Last week we held our April research call, featuring Nicholas Colas, co-founder of DataTrek Research. Nick was joined by his co-founder Jessica Rabe as they both provided specific capital markets commentary. Nick is a regular speaker on CAPIS monthly research calls, and is a renowned media participant.

Click here for the research call video

Our own Dave Choate, COO & Executive Director of Sales and Trading, started the call with an update on commissions from CAPIS’ Q1 data and experiences. Choate explained that in analyzing over $600 billion in stock trading and custody data from CAPIS clients, he found that commission rates (full-service rates paid for bundled research) were up to their highest since 2017. Citing the data, Choate said over 75% of trades were executed at full-service rates, higher than the 73% seen in 2020 and up from 68% in 2019.

Choate also spoke briefly about the upcoming May 6^th virtual roundtable hosted by CAPIS, a discussion that will focus on low-priced stocks and how to avoid AML compliance issues. Stay tuned for details.

Colas’ presentation provided the following insights:

U.S. Geopolitics

Investors have demonstrated that they are focused predominantly on the size and longevity of fiscal and monetary policy. Regardless of which political party is in power, it’s the policies and not the party that are driving returns in the capital markets. Right now, the market is clearly expecting more fiscal and monetary stimulus.

US Midterm elections are already important and being watched. Investors are forecasting a drop off in Democratic seats in the House of Representatives, based on historical data that says when an incumbent President has an approval rating between 50 and 60 (Biden currently stands at 54%), their party will potentially lose upwards of 28 seats. Currently, Democrats control the House by a narrow six seats while they have no seat advantage in the Senate.

New Chairman of the Federal Reserve?

With Chairman Powell’s term ending in 2022, the market is evenly split on his renomination. DataTrek believes Powell will not be re-nominated, and a new Chairman will be coming with the odds favoring Atlanta Fed president Rafael Bostic. Powell has appeared to indicate this change in previous comments and is helping the markets ease into a transition of power with some of his language.

The Global/US Economy and Capital Markets

Colas stated that the global recovery post-pandemic will be uneven – with the US leading the way compared to Europe and Asia. First and foremost, the US government has provided much more fiscal and monetary stimulus to goose the economy. Add to this, the US is at the forefront of global immunization efforts against COVID-19. Thirdly, the US consumer is in excellent financial shape in terms of debt, employment, high savings rates and solid consumer confidence.

“The US consumer has the desire to spend – it’s been slack according to the indicators but this lags actual action. In contrast, Japanese consumer confidence is lower now than in the Great Recession and Chinese consumer confidence is in DataTrek’s view fully recovered with little upside left.”

Therefore, US stocks will continue to have solid footing moving throughout 2021. Colas said consumer cyclical stocks, Financials and Energy will lead the way.

Inflation

Colas said the market and DataTrek don’t expect much in the way of rising interest rates as evidenced by static Treasury 10-year yields and the spread between 10-year and 5-year TIPS. Despite short-term pressures and volatility, long-term inflation will allow the Federal Reserve to stand pat on interest rates.

Also, the aging US population should keep an absolute lid on inflation as older people tend to spend less and keep the velocity of money in check.

Colas then turned the presentation over to his partner Jessica Rabe, who noted that capital markets’ volatility has returned to a more “normal” and “quicker” cycle when compared to other years. Rabe added that against this backdrop, stocks can continue their bullish trend and benefit      the US markets more than in Asia or the emerging markets.

“The emerging markets and China, as evidenced by the indexes, are heavily influenced by  technology stocks and are subject to continued potential future regulation,” Rabe said. “Against this backdrop, these might trade differently than in previous cycles,” which as she added, would lead      to an uneven global recovery.

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