“I sometimes compare my brainstorming on paper to the drilling of oil wells. The only way to strike oil is to drill a lot of wells.” – Tom Monaghan, Founder Domino’s Pizza

Economic data continues to show growth, and it’s still mostly surprising to the upside. The outcome of the election will be a market-moving event, but the stock market is not viewing any of the possible outcomes as a catastrophic event. The view is more like “cautiously optimistic”. Whatever the outcome, the market can deal with it.

While we can’t predict the future, we can predict that there will always be risks out there. Markets will continue to fluctuate and experience pullbacks and losses regularly. That is how the mind game plays out. I try not to fall prey spending a lot of time second-guessing myself because my portfolio has fallen in value from a previously seen higher level. Reevaluating yes, second-guessing, no, there is a difference. One should be viewed as a positive, while the other is negative.

I bring this part of the investment picture to the table this week because there are more than the usual amount of crosscurrents that continue to keep the investment picture very cloudy. Or as I said in a recent missive, it is very foggy out there. No need to go over them, they have all been discussed “ad nauseam” for months now. While many were discussing them, one thing should not have gone unnoticed, the S&P rallied to a new high in September. The Nasdaq continued to set record highs month after month.

The near-term economic outlook is “more of the same”, mixed but moderate growth, with moderate inflation. While the presidential race appears to be less uncertain, attention has turned to the composition of the House and Senate. The exercise of investing based on an election outcome is comparable to correctly guessing what will take place. “Who wins?” “What policies are implemented and when?” “What is the market reaction?” This is not a winning exercise.

Red or blue, it is fair to say that neither outcome would truly be a surprise. I have seen research notes that proclaim the conclusion of the election season, in either direction, should lift sentiment further. Then again I do wonder what I may be missing with that notion. The election is 10 days away and the S&P is 2.7% from the last all-time high just set in September.

It wouldn’t appear the average consumer and investor is sitting on their hands in a “wait and see” mode. I’m not sure the evidence is there that says they are waiting for the election to be over so they then resume normal consumer and investment activity when the election has concluded. So what gives?

From a consumer point of view, all of the data says in aggregate they are “OK”. From an investment standpoint, perhaps it’s what I mentioned a couple of weeks ago. “Mr./Mrs. Market” sees the Fed in the picture with the “lower for longer” mantra and he/she doesn’t care who is sitting in the White House.

I’m not one that likes to guess outcomes so I find it an exercise in futility to make money decisions based on a “guess”. For sure there have been modest portfolio changes. Slight changes in sector strategies, but the bulk of the changes revolve around simple money management that says harvesting oversized profits never go out of style.

So we watch and wait.

The S&P entered the week looking like it was set up to continue trading a sideways range and Monday’s action didn’t do much to change that opinion. All of the indices were down greater than 1+%, with the S&P posting a 1.6% loss on the day. Breadth was notably weak with the vast majority of S&P 500 stocks trading lower. The Nasdaq extended its losing streak to five straight sessions.

Turnaround Tuesday arrived and the S&P rallied back to close at 3,443, up 0.47%. So with no follow-through on the selling, the preferred “sideways” action played out for another day. The five-day losing streak on the Nasdaq was broken as all major indices were higher with the Dow Transports the biggest winner up 1.3%. Autos, Energy, and Financials posted the largest gains.

Indecision continued and ruled Wednesday’s action with a narrow trading range established giving the appearance that the indices were all in a “‘holding” pattern. Last-minute selling pushed the S&P down to a loss of 0.2%, closing at 3,435. Losses were seen across the board on the other indices as well. Communications Services (social media) was the lone bright spot gaining 1.6%.

Going into the end of the week, the trend was one where the market traded with a positive bias in the morning only to give up those gains as the day went on. Thursday was very different. As trading began, the index moved below a short-term support level in what looked like another selling event was shaping up. A midday turnaround saw the index rally to close with a gain of 0.52%. So the indices went from across-the-board losses to across-the-board gains. Energy, Banks, Biotech, and Healthcare were the winners today as Technology lagged.

More and more investors hit the “pause button as a very narrow trading range ruled the day on Friday with the S&P posting a gain of 0.35%. The Russell 2000 was the big winner gaining 0.63%.

All of the major indices were flat on the week, another sign of “indecision”. Entering the final week of October and the last week before the election the S&P is up 7.2% for the year, and just 3% from the all-time high.

Economy

TSA activity jumped 10.7% sequentially last week. This is the 4th consecutive increase and brings weekly passenger throughput to more than 6.0 million. Both weekday and weekend activity levels hit new COVID-19 highs, with the Columbus Day weekend likely boosting travel.

U.S. weekly hotel occupancy hit 50% for just the second time since the low point of the pandemic, according to the latest STR data for the week of October 4-10, 2020. In August, occupancy hit 50 percent for the first time since mid-March before dipping back below 50 percent again.

U.S. chain store sales jumped 1.0% over the 2+ weeks of October ended the 17th versus September, according to Johnson Redbook data. Sales climbed 2.5% year over year versus a 1.2% y/y pace previously. And for the month, sales are up 1.9% y/y compared to the prior 1.2% y/y. Supporting the gains in sales were cooler weather boosting demand for seasonal items, along with the Columbus Day holiday. October sales are expected to rise 2.2% m/m and be up and increase at a 3.1% y/y.

U.S. leading index climbed 0.9% to 107.2 in September after jumping 1.4% to 106.5 in August. This is a fifth straight increase in the index after three straight declines from February through April. The index had dropped -6.4% to 96.9 in April and was at a record high of 112.0 in July 2019. Five of the 10 components made positive contributions, led by jobless claims and building permits, while there were small declines in two categories, nondefense capital goods orders excluding aircraft (-0.04%) and stock prices (-0.03%), while three components were unchanged.

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Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 55.5 at the start of the final quarter of 2020, up from 54.3 in September and signaling the fastest increase in private sector business activity since February 2019. Service sector firms recorded a marked and accelerated rate of expansion in output.

Chris Williamson, Chief Business Economist at IHS Markit:

“The US economy looks to have started the fourth quarter on a strong footing, with business activity growing at a rate not seen since early 2019. The service sector led the expansion as increasing numbers of companies adapted to life with COVID19, while manufacturing continued to report solid growth amid rising demand from households and businesses.”

“A slowdown in hiring and weaker new order inflows were in part attributable to hesitancy in decision making ahead of the presidential election. More encouragingly, business optimism surged higher, indicating that firms have become increasingly positive about prospects for the coming year amid hopes of renewed stimulus, COVID-19 containment measures gradually easing and greater certainty for businesses and households after the presidential elections.”

The -55k initial claims drop to 787k in the BLS survey week trimmed the 75k bounce to 842k from a much lower 767k at the start of October to leave a notably tighter than the expected path. For a third consecutive week, analysts saw a big continuing claims decline, this time of -1,024k, to 8,373k, following a -1,197k drop to 9,397k. According to the report, California completed its pause in processing, and the figures over the last three weeks now include actual counts, leaving a much steeper downtrend.

NAHB housing market index rose 2 points to 85 in October and becomes the new record high, after rising 5 points to 83, the old high water mark, in September (data go back to 1985). These are the first two months that the index has ever been above 80. The index collapsed to 30 in April due to the pandemic, though that was well off the record low of 8 from January 2009. The present single-family sales index edged up 2 points to 90 following September’s 4 point rise to 88. The future single-family index was up 3 ticks to 88 after jumping 7 points to 85 (was 84) previously. The index of prospective buyer traffic was steady at 74 following the 10 point surge to that level (was 73) last month.

Housing starts undershot estimates with a 1.9% September rise to a 1.41 million pace after -33k in downward revisions, as total “starts” climb toward the 13-year high of 1.61 million in January of 2020 from a five-year low of 0.93 million in April. Building permits defied restraint in starts with a 5.2% rise to a 14-year high of 1.55 million, beating the prior high of 1.53 M in January versus a five-year low of 1.06 M in April. Completions soared 15.3% to a 13-year high pace of 1.413 M after a slight -2k in downward revisions versus a prior 12-year high pace of 1.348 M in March of 2019.

While the “headlines” painted a mixed picture, the chart below says it all. Single-family homebuilding is at cycle highs.

Source: Bespoke

U.S. existing home sales figures sharply beat estimates, with a 9.4% September surge to a 14-year high pace of 6.54 M from a 5.98 M prior high in August. That came after two record-large gains to 5.86 M in July and 4.70 M in June. Before that, it was a 3.91 M pace in May that marked a 10-year low. Sales have spent three months above the 5.76 M high pace. Existing home sales posted a 307% Q3 growth pace that more than reversed a -62% Q2 contraction rate, after a 4.8% pace in Q1.

Lawrence Yun, NAR’s chief economist:

“Home sales traditionally taper off toward the end of the year, but in September they surged beyond what we normally see during this season. I would attribute this jump to record-low interest rates and an abundance of buyers in the marketplace, including buyers of vacation homes given the greater flexibility to work from home.”

“There is no shortage of hopeful, potential buyers, but inventory is historically low,. To their credit, we have seen some homebuilders move to ramp up supply, but a need for even more production still exists.”

“The uncertainty about when the pandemic will end coupled with the ability to work from home appears to have boosted sales in summer resort regions, including Lake Tahoe, mid-Atlantic beaches (Rehoboth Beach, Myrtle Beach), and the Jersey shore areas.”

Additionally, a recent NAR study confirms that many Americans continue to seek new living situations due to coronavirus issues.

Properties typically remained on the market for 21 days in September – an all-time low – seasonally down from 22 days in August and down from 32 days in September 2019. Seventy-one percent of homes sold in September 2020 was on the market for less than a month.

The median existing-home price for all housing types in September was $311,800, up 14.8% from September 2019 ($271,500), as prices rose in every region. September’s national price increase marks 103 straight months of year-over-year gains.

Total housing inventory at the end of September totaled 1.47 million units, down 1.3% from August and down 19.2% from one year ago (1.82 million). Unsold inventory sits at a 2.7-month supply at the current sales pace, down from 3.0 months in August and down from the 4.0-month figure recorded in September 2019.

Global Economy

Container Port throughput has rebounded to Pre-COVID levels.

Chart courtesy of Triton International Earnings presentation

Eurozone.gif

The flash IHS Markit Eurozone Composite PMI fell for a third consecutive month in October, dropping from 50.4 in September to 49.4 to register the first contraction of business activity since June. Although the index remains well above the all-time lows seen during the height of the pandemic in the second quarter, the renewed decline raises the possibility that the region could see the economy contract again in the fourth quarter.

Chris Williamson, Chief Business Economist at IHS Markit:

“The eurozone is at increased risk of falling into a double-dip downturn as a second wave of virus infections led to a renewed fall in business activity in October. The survey revealed a tale of two economies, with manufacturers enjoying the fastest growth since early-2018 as orders surged higher amid rising global demand, but intensifying COVID-19 restrictions took an increasing toll on the services sector, led by weakening demand in the hard-hit hospitality industry. The divergence is even starker by country. While Germany is buoyed by its manufacturing sector booming to a degree exceeded only twice in almost 25 years of survey history, the rest of the region has sunk into a deepening downturn.”

Chinese factories are going great guns relative to the rest of the world. As shown below, year-over-year growth in production at foreign-owned factories has been the highest since 2017.

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In other words, the reorientation of foreign supply chains from China during the US-China trade dispute is being broadly unwound. Domestically-owned production is also rising at a very rapid pace.

China’s GDP continues to signal growing momentum as the economic rebound continues. The world’s second-largest economy expanded 4.9% in the July-to-September quarter compared to a year ago, according to government statistics released Monday.

The pace was quicker than the 3.2% increase that China recorded in the second quarter when it managed to avoid the pandemic-fueled recession that has gripped much of the globe. But the growth was also a bit weaker than expected: Analysts polled by Refinitiv research predicted that China’s economy would expand 5.2%.

The headline seasonally adjusted IHS Markit/CIPS Flash UK Composite Output Index, which is based on approximately 85% of usual monthly replies, registered 52.9 in October, down from 56.5 in September and further below August’s recent peak of 59.1. Although still above the 50.0 no-change value, the latest reading pointed to the weakest rise in UK private sector output since a return to growth was first signaled in July.

Chris Williamson, Chief Business Economist at IHS Markit:

“The pace of UK economic growth slowed in October to the weakest since the recovery from the national COVID-19 lockdown began. Not surprisingly the weakening is most pronounced in the hospitality and transport sectors, as firms reported falling demand due to renewed lockdown measures and customers being deterred by worries over rising case numbers.”

“The slowdown would have been even more pronounced had it not been for exports rising as overseas customers sought to secure orders before potential supply disruptions as Brexit draws closer.”

“The slower growth of output, the renewed fall in demand and further deterioration in the labor market suggest the economy started the fourth quarter on a weakened footing. While Brexit preparations may cause a short-term boost to some parts of the economy ahead of 31st December, rising COVID-19 cases and the imposition of local lockdown measures bode ill for the near-term economic outlook. While the fourth quarter still looks likely to see the economy expand, the rate of growth looks to have slowed sharply and the risk of a renewed downturn has risen.”

Japan.gif

au Jibun Bank Flash Japan Composite PMI Including au Jibun Bank Flash Japan Manufacturing and Services PMI.

Earnings Observations

The results have been impressive. Bespoke Investment Group:

“83.5% of the companies reported through mid-week have beaten estimates, the second-most since 2001 and only falling below the 86.4% from earnings reporting calendar Q1 results in 2006 and the 83.6% reporting results for calendar Q1 in 2011.”

This past week a positive trend that began in Q2 has continued in Q3. More companies are raising guidance. Twenty-Eight companies “raised guidance” this week when they reported their results.

Having pertinent information is crucial. At the Savvy Investor Marketplace service, we start our research with these “winners”.

The Political Scene

We are once again in overtime in the quest for a fiscal relief package. Negotiations are getting closer, but it is unclear if we are close. There are competing political priorities, major policy differences, and a compressed timeline to strike any pre-election deal. My timeline never included any deal being made before the election. It was based on a simple theory. There will be no handout that will be perceived as a “win” for the present administration. So the “public” will take a back seat until then.

The S&P 500 is up 7.3% since 8/3/20 (3 months before the election). Historically, a strong stock market has been a good sign that the incumbent party would win. In fact, no president has ever lost an election with stocks up >7% the three months before the election.

Then again this is 2020.

Federal reserve 2.jpg

The Fed & The Yield Curve

Fed’s Beige Book for the November 4, 5 FOMC meeting didn’t contain any surprises.

“Economic activity continued to increase across all Districts, with the pace of growth characterized as slight to modest in most Districts. Changes in activity varied greatly by sector. Employment rose in almost all Districts, but growth remained slow.”

The report noted “most consistently” job gains for manufacturing firms, though firms continued to report new furloughs and layoffs. Most districts reported tight labor markets, due to workers’ health and childcare concerns, with many firms consequently offering increased schedule flexibility. There continued to be some pick up in manufacturing, though at a “moderate” rate. Housing continued to see “steady demand,” while commercial activity continued to “deteriorate.” Consumer spending remained positive, though there was some leveling off in some districts. Demand for autos remained “steady,” but low inventories restrained to varying degrees.

As with the last report, contacts’ outlooks were “generally optimistic or positive, but with a considerable degree of uncertainty.” Restaurateurs are concerned about cooler weather. Banking contacts generally expressed concerns that delinquency rates may rise in the coming months, but so far they’ve been stable. Prices rose modestly across districts. Input costs generally rose faster than consumer prices, though construction, manufacturing, retail, and wholesale sectors passed along higher costs. The report was prepared by the St. Louis Fed using data collected on or before October 12.

While investors remain focused on a Stimulus Bill, yields on the 10- and 30-year Treasury snuck higher this week, putting rates at their highest levels since June, when the economy looked like it was picking up. The 10-year note rallied to close at 0.85%, rising 0.09% for the week.

Source: U.S. Dept. Of The Treasury

The 2-10 spread was 30 basis points at the start of 2020; it continues to widen standing at 67 basis points today.

Sentiment negative.jpg

Sentiment

The stock market moves higher as many “market participants” flee stocks.

This data aligns with the weekly sentiment surveys where the number of “bulls” remain at very depressed levels.

If you are part of that blue line, it’s time to re-evaluate.

AAII’s reading on bullish sentiment has moved above 35% for the first time since April 9th, rising to 35.75% and up just under one percentage point from last week.

Crude inventories drew by just over 1 million barrels which were less than expectations of a draw of 1.37 million, which leaves inventories at the lowest level since early April. Domestic production slowed significantly this week, dropping to 9.9 million barrels per day. That was a 0.6 million decline; the biggest one-week decline since the last week of August.

Refinery throughput was also much lower this week, dropping to 13 million barrels/day. Refiner activity is now the lowest since the first week of September with this week also marking the biggest decline since that same week. As throughput fell, so did gasoline demand which came in at the lowest level since June.

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Crude oil has remained surprisingly quiet in the past few months. It continues to trade in a range of $39 to $41. The commodity moved back to the bottom of the range closing at $39.81, losing $1.08 for the week.

The Technical Picture

A flat week of trading for the S&P as the index straddles short-term support trend lines.

Technicians can make a case for the index to break in either direction in the short term.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

Thirty-three years ago on October 18, 1987, the U.S. equity markets experienced their worst single-day decline on record as the S&P 500 fell 20.5% while the Dow dropped over 22%. If you were alive or old enough to remember things at the time, you remember the 1987 crash. As investors marked this anniversary, there was no such decline this past week. A different time, a different place. While the markets are close to all-time highs they are very much in a state of indecision.

A lot is going on right now for market participants to ponder. The unprecedented global pandemic upsetting the world economy would be trying during any year, but with a highly contentious and unpredictable U.S. election coming up in 10 days, uncertainty is off the charts for some. For others it’s another day at the office if you remember what I mentioned last week:

“The only certainty is continued uncertainty.”

If anyone is waiting for all the uncertainty to go away, they are never going to own stocks, and from the sentiment surveys, it appears that is the approach they have taken. It’s learning to navigate these troubled waters that separate the winners from the losers. The narrative this week was more of the same. Every talking head was telling me how the virus counts are at highs, and there is no stimulus deal. While they pound their story I pound mine. The narrative is not indicative of what is actually occurring in the real world. Businesses, consumers, and some market participants are adapting. They are dealing with the virus and they are getting better at it as each day goes by. Dismissing the data and relying on a “narrative” has and will continue to be a huge mistake.

Expectations seem to be very low right now, with many preparing for outright chaos and big downside risk surrounding the election. I guess that is possible, though as always, the market typically does whatever will surprise the most people. If that does indeed play out once again, it would give us some sort of sideways market activity or higher prices that will shock the naysayers.

The strategy that has yielded positive results in a difficult year is the one that I continue to follow. It’s the same strategy that worked in all of the really difficult market situations in 2000, 2008, and in March of this year. It’s not built around conjecture, speculation, virus counts, vaccines, stimulus packages, or political agendas.

The one thing it does rely on is a good dose of Common Sense. Concentrating on the issues that matter is all that is required.

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week, I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore, I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

Thank you #2.jpg to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

Earnings, Election, & Stimulus packages

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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.

This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.

IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.

Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.

As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.

Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.



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