, it is quite likely that small increases in long-term interest rates (i.e. 1% – 2%) may prompt an economic slowdown that will ease building inflation tensions.

Debt as % of GDP

Question 2

David, I want to shift gears and move away from the Inflation discussion to one of our Economic indicators. We all were captivated this week with pictures of a sideways container ship clogging the Suez Canal. The cargo ship “Ever Given” made headlines Tuesday evening when high winds blew the 1,300 foot, 200,000 ton vessel off course as it traveled through the Suez Canal.

Assuming the blockage is cleared somewhat soon, the delay in shipping shouldn’t have a noticeable impact on world trade or output. That said, approximately 10% of global trade is estimated to pass through the canal each year, posing a risk if the block is not resolved soon.

In our Laidlaw Five for 2021 we assumed there would be a rebound in global GDP and that was supported by data this week like the flash developed-market manufacturing PMI report which showed that the new export orders index has risen to a nine-year high.

Can you share with our audience what the PMI or Purchasing Managers Index represents and why the numbers this past week from the UK, EU and the US were so important?

Rick, supply chains exist between raw materials and consumers and the PMI surveys offer critical information as to how well they are functioning. From this information, one can access whether new orders, a critical driver of economic growth, are rising or falling. Also, from input and output prices one can determine whether inflation is building within the intermediate levels of the economy prior to appearing in the PPI and CPI measures of inflation. All told, the PMI surveys provide a timely window on how well the economy is responding to shocks such as COVID.

The surprise coming out of the latest PMI surveys is that despite concerns over new lockdowns being imposed in Europe, the level of manufacturing activity in key countries such as Germany was stronger than expected. This provides hope that the global economic recovery in 2021 will move forward despite challenges in ramping up COVID vaccinations.

Question 3

David, this weekend, Barron’s, a widely read industry publication, had a feature piece on dividends. As dividend investing is a great strategy that can give investors two sources of potential profit: 1) predictable income from regular dividend payments, and 2) capital appreciation of the stock over time, I thought it would be a good topic to discuss with our audience.

Buying dividend stocks can be a great approach for investors looking to generate income or to build wealth by reinvesting dividend payments. In addition, buying dividend stocks can also be appealing to investors looking for lower-risk investments as stocks that pay dividends can be some of the least volatile to own. However, there are still pitfalls and dividend stocks can be risky if you don’t know what to avoid.
Sadly, David, a yield that looks too good to be true often is and inexperienced dividend investors often make the mistake of buying stocks with the highest dividend yields. While high-yield stocks aren’t bad, high yields are typically the result of a stock’s price falling due to the risk of the dividend being cut often referred to as the dividend yield trap.

Since the Dividend Yield is only a small portion of what investors should consider when evaluating a dividend stock. As a former analyst in the automotive sector, a group that traditionally paid strong dividends, what metrics do you look at? Also, outside of balance sheet metrics are there any additional suggestions such as is the company’s business at risk from competitors, weak demand, or some other disruption you would offer to our audience?

Rick, this is a great question that touches also on how the duration, or average weighted term, of cash flows from a stock can determine its sensitivity to changes in interest rates, something that is clearly holding investor attention at present given the rise in long-term interest rates.

The tables below show how investment styles, industry sectors and global markets have performed during Q1 2020 to date with those categories outperforming the S&P 500 index in both the January-February and March-to-date timeframes highlighted in yellow. Note the following: 1) sectors with yield higher than the S&P 500 have shown relative strength as investors have sought out lower-duration equity investments, a factor that has lead the underperforming Consumer Staples and Utilities sectors to show some recovery in March while still underperforming the S&P 500 index in 2021 to date, and 2) off the back of the rising yield on 10-year U.S. Treasuries prompted in part by improved GDP growth prospects off the back of continued fiscal and monetary relief turbocharged by accelerating COVID vaccination rates, the U.S. Dollar has strengthened +3.15% so far this year, contrary to earlier expectations of depreciation, a critical element that has lead international markets to lag the S&P 500 index.

Relative Performance Chart

Relative Performance

To the broader investor appeal of dividend stocks, we know that total return of a stock comes from two factors: 1) price appreciation and 2) dividend payments. While prices can fluctuate, dividend payments are more fixed and tend to increase over time as dividend policy is one means that management employs to signal the underlying earnings power of a company. So, dividends are quite important and by some estimates have provided 75% of long-term total returns for equities. Consequently, it is important to employ dividend reinvestment as a central part of a long-term equity investment strategy.

Relative to assessing the ability of a given company to sustain, if not increase, its dividend payout, look first to how well the current dividend is covered by the after-tax cash flows of the business. Unless there are regulatory requirements that a company payout the majority of its earnings to investors, it is best to see a dividend policy of paying out at most 30-50% of net income. In order for dividends to grow, a company must invest to maintain and expand operations profitably. It is also important for investors to consider the fixed cost and capitalization structure of the business.

As an auto analyst, I always consider dividends to be something only enjoyed at the top of that industry’s cycle as the fixed operational and capital structure costs of the business would lead to the elimination of dividends in a downturn. That said, dividends are a critical component to realizing superior long-term total returns as stock prices can rise and fall, but for a well-managed company dividends can be forever, rising in good times and bad.

Question 4:

David, as we bring another episode of “A Brighter Future” to a close, I wanted to revisit a topic from our 2021 Laidlaw 5 and that’s the idea of Congress legalizing Cannabis.

This weekend, New York announced that it will legalize marijuana for adult, recreational use after Democrats struck a deal on the issue, with a vote expected this week from the state Legislature. The agreement is the result of years of negotiations between Gov. Andrew Cuomo and the state Legislature in New York, which will become the 16th state to approve legalization.

There is more public support for marijuana law reform than ever before with new polls showing more than half the country is in favor of legalizing marijuana. The Drug Policy Alliance (DPA) believes marijuana should be removed from the criminal justice system and regulated like alcohol and tobacco and according to Pew Research, 66% of voters support adult-use legalization, and 91% support medical marijuana. Add to that, fifteen (15) states plus Washington, DC, and Guam have legalized adult use, and more than 30 have some medical marijuana laws. In fact, the entire country of Canada is federally legal.

Finally, there’s Senate Majority Leader Schumer who said this recently:

“Next is criminal justice reform—and voters agree. Voters in four more states this election voted to legalize adult recreational use of marijuana, and that proves once again it’s past time to work to undo the harm done by misplaced priorities, particularly in Black and brown communities. It’s time to decriminalize marijuana nationally.”

I know you’re not a Cannabis expert, but it feels like we are moving closer to federal decriminalization. Does this create investment opportunities that our audience could or should consider?

Rick, I may not be an expert in the matters of Cannabis legalization, but I know a good source of tax revenue when I see one. For New York State, it is estimated that the legalization of adult Cannabis use could generate $350 million in annual tax revenue. Granted that this would be at most a modest contribution given that the 2022 budget total is $193 billion.

For investors interested in investing in the Cannabis sector, my primary recommendation is to do so via a diversified vehicle such as an exchange traded fund. The sector, as measured by The Marijuana Index (North America), has dramatically outperformed the broader market with a total return of over +160% through early March 2021. The Marijuana Index is an equal-weighted index, which means that it may significantly overweight small-cap equities relative to a cap-weighted index like the S&P 500. The best-performing marijuana ETF for Q1 2021, based on performance over the past year, is the Amplify Seymour Cannabis ETF (CNBS).

From the solid performance realized over the past year, investors should understand that the returns associated with Cannabis legalization have already been discounted in current market prices. As a result, it is important to consider closely how companies in the sector will provide results that have not already been priced in. Caveat emptor.

Much as the end of Prohibition in December 1933 provided an important source of tax revenue as the United States sought to bring itself out of the depths of the Great Depression, I fully expect that Cannabis legalization to fulfill a similar role as we now seek to recover from the COVID downturn and replenish public sector finances while undertaking significant infrastructure investments to support the prospects of a brighter future.

Marth 15th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 41 – As U.S. Economy Positioned To Accelerate, Will 10-year Treasuries Yields Keep Breaking Out?


In this episode, Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the various aspects, benefits and risks related to the recently passed American Rescue Plan (ARP) and its market implications, the possibility that U.S. Consumer Confidence has bottomed, the prospects for this week’s central bank meetings and sector, style and country stock performance prospects.

The topics discussed in this episode are: With the ARP passage, what should investors consider in terms of near-term and long-run implications?, How important is consumer confidence and has it now passed its low for this cycle?, Will this week’s central bank meetings bring a risk of global policy “delinking”?, and How should investors consider geographic diversification post ARP passage?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #AmericanRescuePlan #Congress #Economy #Fed #StockMarket #SP500 $EWU $IWN $XLE $XLF

Episode 42 – “With ARP Now Law, Will U.S. Lead Global GDP Recovery From COVID?”

Transcript to come.

Marth 8th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 41 – As U.S. Economy Positioned To Accelerate, Will 10-year Treasuries Yields Keep Breaking Out?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the chances for a stock market correction, thoughts around how the Fed will manage the long end of the Treasury yield curve, where to look for attractive values in the tech sector and what are the prospects for a commodity super cycle.

The topics discussed in this episode are: Where should investors be positioned for positive stock market performance?, How can a dovish Fed effectively manage the long end of the Treasury yield curve?, Where may investors find attractive values now in the tech sector?, and Are we in the early stages of a commodity super cycle?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #Economy #Fed #GSCI #Inflation #StockMarket #SP500 $XLE $XLF $XLU 

Episode 41 – As U.S. Economy Positioned To Accelerate, Will 10-year Treasuries Yields Keep Breaking Out?

Transcript to come.

February 22nd., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 40 – A Question Of Interest, Where Will Stocks Go Now?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses whether the rise of interest rates will slow the pace of economic recovery, whether inflation’s upturn is transitory or secular, whether the VIX index subsiding is a signal for a “risk on” market environment and how investors should consider Bitcoin and crypto-currency investment now versus the 2017 run-up.

The topics discussed in this episode are: Is the market forcing the Fed’s hand on interest rate policy?, Is the upturn in inflation a sign of something more permanent? How should investors consider the pull-back in the VIX index and should they go “risk on”?, and Does Bitcoin stand a chance of becoming “the digital equivalent” of gold?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #COVID #Congress #Economy #Fed #StockMarket #SP500 #RedditMob $IWO $IWN $XLE $MCHI $EWT $EWY 

Episode 40 – A Question Of Interest, Where Will Stocks Go Now?


Hello and welcome to another episode of “A Brighter Future” Laidlaw & Co’s podcast series.  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined again by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, it’s been a few weeks since we last spoke and we have a lot to cover, so let’s get right into it. 

We saw stocks set new highs again last week with a myriad of factors grabbing a piece of the spotlight, including Congressional hearings aimed at deciphering the recent GameStop trading frenzy, ongoing Washington negotiations over the details of the fiscal aid package, and economic data that continue to paint a picture of an economy that is enduring lockdown headwinds, but is also primed for a jump amid rising vaccinations.

But what caught my attention, and the market’s, was the upward move in interest rates. A 10-year Treasury yield of 1.3% may feel like a nonstory, but the recent move higher in longer-term rates is unlikely to proceed unnoticed, both for the reasons behind the increase as well as the implications higher rates pose to the market’s path ahead. 

Question 1

And that’s where I’d like to start today.  As I mentioned, ten-year rates have now doubled since September.  While that trajectory may feel abrupt, I want to remind our listeners that this brings 10-year interest rates back to where they were last February and the yield on 10-year Treasuries is still at the lowest level in history.  

At the same time, we are also seeing global yields rising with Treasury yields. The German 10-year Bund yield has risen +17 basis points over the last month, compared to +28 basis points for the UK 10-year government bond. So, rising yields is a global phenomenon, which means it’s based on the market’s expectations for a global economic reflation and uptick in inflation.   

Practically, that makes the trend of higher yields more sustainable going forward, and it’s one of the key differences between this episode of rising yields, and some others where Treasury yields may have been rising, but global yields were falling.

But this move has caused a lot of discussion on Wall Street about the movement up causing money to come out of risk assets. 

In your opinion, could this movement up in rates choke off economic growth?   Could this uptick in rates be the proverbial “fly in the recovery ointment “ ?  

Rick, the rise in interest rates is a reflection of the success of the past year’s combined fiscal and monetary stimulus has had in sustaining the global economy through the pandemic in 2020 and positioning it for growth as COVID vaccine distribution efforts scale in 2021. As we know, interest rates typically reflect real economic growth plus inflation. 

Current economic forecasts call for 2021 world GDP growth of +5.2% following the -3.6% contraction in 2020. Inflation is expected to come in above the Federal Reserve’s policy threshold of +2.0%, but given the August 2020 policy shift to average inflation rate targeting this is not expected to trigger a round of Fed tightening. That said, the moves higher in 5-year and 10-year Treasury yields to pre-COVID levels last seen in 1Q 2020 have investors concerned of an equity market reset as discount rates increase.

Important here to keep a close eye on the CME FedWatch data series as the Fed Funds Futures curve shows that the odds of an interest rate increase in 2021 are beginning to rise, albeit to modest levels. The chance of a rate increase at either of the 4/21/21 or the 6/16/21 meetings stand at 4.0% each, up from 2.1% last week. Further out in the year, the odds of an increase at either the 9/21/21, 11/3/21 or 12/15/21 meetings are now 9.7%, also up from 2.1% last week.

The interest rate moves come at a tricky time for the stock market as the 4Q 2020 earnings season, while quite strong, is largely over and 1Q 2021 earnings season won’t begin until mid-April. At present, based on FactSet data, Wall Street analyst estimates for 2021 and 2022 are trending sideways and most likely will not see meaningful upward revisions until the 1Q 2021 earnings season gets underway.

The stock market depends on two components: earnings and interest rates. If earnings are flat and rates are up, the odds are good that markets will be down, all else being equal. That said, I only see the correction as temporary until we get more indications of fiscal and monetary support. To that end, we look with interest to Federal Reserve Chair Powell’s Humphrey Hawkins testimony before Congress on this Tuesday.

One last observation is that while there are concerns that the increase in U.S. borrowing attendant on the passage of proposed fiscal stimulus and infrastructure investment programs may lead to debt service payments crowding out other categories of government spending, the level of interest rates at which such borrowing may occur are sufficiently low as to leave U.S. interest expense as a percentage of GDP below the 1.4% median seen since 1940 through 2024. If ever there were a time to borrow to build America back better, this is that time.    

Question 2

David, let’s talk about a more Macro topic that was addressed in our Laidlaw 5 for 2021 and has been written about a lot recently – Inflation.  

Without even accounting for the aid package proposed by the new administration, the U.S. has already provided about $4 trillion of fiscal support, or about 20% of GDP, to get the economy back on track. 

These measures, together with the $3 trillion expansion of the Fed’s balance sheet, have been highly effective in providing liquidity to businesses and consumers and preventing a prolonged recession.  However, over the long term, excessive government debt and deficits can exert some upward pressure on prices.

 In addition, the pandemic and resulting shift in demand patterns (as consumers redirected spending towards goods, like computers, furniture, etc. instead of services) has disrupted global supply chains and caused bottlenecks. For example, the shortage of semiconductor chips reported recently is costing automakers billions of dollars in lost revenue. Shipping and raw-material costs are also rising with commodity prices to their highest levels in more than a year. 

The recent data from the survey of purchasing managers at manufacturing firms confirm that prices paid in the production process are rising. This is a leading inflation indicator because producers will most likely pass along the price increases to consumers.

David, anyone who has ever walked in NYC or Chicago on a windy day has felt a strange wind effect.  Wind speeds can be moderate when walking near one side of a tall building, but, after turning around the corner, strong wind gusts can suddenly appear.  Should our listeners worry that inflation is about to do a similar about-face?

Rick, you put it quite well in saying that the winds of change are blowing in the financial markets as investors begin to consider the growing prospect of our seeing a post-COVID world in 2021 and try to assess how best to position themselves in a global economy that it is characterized by massive unemployment and supply chain bottlenecks reflecting largely capacity that was shut in during COVID and that will take time to restart.

Last week’s Producer Price Index clearly showed the impact of supply chain bottlenecks. We believe that as the world economy reopens that these bottlenecks will be cleared and that the transitory price increases associated with them shall pass. 

It is important to note when considering the pace of the world’s recovery from COVID that it is highly uneven, being largely dependent on the success of scaling COVID vaccine distribution efforts while maintaining necessary public health protocols. While it is encouraging that the level of vaccination doses per hundred persons has begun to rise with the U.S. at 16.5, Britain at 23.8 and Israel at 78.1, there are countries where levels are far lower such as Denmark at 7.3.

When it comes to viewing inflation data, bear in mind that as the brunt of the global economic shutdown to contend with COVID fell in 2Q 2020 that the year-over-year comparisons will be pronounced through July 2021. Given the substantial slack remaining in the global economy, inflation is likely to moderate going into 2H 2021. Within this framework view of global excess capacity, we also consider the rise in oil prices as being a transitory development.

Nevertheless, there is a clear shift in the market as investors are looking to position themselves to preserve purchasing power in the face of inflation. We have previously noted Paul Tudor Jones’ May 2020 paper, “The Great Monetary Inflation,” which lists 9 investments that are expected to perform well during reflationary periods such as we are experiencing post-COVID. Rather than paraphrase, we quote the paper here:

  1. Gold – A 2,500 year store of value; 
  2. The Yield Curve – Historically a great defense against stagflation or a central bank intent on inflating. For our purposes we use long 2-year notes and short 30-year bonds;
  3. NASDAQ 100 – The events of the last decade have shown that quantitative easing can rapidly leak into equity markets; 
  4. Bitcoin – There is a lengthy discussion in the paper; 
  5. US Cyclicals (Long)/US Defensive (Short) – A pure goods’ inflation play historically; 
  6. AUDJPY – Long commodity exporter and short commodity importer; 
  7. TIPS (Treasury Inflation-Protected Securities) – Indexed to CPI to protect against inflation; 
  8. GSCI (Goldman Sachs Commodity Index) – A basket of 24 commodities that reflects underlying global economic growth; 
  9. JPM Emerging Market Currency Index – Historically when global growth is high and inflationary pressures are building, emerging market currencies have done quite well.

Going into 2021, our “Laidlaw Five” forecast indicated that investors could be well-rewarded by favoring value-oriented sectors such as Energy and Financials as well as stock markets outside the U.S. The tables below show year-to-date performance for styles, sectors and geographies.

Performance: Year to Date 2021 – Style, Market Cap & Sector
Index Price Change vs. S&P 500
S&P500 4.0%  
  – Growth 3.6% -0.4%
  – Value 4.9% 0.9%
Russell 2000 14.8% 10.8%
  – Growth 14.1% 10.1%
  – Value 15.5% 11.5%
S&P Energy 21.8% 17.8%
S&P Financials 9.9% 5.9%
S&P Communications Services 7.4% 3.4%
S&P Technology 4.6% 0.6%
S&P Materials 3.7% -0.3%
S&P Real Estate 3.6% -0.4%
S&P Industrials 2.7% -1.3%
S&P Health Care 0.9% -3.2%
S&P Utilities -2.1% -6.1%
S&P Consumer Staples -3.7% -7.7%
Performance: Year to Date 2021 – Geographic  
Index Price Change vs. S&P 500
S&P500 4.0%  
– U.S. Dollar Index 0.6% -3.5%
MSCI China 18.1% 14.1%
MSCI Taiwan 13.1% 9.1%
MSCI Emerging Markets 11.3% 7.3%
MSCI South Korea 8.2% 4.2%
MSCI Emerging Mkts ex-China 6.9% 2.9%
MSCI India 6.2% 2.2%
MSCI UK 5.7% 1.7%
MSCI Japan 5.6% 1.6%
MSCI EAFE 4.5% 0.5%
MSCI Frontier Markets 4.4% 0.4%
MSCI Eurozone 3.6% -0.4%
MSCI Singapore 2.0% -2.1%


 Question 3

David, in basketball, they call it a “head fake”, in baseball they call it a “change-up”, but in markets they call it a “blip” and that’s exactly  what we got when the VIX broke through  the 20 handle, closing at 19.77 (last seen 2/21/20). Yes, it’s been a year almost to the day since we last saw stability, but now continue to operate under the mantle of volatility. To some it elicits “fear”, to others it represents “opportunity”; and we prefer the latter.  

Each week in our meetings, we look at what many call the Fear & Greed Index – the VIX.   The VIX helps investors measure the expected volatility in the stock market, and since a spike to just below 40 in the last week of October, it has been in free-fall mode.  

In a research note, FundStrat’s Tom Lee said the VIX dropping below 20 would be a major risk-on signal, as it would suggest that investors see lower volatility in the coming months.  In other words, this would be more firepower to buy equities.     

I know we have touched on the VIX in the past, but could you offer some insights into the VIX and then share if you agree with Tom Lee’s suggestion that the recent drop below 20 is a “risk on” buy signal. 

Rick, I agree that a decline in the VIX can be viewed as a buy signal, but for the reasons indicated earlier as to earnings expectations marking time ahead of the 1Q 2021 earnings season and the impact of rising interest rates it may be best for investors to view the VIX signal cautiously.

This is underscored by considering the CBOE VIX Term Structure which represents what the market is expecting in terms of future volatility past just the next 30 day. As the curve shows levels above 29 from June to October 2021, well over Friday’s 22.05 level, we should understand that higher risk levels are being priced into the options market. So, again, best for investors to view the VIX signal cautiously.

One thing to note here is that volatility as measured by the VIX has a historical tendency to cluster. Volatility does not adhere to the famous “random walk” of stock prices. Instead, it clusters in high volatility periods like 1998 – 2003 and 2008 – 2012 and times of low volatility like 1992 – 1996, 2003 – 2007 and 2013 – 2018. After high volatility periods, it generally takes more than 12 months before US stock prices see even average daily price churn. VIX futures rationally reflect that reality even before factoring in current high equity valuations and/or the possibility of a Fed rate increase and higher long term interest rates.

Question 4

David, as we bring another episode of “A Brighter Future” to a close, could you offer some insights into what has been happening recently in the crypto-currency markets.

We have seen the price of Bitcoin go through $56,000 and Ethereum is now above $2,000 for the first time.  Bitcoin is up more than +91% so far this year!!!!!  The rally has been helped along by new institutional interest in crypto — big names like Mastercard and Morgan Stanley warming to the idea of digital currencies not backed by governments — but the sustained run-up also suggests that some of the same retail investors that powered Bitcoin’s last bull run in 2017 are coming back, buying and holding the asset for the long haul.

So, let me ask you a few questions on this topic:

Given market attention on the first and most popular cryptocurrency, Bitcoin, how should we view it relative to a traditional currency?  

Rick, Bitcoin was initially conceived as a disintermediated means of exchanging value anonymously and instantaneously with transactions verified through a distributed blockchain ledger. There is no government authority with taxing power that supports the value of Bitcoin, so its value lies in how highly individuals prize its characteristics. 

Now, what is different from its 2017 run-up is, as you rightly point out, that the level of institutional interest has grown markedly. We noted earlier, Paul Tudor Jones’ endorsement of Bitcoin as an inflation hedge. However, as important is the fact that regulators have begun to offer guidance to financial institutions as to the use of Bitcoin and other crypto-currencies in existing payment systems. To that end, the 1/4/21 guidance from the Office of the Comptroller of the Currency titled, “Authority to Use Independent Node Verification Networks and Stablecoins for Payment

Activities,” should be viewed constructively as an indication that this time around crypto-currencies are gaining actual traction.

Bottom line, Bitcoin and other crypto-currencies are not currencies in the strict sense offered above, but are merely payment system tools that should be only remotely viewed as a possible store of value. In approaching possible investment in the area, we urge only nominal exposure and best if done through a diversified approach. Caveat emptor. 

I heard an interview with Michael Novogratz where he said “there are 118 elements in the periodic table, yet gold is the only element to be designated safe-haven status. The same designation can extend to bitcoin in a digitized world, especially given growing risk of debasement of fiat currencies and raised prospects of a higher inflation regime” 

Should Bitcoin be viewed as a store of value, akin to a “digital version of gold?”  

Rick, Michael Novogratz has been an early proponent of Bitcoin, in particular, and crypto-currencies, in general, so pardon the cynicism if one says that he is talking his own book of business. 

To the specifics of whether Bitcoin should be considered a “digital version of gold,” it depends on whether Bitcoin is capable of retaining its value in a manner equal to or better than physical gold. To the extent that Bitcoin is becoming accepted as a payment mechanism, it is superior to gold. 

However, as Novogratz appears to hang his view of Bitcoin’s value on the growing risk of debasement of fiat currencies and raised prospects of a higher inflation regime, a significant part of the argument for Bitcoin (and gold, for that matter) depends on the extent to which a higher inflation regime becomes the norm. Clearly, monetary and fiscal policy are intent on reflation and allowing the global economy to run hotter than in the past. Apart from this element, the shift away from globalization occurring under the previous Administration promises to constrain supply chains leading to the PPI spike seen last week. 

Bottom line, Bitcoin is not yet the digital equivalent of gold, but a secular rise in inflation may assist it on its way to becoming so.

Can you address the scarcity issue?  In the same interview, it was discussed that the scarcity of bitcoin (there is a finite amount of around 21 million) will reinforce its value.  

Rick, the design of Bitcoin is to allow a maximum of 21 million tokens to be mined, a limit expected to be reached in 2040, versus a level of 18.5 million mined by mid-December 2020, or roughly 88% of the expected total. 

As such, the quantity of Bitcoin is relatively fixed. As institutional and regulatory acceptance of Bitcoin as a payment medium grows, this will create greater demand for a relatively fixed supply, with Wall Street expectations that the price of Bitcoin could rise to anywhere in a range of $146,000 to $400,000. Clearly, if these forecasts are accurate, then Bitcoin still has the potential for appreciation from current levels.

Finally, is there any easy way for the average investor to participate?  I personally have used a platform called CoinBase, but it forces you to choose one particular crypto-currency. Is there an ETF, Mutual Fund or a company that can give people some exposure? 

Rick, at Laidlaw Wealth Management, we have created a Disruptor Portfolio which offers investors exposure to a range of emerging technologies such 5G, artificial intelligence and blockchain. A range of ETFs are used to implement a diversified approach to each technology. For blockchain, the Amplify Transformational Data Sharing ETF (NYSE: BLOK) is employed in the Disruptor Portfolio. 

In approaching a fast market such as Bitcoin, investors are better served to gain indirect exposure so as to moderate the risk of possible loss and thereby improve the likelihood of realizing sustainable gains.

February 1st., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 39 – Will The “Reddit Mob” Bubble Derail The Stock Market Recovery?


In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses whether The Federal Reserve can be thought to have abandoned the concept of moral hazard, the strength of the corporate earnings recovery as shown in the 4Q 2020 earnings season, the growth in ESG portfolios and how this may impact technology companies, and the significance of the current speculative bubble in heavily shorted assets.

The topics discussed in this episode are: Has The Fed abandoned moral hazard?, What are the take-aways from the strong 4Q 2020 earnings season? What are the broader implications of ESG’s rise as a portfolio management framework?, and Does the “Reddit Mob” speculative wave mark the end of the current stock market advance? 

Please tune in for more timely insights.

Hashtags & Stock Symbols: #COVID #Congress #Economy #Fed #StockMarket #SP500 #RedditMob $IWO $IWN $XLE $MCHI $EWT $EWY 

Episode 39 – Will The “Reddit Mob” Bubble Derail The Stock Market Recovery?


Hello, and welcome to another episode of “A Brighter Future.”  I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined again by David Garrity, Chief Market Strategist for Laidlaw & Co. 

David, I hope you are safe and warm as the Northeast is in the middle of a major snow storm, while the market is in a storm of its own.

Rick, turbulence is the watchword here, most certainly. As harsh conditions generally prompt one to batten down the hatches, it is not surprising to see the news last week that hedge funds were reducing their books as the S&P 500 sold off -3.31%. Currently, in line with our “Laidlaw Five” forecast, we expect the volatility to continue until such time as COVID vaccination efforts gain better traction. 

David, what a week. We will address GameStop later in the episode, but today being February 1st means we are one month in for the stock market in 2021, but I think this might be a month we’ll be talking about and dealing with all year because this was truly not an ordinary January:   

  • Georgia had a runoff for both of its Senate seats and Democratic challengers won both races, leaving the Senate split 50-50 between Democrats and Republicans.
  • There was an insurrection at the U.S. Capitol that resulted in five deaths.
  • The House of Representatives voted to impeach President Trump before he left office for an unprecedented second time.
  • Joe Biden was inaugurated the 46th President of the United States of America and Kamala Harris became the first female, first black, and first Asian-American to hold the office of Vice President of the United States.
  • A spokesman for China’s defense ministry warned Taiwan that independence means war.
  • Fed Chair Powell said he doesn’t see the Fed raising rates anytime soon and that inflation is going to be allowed to run above +2.0% for a time.
  • Hot on the heels of Congress passing an additional $900 billion stimulus package, President Biden proposed a $1.9 trillion stimulus package.
  • The Russell 2000 gained +5.0% and the S&P 500 energy sector gained +3.7%.
  • The 10-year note yield climbed back above 1.00% for the first time since March 2020.
  • COVID vaccination efforts got off to a slow start, but gained some momentum as the month progressed. In turn, Johnson & Johnson (JNJ) said its single dose COVID vaccine candidate is 66% effective in preventing COVID, but 85% effective in all regions in protecting against severe COVID cases and provides complete protection against hospitalizations and death.
  • And finally, driven by retail interest and a populist movement that gathered momentum on social media, there was an epic short squeeze on heavily shorted stocks — GameStop (GME) chief among them — that reportedly upended a number of hedge funds, commanded the attention of Congress and regulators, and pitted Main Street against Wall Street.

Question 1:

So, given the rather full menu I just ran down, I’d like to start our discussion today on the topic of the Fed. 

In your opinion, has this Fed abandoned the idea of “moral hazard?”

I ask this in light of the fact that both the Fed’s statement and Powell’s commentary at the press conference were extremely dovish.  In fact, there was zero hint that the FOMC was even contemplating tapering QE, and in fact there were multiple mentions by Powell about expanding QE if necessary. As a result, several reporters asked Powell if he was concerned the Fed’s policies (QE and others) risked creating bubbles and encouraging the types of behaviors that have led to for example the GameStop fiasco.

Rick, moral hazard occurs when an entity has an incentive to increase its exposure to risk because it does not bear the full costs of that risk. The notion of the “Fed Put” has been popular since Federal Reserve Chairman Alan Greenspan lowered interest rates in 1998 to forestall a stock market sell-off after the collapse of hedge fund Long-term Capital Management. 

While the “Fed Put” is clearly alive and well given the amount of monetary relief provided by The Fed and other central banks to the global economy since the onset of COVID, it is not fair to say that the idea of moral hazard has been abandoned. Moral hazard generally applies to a situation where an entity does not bear the full burden of the consequences of their own bad decisions. 

In the context of the COVID pandemic, it is fair to say no one intentionally went out to catch the disease, it was an exogenous shock that brought the global economy to a crashing halt. However, the Fed must be mindful that while it has succeeded in helping to stabilize the global economy and supported the capital markets, it has also enabled extreme “risk-on” moves in areas of the stock market such as heavily shorted stocks.    

 Question 2:

David, as we have discussed, there was an ebb and flow in January in which pro-cyclical plays led the way some days and the mega-cap stocks led the way other days. 

Small caps did very well for most of the month but faded in the closing stretch. The energy sector ran hot to start the year, but cooled off considerably in the back half of the month as did the financial sector hot start, cold finish.

There wasn’t a lot of consistency throughout the month of January, except for the Federal Reserve, which as we just discussed promised to keep filling the punch bowl and Congress, which continued to squabble about providing more stimulus.

There has though been one consistent thing though, and that’s a solid fourth quarter earnings reporting season.  S&P 500 companies are blowing expectations out of the water.  I know you are scheduled to be on Bloomberg Radio later this week to discuss this very topic but was hoping maybe you could offer a “sneak peek” into your analysis. 

Rick, despite all the aggravation to the stock market since the start of 2021, the baseline that investors need to focus on is the cyclical recovery in corporate profits which continues to outperform expectations. 

Along with generally positive developments around COVID vaccines, it is the profit recovery that we credit with keeping stock market losses moderate in January with recovery plays such as the energy sector, small-cap stocks and overseas markets showing positive progress.

Performance: Year-to-date 2021 – Style, Market Cap & Sector
Index Price Change vs. S&P 500
S&P500 -1.1%  
  – Growth -0.5% 0.6%
  – Value -1.6% -0.5%
Russell 2000 5.0% 6.1%
  – Growth 4.8% 5.9%
  – Value 5.0% 6.2%
S&P Energy 3.7% 4.9%
S&P Health Care 1.4% 2.5%
S&P Real Estate -0.4% 0.7%
S&P Technology -0.8% 0.3%
S&P Utilities -0.9% 0.2%
S&P Communication Services -0.9% 0.2%
S&P Financials -1.8% -0.7%
S&P Materials -2.4% -1.3%
S&P Industrials -4.3% -3.2%
S&P Consumer Staples -5.0% -3.9%
Performance: Year-to-date 2021 – Geographic  
Index Price Change vs. S&P 500
S&P500 -1.1%  
– U.S. Dollar Index 0.7% 1.8%
MSCI China 8.1% 9.2%
MSCI Taiwan 4.3% 5.4%
MSCI Emerging Markets 3.2% 4.3%
MSCI South Korea 2.4% 3.5%
MSCI Frontier Markets 2.2% 3.3%
MSCI Singapore 0.3% 1.4%
MSCI Emerging Mkts ex-China 0.1% 1.2%
MSCI UK -0.2% 0.9%
MSCI EAFE -0.8% 0.3%
MSCI Japan -0.8% 0.3%
MSCI Eurozone -1.7% -0.6%
MSCI India -2.7% -1.6%

Relative to 4Q 2020 earnings season, roughly 37% of the S&P 500 index companies have reported results and their out-performance of Street expectations continues as they are beating EPS estimates by +13.6%, well above the 5-year average of +6.3%. The 4Q 2020 performance is on track to show the fourth best beat percentage since at least 2008 as 82% of companies have beaten their estimates so far this quarter, close to the record 84% from Q2 and Q3 2020. 

Even more surprisingly, 4Q 2020 is now on track to show positive revenue comparisons to 4Q 2019. The current consensus is for +1.7% revenue growth; analysts were looking for flat (+0.1%) when earnings season began. Aggregate S&P company revenues have thus far beaten analysts’ estimates by +3.2%, the highest on record.

Most importantly, this is prompting Wall Street analysts to raise numbers for 1Q 2021, by +3.4%. This is an unusual occurrence as the Street is usually cutting numbers by this point in the current quarter. The critical analysts estimates here are those for 3Q and 4Q 2021, which represent the best Street guesses for normalized post-COVID corporate earnings. These are also grinding higher, up +2.3% since January 8th. 

Current estimates for 2H 2021 are $91.42/share, up +14% from 1H 2021’s $79.96.

Annualizing 2H 2021 results in earnings power for the S&P 500 index of $182.84/share, indicating a market multiple of 20.3x which is acceptable if The Fed stays the course in not raising interest rates over the course of 2021.

Question 3: 

David, let’s talk about a completely different topic, but one that prior to last week was starting to get a lot of attention and that’s ESG investing which looks at a company’s Environmental, Social, and Governance strategies.  

Maybe you can share a bit more with our listener’s what the “ESG movement” means and how this movement, being driven by the likes of BlackRock’s Larry Fink, could have a major impact on their portfolios. 

Rick, as we have discussed in prior conversations, the ESG approach to portfolio construction has garnered greater traction as investors across all categories have come to accept that profit maximization no matter the costs is not the best way to run an economy. In this regard, how companies manage all stakeholder constituencies – customers, communities, employees, the environment – is being more clearly seen as setting the benchmark against which company management should be measured. 

Interestingly, this shift dovetails with growing concerns across society with the advent of increased calls to examine how technology companies, and most specifically social media companies, have impacted the economy, politics, and, more broadly, society at large. Some have said an invisible coup has been engineered by technology companies as they have created an ecosystem of surveillance capitalism that has for all practical intents and purposes overthrown democracy (see: https://www.nytimes.com/2021/01/29/opinion/sunday/facebook-surveillance-society-technology.html?referringSource=articleShare). This growing awareness could lead to some technology companies being excluded from ESG portfolios. 

There is an awareness within the technology sector of the growing importance for companies to distinguish their business models from the “data capture at all costs, data is the new oil” approach. Speaking recently in Brussels at an event marking International Data Privacy Day, Apple CEO Tim Cook said, “If a business is built on misleading users on data exploitation, on choices that are no choices at all, then it does not deserve our praise. It deserves reform. We believe that ethical technology is technology that works for you. It is technology that helps you sleep, not keeps you up. It tells you when you’ve had enough.” (for full article, see: https://www.inc.com/justin-bariso/tim-cook-may-have-just-ended-facebook.html)

As we can see here, Rick, ESG is an approach that will have consequences that are far-reaching not just in terms of how assets are managed, but on the conduct of business as a whole.

Question 4:

David, 2020 may be over, but this past week added to the list of unique market behaviors that started last year. GameStop and “short squeeze” became household names overnight, as the stock skyrocketed and the narrative around small day traders versus massive hedge funds captured nearly all the attention in recent days. 

If history is a guide, GameStop will not maintain its grip on the headlines, repeat its parabolic share-price ascent or remain the driving force behind overall stock-market moves. But as we bring this week’s episode to a close, let me ask if you think it represents a broader condition of the market, one in which speculation and animal spirits have produced abnormal returns in certain investments? Is this the canary in the coal mine for a stock-market bubble or should this be ignored?  

Rick, it never pays to underestimate the capacity of humans to engage in irrational speculation. As Charles MacKay said 180 years ago, “Every age has its peculiar folly—some scheme, project, or phantasy into which it plunges, spurred on either by the love of gain, the necessity of excitement, or the mere force of imitation.” 

So, in the current context of the “Reddit Mob”, we can see human history repeating, a tradition where nothing succeeds like excess. Clearly, investors should be well aware that the current wave of manic speculation will end badly, just as all those that have gone before have. 

We expect that traditional tools will be employed to pop the speculative bubble that has developed around heavily shorted assets, whether it be stocks or commodities. These would include margin requirements, stock loan pricing, as well as broker-dealer compliance with customer suitability requirements. Along the line of our earlier discussion, there should be an examination of whether social media has veered into areas such as investment advice that is subject to regulatory compliance.

While the unwinding of the current “Reddit Mob” mania will involve further market turbulence, Rick, investors should look to the corporate profit cycle recovery and COVID vaccination efforts as underpinnings for the stock market that will outlast the current bubble in heavily shorted assets.

January 25th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 38 – Is Infrastructure Investment Necessary For U.S. Economy To Keep Up With The Competition?


In this episode, Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the growinglikelihood of a stock market correction, the In this episode Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the factors supporting the current market advance and handicaps three major risk factors, the significance of improved market breadth following the November election and how U.S. market sectors and overseas markets have fared so far in 2021, the concepts around Modern Monetary Theory and how they apply to current U.S. economic policy, and the need for significant infrastructure spending to support long-term U.S. growth prospects.

The topics discussed in this episode are: How to handicap the risks to the current market advance?, How should we view the market’s greater breadth and how are different sectors and geographic markets performing year to date? Should Modern Monetary Theory be viewed as a risk or a benefit?, and What is to be gained from a substantial infrastructure investment program and what companies would benefit?

Please tune in for more timely insights.

Hashtags & Stock Symbols: #COVID #Congress #Economy #Fed #StockMarket #SP500 $IWO $IWN $XLE $MCHI $EWT $EWY

Episode 38 – Is Infrastructure Investment Necessary For U.S. Economy To Keep Up With The Competition??


Hello and welcome to another episode of “A Brighter Future.” I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and I am joined again by David Garrity, Chief Market Strategist for Laidlaw & Co.

David, I know you were disappointed to miss out on skiing due to rain over the holidays, but I saw you were back on the slopes last weekend.

Rick, while the conditions this past weekend were far improved, the weather was frigid with sub-zero wind chill as winds gusted over 30mph. We enjoyed the skiing, but called it early as we were chilled to the bone. Never have I heard happier cheers at the arrival of hot chocolate and other warm beverages than this past weekend.

I took the opportunity to tell our boys of Jack London’s short story, “To Build A Fire,” of how a newcomer to the Yukon Gold Rush decided to venture forth with his dog into -75 degree Fahrenheit weather to join up with a band of prospectors. Needless to say, the story doesn’t end well for the man, but husky being more adapted to the environment survives.

While retelling the story was meant to impart a respect for the cold and its dangers, a similar warning may be offered to current day prospectors in the financial markets where conditions have likewise gone to potentially dangerous extremes.

Question 1:

David, we saw equities add to their solid nine-month gains last week, with major indexes reaching fresh all-time highs as Joe Biden was sworn-in as the 46th president of the United States. The recent two-and-half-month stretch from Election Day to the inauguration marks the strongest post-election performance since 1932, with the S&P 500 returning +14%.

For comparison, the second-best election-inauguration gain took place in 1960-1961 when Kennedy assumed power, with the S&P 500 gaining +9%. In addition, the discovery and rollout of effective COVID vaccines have raised hope that restrictions will gradually be lifted, accelerating the economic recovery and return to normalcy.

So, David, we have rising corporate profits, easy Fed policy, and loose financial conditions – a powerful combination for rising equity markets and, then, if you add in that these conditions, historically, occur in the early and mid-cycle phases, rather than the end of a bull market and it looks like we are set up for 2021 to be a good year.

Rick, all the conditions you mention are indeed supportive of positive market returns, but there are clear signs of excess that should caution investors to book profits as these are made and not be complacent in the view that gains will continue to compound as they have off the March 2020 lows.

Just to recap, the four pillars of recovery remain intact, namely, 1) Historic Fed stimulus, 2) Massive Federal stimulus, 3) Vaccine optimism and 4) No Double-Dip Recession. The fifth pillar discussed previously, Divided Government, went by the wayside earlier this month with the Democrats winning control of the U.S. Senate. However, investors should note that there are three leading candidates that pose a risk to further market progress, namely, 1) Possible Tax increase, 2) Stimulus Disappointment and 3) Vaccine Disappointment.

As to the likelihood of each risk materializing, we take Janet Yellen’s comments during her Senate confirmation hearing that the 2017 tax cut would not be reversed until the economy fully recovers as providing sufficient reassurance on the first point. Relative to stimulus disappointment, we think this hinges on whether the filibuster is removed as part of the new Senate rules. Leaving the filibuster in place promises to hamstring the Biden administration’s ability to move quickly forward with its $1.9 trillion fiscal stimulus plan. On the question of vaccine distribution, there are clear indications from countries across the world that vaccination efforts are being hampered by supply chain issues limiting availability as well as moves by providers such as Pfizer to price by dose, not vial, in order to maximize profit. Separately, news that Merck is ceasing vaccine development efforts may diminish future increases in supply, but there are expectations that Johnson & Johnson will shortly announce the successful conclusion to its vaccine development efforts.

Bottom line, Rick, the market has always traded higher on rumored expectations and then taken profits on the actual news. A great deal of hope is now discounted in the market, something the final outcomes may not support. Last week’s trading around the 2020 4Q results from IBM and Intel certainly gave a clear example of that mindset being very much present in the current market. Accordingly, we advise investors to book profits as they are made and not be so inclined to let their winners run.

Question 2:

David, there has been a lot of media attention to the concept that the S&P 500 Index is being carried to all-time record highs by a small handful of stocks that we all know and whose products and services we use every day some maybe more often during the pandemic.

And while that might have been the case at certain points in the past, over the last five months or so the widening breadth has become much more pronounced. So much so that since late October, the equal-weighted S&P has outperformed the capitalization-weighted S&P by approximately +5%, meaning more companies are participating in the market’s gains.

But it is not just large-capitalization stocks that are moving higher. The Russell 2000 Index, an index tracking stocks of small-cap companies has been setting new record highs over the course of the last six months and has outperformed the SPX by more than +30% since late September.

Can you share with our listeners why having a smaller company index outperforming the larger company index at the same time a wider swath of those big companies are carrying the S&P to new all-time record highs is a meaningful positive when trying to gauge the underlying strength of the stock market.

Rick, last year we had discussed the narrow nature of the market’s advance and how historically this has been indicative of a potential top in the market. Consequently, the fact that we have seen market breadth improve following the November election with a record +41% advance by the small-cap Russell 2000 index since the end of October is clearly encouraging.

The major reason underlying this advance is the expectation that with COVID vaccines being distributed and more aggressive fiscal relief being advanced by the new administration that the prospects of GDP growth accelerating by the economy reopening are improved.

So far, S&P 500 sector performance in January bears out the expectations for economic reopening with the Russell 2000 (+9.8%) and the Energy sector (+11.0%) substantially outperforming the S&P 500 index.

Performance: Year-to-date 2021 – Style, Market Cap & Sector
Price Change
vs. S&P 500

– Growth
– Value
Smaller Market Capitalization:

Russell 2000
– Growth
– Value

S&P Energy
S&P Health Care
S&P Financials
S&P Materials
S&P Technology
S&P Communication Services
S&P Real Estate
S&P Utilities
S&P Industrials
S&P Consumer Staples

Relative to how markets outside the U.S. have started off 2021, it is clear that better ability to manage COVID containment efforts have redounded to the benefit of China, Taiwan and South Korea, but most important for investors to note is that almost all overseas markets with the sole exception of the Eurozone have outperformed the S&P 500 despite the U.S. Dollar weakening only modestly.

Performance: Year-to-date 2021 – Geographic

Price Change
vs. S&P 500

– U.S. Dollar Index
Country Indices:

MSCI China
MSCI Taiwan
MSCI South Korea
MSCI Emerging Markets
MSCI Emerging Markets ex-China
MSCI Singapore
MSCI Frontier Markets
MSCI India
MSCI Japan
MSCI Eurozone

Question 3:

David, in keeping with a tradition here on “A Brighter Future,” I’d like to spend a few minutes on one of our favorite topics – The Fed.

When the coronavirus pandemic hit last February, the Fed’s balance sheet stood at $3.94 trillion. Today, it’s $7.37 trillion and it is going even higher as the Fed has proclaimed that it will buy at least $80 billion per month of Treasury securities and at least $40 billion per month of agency mortgage-backed securities “…until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”

The Fed’s balance sheet today is 35% of GDP, but it is slated to hit 42% of GDP in 2021 based on the trajectory of the stated purchase program.

In addition to the Fed, we now have Janet Yellen who will be our Secretary of Treasury, saying at her nomination hearing that the U.S. needs to “Act Big,” taking advantage of historically low interest rates, to combat the effects of the pandemic and that the economic benefits will outweigh the costs of this relief package.

So, my question, David, is have we accepted that Modern Monetary Theory is our way out of the “hole” created by the pandemic?

As a reminder to our listeners, Modern Monetary Theory essentially says that as long as government spending creates a higher growth rate than it does inflation, any debt or deficits the spending creates really don’t matter. Simply put, MMT abandons the idea that government needs to be able to afford their spending.

Rick, as the practical upshot of fiscal policy over the past 20 years, no matter the political party in power, has been to raise government spending as long as it supported growth in real GDP, so we can say that Modern Monetary Theory has been practiced in stealth mode and is now out in the open.

In discussing present fiscal policy, one point to make here is the significant difference between the COVID Depression and the 2008 Financial Crisis. With COVID the global economy was impacted by the exogenous force of the pandemic that forced shutdowns worldwide from which full recovery will depend crucially on effective COVID containment and vaccination efforts, so the need for fiscal and monetary stimulus is clearly to sustain the economy until such time as that occurs.

With the 2008 Financial Crisis, it was the mispricing of risk and an overabundance of overleveraged borrowers that prompted a collapse particularly in the financial services sector as evidenced by the failure of Lehman Brothers and the take-under of Bear Stearns by J.P. Morgan. Then in 2008 it could be said that the recipients of relief were being bailed out from their own errors, that moral hazard had occurred. Not so in 2021.

The advantage to the U.S. applying MMT is that as the issuer of the world’s reserve currency, the ability to finance the related deficits is unimpaired. As real long-term interest rates are negative, the financial markets are giving the U.S. a clear signal that if there were ever a good time to implement further fiscal stimulus, that time is now.

Question 4

David, as we bring this week’s episode to a close, I think our listeners would be interested in your thoughts on an investment theme that President Biden specifically addressed in speech – Infrastructure.

In a speech last week, President Biden said, “It’s time to stop talking about infrastructure and to
finally start building an infrastructure so we can be more competitive.” He added that his plan “would produce millions of good-paying jobs that put Americans to work rebuilding our roads, our bridges, our ports to make them more climate-resilient, to make them faster, cheaper, cleaner to transport American-made goods across our country and around the world.”

Both parties have agreed for four years that increased infrastructure is paramount, but intraparty squabbling has blocked a spending plan from being passed through all required channels. So, with a Democratic control of Congress and the presidency does it make it more likely that some kind of infrastructure bill will be passed into law? If so, could be some examples of companies/industries poised to benefit from increased infrastructure spending?

Rick, it is true that new administrations proposing bold infrastructure initiatives has become something of a political chestnut in that all say they are in favor of it, but then fail to pass any of the enabling legislation.

While there will be a rapid short-term economic rebound once there is widespread vaccination, even without new fiscal stimulus, the importance of and the need for infrastructure investment comes into focus when one considers the long-term growth prospects for the U.S. economy. A big increase in public investment is beneficial for many reasons. It would help sustain the economy beyond the vaccination bounce; it would help repair our decaying infrastructure; and it could be an important part of a climate strategy.

How should this public investment surge be funded? Actually it does not need to be paid for at all. Even before the pandemic the U.S. was an economy awash with more savings than the private sector wanted to invest, so that the government could borrow money very cheaply. In effect, markets have been begging Washington to borrow even more, and it would be good for everyone if Congress obliged and used the money to invest in the future.

Whether the GOP under Senator McConnell will allow this to happen is the main question now. Under the previous administration, McConnell did not want a big infrastructure bill. His objections probably flowed not from concerns that such a bill would not work, but from fear that it would — and in working, would help to legitimize an expanded role for government. Now, if McConnell would not permit infrastructure legislation to come to the floor with a Republican in the White House, he will certainly not do so during the Biden administration, which is just another reason why the filibuster needs to be set aside.

Now, assuming the political roadblocks can be removed to passing an infrastructure program, the trade for investors can be straight forward in considering the engineering, equipment and materials suppliers that would benefit which with the Biden administration’s “Buy America” program would be names such as Caterpillar (CAT), Fluor (FLR) and Vulcan Materials (VMC).

To touch back to our discussion of MMT, Rick, having greater public spending go towards building back better in terms of infrastructure spending it will serve to increase the GDP growth prospects for the U.S. economy not just over the next year, but over the longer term which is more important in providing support for the growth expectations that have been factored into the U.S. financial markets presently.

January 11th., 2021 – A BRIGHTER FUTURE, with Laidlaw.

A Brighter Future with Laidlaw, Episode 37 – What Risks Emerging As The Market Scales New Heights?


In this episode, Richard Calhoun, CEO of Laidlaw Wealth Management, discusses the growinglikelihood of a stock market correction, the pillars supporting further stock marketadvances and whether they are intact, the volatile rise of Bitcoin as an alternative asset,and the prospects for “Work From Anywhere” (“WFA”) continuing.The topics discussed in this episode are: How extended is the current market advance?, Howrobust are its underpinnings and have they been in any way compromised by recentevents?, Is it possible to make a long-term case for owning Bitcoin?, and What are thelikelihood and investment implications from“WFA” continuing?Please tune in for more timely insights.

Please tune in for more timely insights.

Episode 376 – Episode 37 – What Risks Emerging As The Market Scales New Heights?


Hello and welcome to our first episode of “A Brighter Future” for 2021. I’m Rick Calhoun, CEO of Laidlaw Wealth Management, and back for our second season is David Garrity, Chief Market Strategist for Laidlaw & Co.

David, I hope you had a nice, and of course socially distanced, holiday season.

Rick, the holiday break was enjoyable, thank you, but not without its challenges. I rented a house in northern New Hampshire, thinking that being in The North Country with the snow would be a good way to be socially distanced with the opportunity to get some skiing in. Two things happened. First, the rainstorm that swept the East Coast on Christmas Day washed away the snow cover. Second, I didn’t count on the plumbing in the house’s one bathroom clogging on New Year’s Day, so the household had to head back home that night, driving through a blizzard. We made it back safely, but clearly it made for some unsought-for holiday excitement. As I said to the plumber who came late on New Year’s Day, but failed to clear the clog, “2021: new year, same stuff.”

David, to say 2021 has started off with a bang is bit of an understatement. Equity markets are off to a strong start across the globe, with major indexes hitting fresh record highs last week. Democrats secured the Senate majority following a pair of narrow runoff victories in Georgia. Ten-year yields moved above 1% for the first time in nine months, while small-cap and international stocks outperformed, signaling optimism around the outlook for the post-vaccine phase. Adding to the positive sentiment, WTI oil prices rose above $50, a level last seen in February, as Saudi Arabia announced an unexpected production cut.

Last week also brought some unfortunate, unfamiliar political and social events, but from an investment perspective there were familiar themes: economic data revealed a mix of resiliency and lockdown stress, political uncertainties captured the headlines, and the stock market powered higher.

In a week when the logical market response may have presumably been more negative, the positive gain in stocks is a reminder that the market ultimately takes its direction from fundamentals (the economy, corporate profits, interest rates) and highlights the importance of a long-term view and a disciplined investment strategy aligned to your personal goals, not the news cycle.

Question 1:

So, David, that’s where I would like to start today, having closed the book on a year that contained a global pandemic, a presidential election, a historic recession, an unprecedented bear market followed by an equally unprecedented market rebound, the logical question is what happens next because for example, the market has traditionally done well in the year after a presidential election as well as the year after a recession?

Rick, somehow the phrase, “wild ride,” just doesn’t seem to go far enough in describing 2020 and the early days of 2021. While the stock market’s historical pattern following elections and recessions would offer the prospect of positive returns, something we forecast for 2021 with a “Laidlaw Five” S&P 500 target of 4000, there should be some measure of caution as this market has come quite far, quite fast.

A recent study of 6-month returns for the S&P 500 since 1958 shows only five instances where the market has gained more than +38.0%. On average the S&P 500 over this time period has generated 6-month returns of +4.3% with a standard deviation of +/-11.1%. Based on this, the market’s +45.1% rally at the 6-month mark in September 2020 from the March 2020 low is more than three standard deviations above historical norms and by definition an extraordinary performance. So, what happens next?

Follow-on returns after such performances in the past have been on balance modestly positive (i.e. One Month, +2.3%; Two Months, -0.7%; Three Months, +4.6%; Four Months, +3.4%). In contrast, the current rally (now up +70.9% from the March 2020 low through last Friday’s close) has also broken records in its follow-on performance (i.e. One Month, +4.8%; Two Months, +12.0%; Three Months, +14.1%). On this basis, we have to acknowledge that market performance is extended and possibly vulnerable to disappointment should, for example, 4Q 2020 earnings not substantially exceed expectations as the S&P 500 is trading at 23x 2021 estimates.

That said, we believe a reasonable expectation should be for a -10% correction sometime during 1H 2021. Assuming that the transition to the new administration is peaceful and Congress successfully passes further fiscal stimulus along with there being improved COVID vaccination efforts globally such that economic recovery can unfold, we believe the market will trade higher over the course of 2021, but the ride is likely to be bumpy so best buckle up.

Question 2:

David, last year you discussed the “Four Horseman” of the rally and now we are hearing about the “Five Pillars of the Rally”

Historic Fed Stimulus
Historic Fiscal Stimulus
Vaccine Distribution
Divided Government
No Double Dip Recession
Much of the discussion has been as long as they remain in place then the chances of a material decline in stocks that puts the rally in jeopardy is slim. However, one of those pillars, Divided Government, has now collapsed. In looking through history, I found that when a Democratic president took office following a Republican White House, the average stock market return in the following year was +14.1%.

I also discovered that when an election produced the same political party in control of the White House and Congress, the average return the next year was +11.8% and when it was the Democratic party in control, the market returned +13.7%.

So, is the Divided Government theory flawed or have things changed?

Rick, the thought that divided government is beneficial in stock market terms is not a flawed concept as it serves to limit the ability of an administration to implement sweeping policy programs without restraint. The general experience has been that legislative gridlock has been favorable to the stock market.

Now, with last week’s developments, the question is not so much whether the government is divided, but more to the point whether it has been critically destabilized. I believe the stock market has been supported in this moment of political turmoil by the expectation that the Biden Administration will rapidly pursue further fiscal stimulus.

The prospect of this effort proving successful was bolstered as you indicated by the outcome of the recent Senate run-off elections in Georgia that now have the Democratic Party in control of both houses of Congress and The White House. With the margin of majority narrow, bipartisanship will be necessary to pass the related legislation. Whether this proves to be a vain hope in the face of last week’s partisan extremes remains to be seen.

We are at a moment where the integrity of our political institutions is being sorely tested. The law needs to be upheld while at the same time the economy needs to be supported. Government has to be capable of acting in the interest of the people, not the hostage of a political party.

Question 3:

David, let’s look at a completely different topic for a few minutes, crypto currencies and the incredible, almost parabolic move of Bitcoin.

In our “Laidlaw Five” announcement, we said that it was possible inflation could rise over the course of 2021 causing Bitcoin to hit $25,000. However, it has now moved through $40,000!!

Is Bitcoin “prone to a sort of correction,” and will it resemble that seen three years ago or will the growing interest in blockchain and cryptocurrencies protect prices from returning to the recent lows?

Rick, with inflation break-evens rising and the U.S. Dollar weakening, investors are looking for various means to hedge against depreciation risk. With negative real interest rates, such traditional inflation hedges as gold should be gaining. However, gold peaked at $2,010/oz in early August 2020 and is off -8% since. Meanwhile, over the same time frame, the cryptocurrencies, specifically Bitcoin, has risen +177% to $31,100. It appears gold has some competition as an inflation and currency hedge as Bitcoin is giving it a run for its money.

There are a number of reasons for this such as it is easier to maintain a digital wallet than a physical vault and transaction settlement is more frictionless with Bitcoin than gold. Viewing it as an alternative asset substitute for gold, various investment firms have issued forecasts that Bitcoin could ultimately reach a valuation level of $146,000 to $400,000. Clearly, animal spirits are likely to remain alive and kicking in the cryptocurrency sector when it comes to considering the possibility of realizing such price objectives.

However, investors should be cautious when it comes to Bitcoin and other cryptocurrencies. There are a limited number of use cases, albeit they are growing as regulatory authorities such as the U.S. Treasury’s Office of the Comptroller of the Currency (“OCC”) have indicated that financial institutions may consider adopting blockchain and stable tokens for use in their operations as a means of increasing transaction integrity and speeding transaction settlement. The investment case for Bitcoin and blockchain more broadly exists, but exposure should be limited at most until further developments show increased regulatory approval and institutional adoption.

Question 4

David, as bring this week’s episode to an end, let’s shift gears and look at more macro topic – the future of “work from anywhere”

Prior to the COVID pandemic a movement was already brewing within knowledge-work organizations. Personal technology and digital connectivity had advanced so far and so fast that people had begun to ask, “Do we really need to be together, in an office, to do our work?” Well, we got our answer during the pandemic lockdowns as we learned that many of us don’t in fact need to be co-located with colleagues, on-site to do our jobs.

We have seen that individuals, teams, even entire workforces, can perform well while being entirely distributed.

So, now we face new questions:

Are all-remote or majority-remote organizations the future of knowledge work?
And is work from anywhere (“WFA”) here to stay?
Rick, we know that changing human behavior can take years, if not generations. However, it has been proven time and again over the course of history that individuals and societies can demonstrate remarkable resilience in the face of adversity and the adaptations necessary to survive and prosper. The COVID pandemic crisis has proven to be such a moment that has forced businesses to shift to a distributed, socially distanced paradigm in order to operate successfully or otherwise face a not insignificant risk of failure.

As we are seeing, containing COVID is not something that is easily achieved. Vaccination efforts are proceeding slowly, the virus is mutating into more virulent strains and there are new outbreaks occurring around the world with last week bringing news of an outbreak in Hebei, China, a city of 11 million people. Guess when it comes to COVID and China, what goes around, comes around. Bottom line, the effort to contain COVID is going to require constant vigilance as the mutations developing are more infectious.

As such, public health policy alone is likely to demand the continuation of WFA. There are myriad implications from this ranging from widening income inequality along the lines of educational achievement as in-person businesses are challenged to a substantial restructuring around the use of and need for commercial buildings over the medium term.

Relative to investment strategy, the persistence of COVID and the semi-permanent adoption of WFA serves to underpin the necessity of an allocation to the Technology sector specifically and towards Growth more broadly as economic recovery prospects are challenged until such time as COVID is brought fully under control.

For now, COVID is outstripping the development and implementation of measures to contain it. That said, investors should keep portfolios balanced as the start of 2021 may prove to be more volatile to the downside.

Featured Guest: David Garrity

Chief Market Strategist, Laidlaw Ltd.

Mr. Garrity has had an extensive career in investment research. In 2000, Mr. Garrity was appointed Global Research Coordinator – Automotive at Dresdner Kleinwort Benson. Soon after, he drew media attention during his time at Dresdner Kleinwort Benson, when he put a 1,000 price target on Commerce One (CMRC). The high-profile call marked a turning point in Garrity’s analyst career as he went from Auto Analyst to Technology Analyst. Mr. Garrity is an authority on blockchain technology, highlighting the difference between cryptocurrency and the underlying blockchain.

Interviewed by: Richard J. Callhoun

CEO, Laidlaw Wealth Management

Mr. Calhoun is the Chief Executive Offer of Laidlaw Wealth Management – a wholly subsidiary of Laidlaw Holdings. Previously Mr. Calhoun was the President of a Private Investment Boutique firm in MD/DC Metro market and prior to that was a Managing Director with Well Fargo Advisors Financial Network (FiNet), the Independent Advisor Channel of Wells Fargo Advisors. Mr. Calhoun has also held leadership roles with Smith Barney and Legg Mason. He began his career as a Financial Advisor with Merrill Lynch.

Partner Profiles

These podcasts feature in depth interviews with partners who offer unique investment strategies and services complimenting Laidlaw’s capabilities and offering “ best in class” solutions for our clients.

A BRIGHTER FUTURE, with Laidlaw, in this episode Richard Calhoun, CEO of Wealth Management at Laidlaw and Company discusses thematic investment opportunities with Paul Dellaquila, President of Defiance ETFs. Defiance ETFs were created to take advantage of certain themes which weren’t covered by existing ETF providers. They currently offer three thematic ETFs 5G, Food & Sustainability and Quantum Computing and Machine Learning.

A BRIGHTER FUTURE with Laidlaw, Episode #2 an interview with Robert Holderith, CEO of Green Harvest Asset Management which provides tax beneficial investment products and services. Robert and Ken Mathieson, Head of Laidlaw Asset Management, discuss what makes Green Harvest unique within the tax-loss harvesting space.

Laidlaw Five: The year ahead, 2021

2021 Outlook – Five Forecasts

With 2020 drawing to a close, the Laidlaw Investment Policy Committee is updating the “Laidlaw Five” forecasts for 2021 to offer investors thoughts on five particular areas to take into account when considering how best to navigate the capital markets in the year ahead and which will be periodically revised as the year unfolds and significant events necessitate.

However, before hurling ourselves into the unknown, it is wise to review just how well our 2020 forecasts fared in providing useful guidance in considering the lay of the land investment-wise. Of course, we will readily acknowledge utter failure in anticipating the advent and subsequent devastation wrought by the COVID-19 coronavirus epidemic, but aside from that let us continue on to how else we may have gotten things right or wrong. 

Here were the 2020 “Laidlaw Five” forecasts:

2020 Assessment: Not Fully Capturing Volatility, But Did Anticipate Markets’ Direction

Politics: Elections Prompt Markets To Pause

With 2020 being a year of elections across the world culminating in the November 2020 U.S. general election, investors should consider that investment returns are likely to be muted until the electoral tea leaves are read. That said, Laidlaw expects positive investment returns will most likely be realized as a “relief rally” in the back half of 2020. Relative to the U.S. Presidential contest, while the expected candidates in the general election are Donald Trump (GOP) facing Michael Bloomberg (Democratic), it is important to note that there is high level of uncertainty as there are thoughts the Democratic Party at its July 2020 convention in Milwaukee, Wisconsin might have its first “brokered” convention in years. Meanwhile, impeachment, trade policy, technology sector regulation, health care reform, and Supreme Court vacancies are expected to result in a contentious campaign culminating in an election with high levels of voter turn-out. Interesting to note, 2020 will be the first U.S. election in which the “Baby Boomer” generation is no longer the majority of the electorate as “Millenials” move to the fore.

Assessment: While we failed to call correctly the Democratic nominee, we did manage to anticipate the market’s evolution during this election year fairly well as the S&P 500 on a total return basis was +9.74% through the end of August, then retraced -6.36% between then and the end of October as the general election kicked into high gear after Labor Day, and then surged +13.73% from the end of October until now.    

Macro-economy: Tariff Wars, “Brexit”, & Iran Are Wild Cards 

The global macro-economy is likely subdued as major events such as the U.S.-China trade tariff confrontation and the distinct possibility of a hard “Brexit” by the U.K. from the E.U. remain unresolved. Note that the inclination of the current U.S. Administration to withdraw from long-standing multilateral agreements in favor of more inefficient bilateral trade arrangements is likely to leave open the possibility of increased trade tensions with the E.U., something that may result in ECB monetary policy moving away from continued experimentation with negative interest rates. In terms of exogenous shock, Laidlaw believes an increase in oil prices to the $75/barrel level is possible depending on OPEC production cut-backs and the possibility of conflict with Iran limiting Persian Gulf shipments through the Strait of Hormuz. With this as back-drop, GDP growth is expected as follows: U.S. +1.5%, E.U. +1.0%, and World +2.5%

Assessment: As we missed calling COVID-19 entirely, our economic forecasts were utterly useless as 2020 GDP growth is expected to end up as follows: U.S. -3.6% (according to The Conference Board), E.U. -7.8% (according to The European Commission), and World -4.4% (according to The IMF). Relative to our oil forecast, the price of a barrel of crude reached a high of $65.65 for a hot second on 1/8/20 as tensions flared between the U.S. and Iran, but then on the heels of COVID-19 it crashed along with the global economy to hit negative levels (-$40.32/barrel on 4/19/20) before stabilizing at its present $47.53/barrel, off –22.2% from its 2019 year-end price of $61.06. Meanwhile, on the trade front, relations between the U.S. and China have worsened and are likely to remain so under the incoming administration while relations with the E.U. are expected to be restored. The only call we appear to have right is the hard “Brexit” which may nevertheless be averted at the last minute. All in all, a rather mixed performance on our part.  

Markets: Equities +7% Due To Buybacks & “TINA”, Interest Rates Edge Lower  

The fixed income markets in 2018 called the tune as the shift in E.U. interest rates towards negative prompted the U.S. Federal Reserve to cut interest rates three times thereby supporting equities during a period when earnings contracted and capital investment spending stagnated under the uncertainty associated with the U.S.-China trade tariff confrontation. For 2020, Laidlaw has a 3,400 level target for the S&P 500, a +7% total return from current levels. Equities benefit from a return to corporate earnings growth supporting stock buy-back activity coupled with low interest rates leaving investors in the position of “there is no alternative” to equities. While no further Fed interest cuts are thought to be in the offing, the estimated -0.6% impact to U.S. GDP growth from Boeing halting 737 Max production may change that view. The U.S. Treasury 10-year rate now at 1.92% is expected to contract to 1.25-1.50% over the course of 2020 as the global macro-economy slows. 

Assessment: In terms of our S&P 500 forecast for 2020, our 3,400 level call was surpassed during August at which time we raised our target to 3,800, still +2.4% over current levels. This hinges on the expectation that the corporate earnings cycle unfolding from the 2020 Q2 trough will drive earnings estimates higher over the course of 2021. While the current 2021 Street S&P 500 EPS forecast of $169/share indicates a market trading at 22x next year’s earnings, an elevated multiple, it is our view that 2021 EPS will end up +9% higher at $184/shares as earnings outperformance relative to Street estimates continues. On the higher estimate, the adjusted market multiple is 20x, still high but supportable based on the earnings cycle dynamics. Our call on the U.S. Treasury 10-year rate to be lower over the course of 2020 was correct, but we failed to anticipate that it would end up at the current 0.95%. In sum, while correct on direction, we missed on magnitude yet gladly still made profitable calls on equities and fixed income.  

Sectors: Tech Sees Regulation Risk Limit Potential, Election May Benefit Healthcare Prospects

While investors have built wealth since the 2009 Recession by taking an overweight position in large-cap U.S. Tech, the increasing risk of greater regulation may serve to depress profit margins for names such as Alphabet and Facebook and in the process limit the sector’s appreciation potential. While the yield curve has steepened off the August 2019 lows, a development that has favored Financial sector shares, Laidlaw expects the macro-economy’s uncertainties to slow and eventually limit further curve steepening. Meanwhile, the possibility of “Amazonization” is rising in the Financial sector as Tech names are speculated to be considering potentially disruptive moves such Apple acquiring as asset manager. That said, Laidlaw views the Healthcare sector as offering an attractive combination of growth and valuation that has the potential to improve should the 2020 election better define its return potential.

Assessment: In terms of our sector calls, the impact of COVID-19 in shifting activities to “Work From Home” (WFH) served to accelerate market share gains for the large-cap U.S. Tech companies to give them a banner year in 2020 with the sector (+41.3%) substantially outperforming the S&P 500 (+14.8%). The expectation that WFH will represent the “new normal” proved sufficient to allow the Tech companies to overcome the threat of increased regulation, a risk that became more apparent as the 2020 progressed. Overall, 2020 was another banner year for Growth companies (+30.3%) which substantially outpaced Value companies (-2.9%), although there has been a rotation towards Value unfolding over the course of 2020 Q4 after news of COVID-19 vaccine discoveries led to views of accelerating economic recovery in 2021. Our 2020 call for the Healthcare sector while netting positive results (+12.4%) did not outperform the broader market. We made money. Not bad.

2021 “Laidlaw Five”: Now, The Hard Work Of Recovery Begins

So, with 2020 thankfully heading soon to exit stage left, we now set the stage for the entrance of 2021 which brings its own challenges very quickly soon after the turn of the year. 

Here are the 2021 “Laidlaw Five” forecasts:

Politics: With Fiscal Stimulus Efforts Still Critical To Economy, Congress Remains In Spotlight

While it would be nice to consider the possibility that, after an election year, investors could just go back to focusing on things other than politics, it would be difficult, if not detrimental, to ignore fiscal policy as new, expanded programs are very likely to remain a critical element in supporting global economic recovery and thus financial markets. 

The path for the incoming administration will be challenging as the first order of business is to get COVID-19 addressed with a well-executed federal-led plan. The pay-off is quite clear: beat COVID-19, win the hearts and minds of the nation; and in the process perhaps get some significant percentage of the 74mm voters (46.9% of turnout) who voted for the incumbent to accept the new administration as the nation yearns for competence and leadership in government. 

While Congress is expected to pass an additional $900bn in fiscal stimulus, bringing the total provided since the onset of COVID-19 to $3.2tn, passage of the further larger stimulus effort sought by the new administration will take time and have to confront determined political resistance should the party leadership in the Senate not shift following the two Senate run-off elections in Georgia scheduled for early January. Away from the run-off outcome, we are open to the possibility that certain senators may opt to become independent in an effort to promote bipartisanship. 

That said, Laidlaw expects positive investment returns will again be skewed towards the back half of 2021 as a better sense is gained as to how well the new Congress operates to support the nation’s recovery. Particular areas such as trade policy, technology sector regulation, and health care reform will be important. The government will be looking for new sources of revenue, something that may lead to the legalization of controlled substances such as marijuana. Note that Prohibition was repealed in 1933 as a means to generate new tax revenues in the midst of the Great Depression. Other developments such as the ongoing population shift prompted by COVID-19 from densely populated cities to less densely populated suburbs along with a greater shift to online from traditional “in person” education and the likelihood of “Work From Home” as the “new normal” will have political impact as funds are needed to support new programs and restructure old ones as institutions such as universities and commercial properties are faced with crisis while COVID-19 remains uncontained. 

Macro-economy: COVID-19 Containment, Trade Policy & Inflation Are Wild Cards 

Assuming vaccines prove effective in containing the COVID-19 pandemic and no significant mutations develop, the global macro-economy should be poised to recover as customer-facing economic sectors that can represent approximately 20% of employment may fully resume operation. Meanwhile, U.S.-China confrontation on a range of fronts including trade policy and the possibility of a hard “Brexit” by the U.K. from the E.U. will serve to depress recovery on the margin. What will be interesting to see over the course of 2021 is whether inflation strengthens as supply chains have been strained during the pandemic. Recent changes in monetary policy by The Federal Reserve Bank have eased guidelines to allow inflation to run on average over a 2% rate. How other central banks known for anti-inflationary policies such as the European Central Bank and the fixed income market are comfortable with this possible development will be a central question in 2021 as Laidlaw expects inflation break-evens to increase from 1.8% currently to 2.3% over the course of the year. In terms of exogenous shock, Laidlaw does not expect oil prices to spike as they trade towards the $60/barrel level seen before the pandemic, an expected +26% gain which will add to the inflation outlook. With this as back-drop, GDP growth is expected as follows: U.S. +3.6% (vs. -3.6% in 2020), E.U. +4.2% (-7.8%), and World +5.2% (-4.4%). Off the back of easy monetary policy and slower relative economic growth, Laidlaw expects to U.S. Dollar (DXY, 90.016) to weaken -10% over the course of 2021.

Markets: Equities +8% Due To Recovery Trade, Interest Rates Edge Higher  

The pace of monetary policy easing and fiscal stimulus drove the markets in 2020 as greater liquidity served to support financial markets as the global economy contracted. At present, there are strong indications that both of these factors will extend forward for the foreseeable future until COVID-19 is contained fully. For 2021, Laidlaw has a 4,000 level target for the S&P 500, an +8% total return from current levels, with an upside possibility of a +15% return to the 4,265 level. As outlined earlier, equities benefit from the corporate earnings cycle outperforming expectations which along with a resumption of buy-back activity coupled with low interest rates will continue to leave investors in the position of “there is no alternative” to equities. The U.S. Treasury 10-year rate now at 0.95% is expected to rise to 1.50% over the course of 2021 as central banks allow negative real interest rate policy to support the global economic recovery. Meanwhile, with inflation expected to rise in 2021, this should support alternative assets such as gold (now $1,909/oz, target $2,100/oz) and Bitcoin (now $22,931, target $25,000).

  Sectors: Tech Continues To Disrupt, But Value and International Stocks Outperform

COVID-19 has clearly transitioned a greater share of the economy over to the companies who dominate the Tech sector. In 2021, while Laidlaw fully expects the disruption-led growth Tech has produced will continue, we forecast the economic recovery trade will favor Value stocks from sectors where high fixed costs will lead to high profit margins on the incremental revenues realized from the recovery and thereby produce better than expected EPS growth. Sectors that fall into this category include Energy (XLE, $39.40, -30.9% in 2020, -45.7% vs. S&P 500) and Industrials (XLI, $88.84, +10.8% in 2020, -4.0% vs. S&P 500). A steepening yield curve should favor the Financials (XLF, $28.49, -5.5% in 2020, -20.4% vs. S&P 500). A weaker U.S. Dollar serves to lower the prices of commodities such as oil and industrial metals in foreign currency terms. For 2021, Laidlaw expects that non-U.S. equities will outperform the S&P 500 until such time as market expectations begin to factor in a monetary tightening shift by The Fed. In 2020, the broader Emerging Markets (EEM, $50.99, +15.5% in 2020, +0.7% vs. S&P 500) paced the U.S. market with substantial gains by South Korea (EWY, $81.22, +31.6% in 2020, +16.8% vs. S&P 500) and Taiwan (EWT, $51.57, +27.8% in 2020, +13.0% vs. S&P 500). For 2021, along with the broader Emerging Market and leaders South Korea and Taiwan, we suggest investors consider India (INDA, $39.33, +12.3% in 2020, -2.5% vs. S&P 500) for its growth potential and the U.K. (EWU, $29.38, -11.5% in 2020, -26.3% vs. S&P 500) for a recovery trade as “Brexit” is resolved hopefully for good and COVID-19 is beaten.

Odds & Ends: Random Thoughts To Consider

As we are not “all markets, all the time,” we would like to take a moment to offer up random thoughts to consider. One that intrigues us is contemplating how Amazon founder and CEO Jeff Bezos will reallocate the capital he has generated. While it is fascinating to consider how he is developing his own space exploration venture, Blue Origin, and as such has designs perhaps on leaving the planet, we think more terrestrial concerns may occupy his mind. Namely, as Amazon evolves its business model around media offerings, it is possible that Mr. Bezos may consider acquiring multiple professional sports franchises to expand the company’s content offerings. The cross-marketing and sell-through opportunities would be out of this world.

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