Investing in a post-COVID market is ‘still crazy’: Bespoke Investment Group co-founder

Key Concepts

• Post-COVID Market Dynamics: Assessment of market conditions following the COVID-19 pandemic, including interest rates and economic recovery.
• Small-Cap Performance (Russell 2000): Analysis of the Russell 2000 index’s strong start to the year and historical precedents.
• Liquid Biopsy (MP Materials): Discussion of a novel cancer detection blood test and its growth potential.
• Shake Shack Turnaround Potential: Examination of Shake Shack’s recent struggles and potential for recovery due to easing inflationary pressures and new leadership.
• Interest Rate Normalization: The move towards more typical interest rate levels after a period of historically low rates.

Economic Reflections on the Post-COVID Landscape

The discussion begins with a retrospective look at the COVID-19 pandemic and its impact on economic and market conditions. The speaker notes the extraordinary measures taken during that period – specifically referencing restrictions requiring a “thing” (likely referring to proof of vaccination or a negative test) to access basic services like restaurants for a decade – and expresses a sense of disbelief at the extent of those measures in hindsight. The sentiment is that while a return to pre-COVID normalcy is desired, market changes are inevitable and, in fact, already occurring, regardless of the pandemic. “As much as you want to say I wish we could go back to the pre-COVID days of the market things would change regardless,” the speaker states, emphasizing the constant evolution of the economic environment.

Interest Rate Normalization & Healthy Environments

The conversation shifts to interest rates, with the speaker addressing the debate surrounding the Federal Reserve’s (the Fed) policy. Many believe the Fed needs to raise rates to 2%, but the speaker suggests 3% would be a more “perfectly normal” level for the short-term Fed Funds rate. This is framed as a return to a “healthy environment,” contrasting with the previously experienced “0 interest-rate [and] negative yielding bonds.” The goal is to move away from these unconventional monetary policies.

Russell 2000: A Promising Start & Historical Analysis

A significant portion of the discussion focuses on the performance of small-cap stocks, specifically the Russell 2000 index. The index experienced a strong start to the year, rising nearly 5% in the first week. A scatter chart analysis reveals that historically, such a strong start (represented by the redline on the chart) has been a positive indicator for the remainder of the year. Out of all previous instances, only once did the Russell 2000 decline after a similar initial surge; in all other cases, it continued to perform well throughout the quarter, half-year, and full year, with gains ranging from 8% to 12%. This suggests a potentially bullish outlook for small-cap stocks.

MP Materials: The Potential of Liquid Biopsy

The speaker then highlights MP Materials, describing it as a company involved in a groundbreaking cancer detection technology. This technology utilizes a “blood test” to identify cancer DNA in a patient’s blood, allowing for monitoring of remission and detection of cancer recurrence. This process is referred to as a “liquid biopsy.” The test received approval last year and is experiencing rapid growth, with a 55% increase observed towards the end of the year, driven by increasing insurance reimbursement coverage.

Shake Shack: A Potential Recovery Story

Finally, the discussion turns to Shake Shack, a restaurant chain that has faced challenges in recent years, resulting in a significant decline in its stock price. The speaker attributes this decline to factors such as “higher labor costs [and] higher because [of] inflation.” However, they suggest that these factors are beginning to “lap” – meaning the year-over-year comparisons will become more favorable. Furthermore, the arrival of a new CEO and a focus on “efficiency bringing margins in” are seen as positive developments. The speaker concludes that Shake Shack “could be a great stock for the year ahead,” particularly as consumer spending increases.

Technical Terms:

• Fed Funds Rate: The target interest rate set by the Federal Reserve for commercial banks to lend reserves to each other overnight.
• Russell 2000: A stock market index measuring the performance of approximately 2,000 small-cap companies in the United States.
• Liquid Biopsy: A non-invasive method of detecting cancer or monitoring treatment response by analyzing circulating tumor DNA (ctDNA) in a blood sample.
• Margin: The difference between a company’s revenue and its costs, representing profitability.
• Lapping: In financial analysis, refers to comparing current performance to the same period in the previous year, particularly when unusual events impacted the prior period.

Synthesis/Conclusion:

The conversation paints a picture of a market navigating a post-COVID landscape, seeking a return to normalcy in interest rates while simultaneously presenting opportunities in specific sectors. The strong start of the Russell 2000 suggests potential for small-cap growth, while innovative technologies like MP Materials’ liquid biopsy offer promising advancements in healthcare. Shake Shack’s potential turnaround highlights the importance of adapting to changing economic conditions and implementing effective management strategies. The overall takeaway is one of cautious optimism, acknowledging the ongoing changes while identifying potential investment opportunities.