“The fear, not the disease, threatened to break the society apart.” – John M. Barry, The Great Influenza: The Story of the Deadliest Pandemic in History
Investors go through the learning process every day of their investment lives. No one ever has all the answers all the time and no one stops learning in the world of investing. Some lessons are painful while others can work out to be quite rewarding. This year has taught many investors valuable lessons that one would hope they have learned from. It has been demonstrated how jumping to conclusions, letting emotion rule the decision-making process has been the downfall of so many this year. However, that is usually the case throughout an investor’s life.
At the end of the day, the rewards go to those that utilize all of the information at their disposal. Focusing on the negatives and dismissing the positives was the consensus view of the equity market since the COVID event started to play out. Some knew from the outset that this wasn’t another Spanish Flu pandemic, and that same group also knew that modern medicine was not to be equated to what was available in 1918. However, that is not what was being told to investors back in March. It was painted as another great recession that would take the S&P 500 much lower than the already witnessed 30+% decline.
Those comparisons were foolish then and now have been shown to be an absurd notion. So while the Bulls were being chastised for their approach to the situation, the S&P 500 rallied to a new high in September before pausing. There was a myriad of reasons why that occurred, and they were posted here every week. The economy was in fact staging a “V” shaped recovery. That observation was dismissed week after week. So while we waited for the medical breakthrough, a new economy emerged. Earnings from the sectors that carried the infected economy surged and that surge continues during this earnings season. Hence the reason the S&P index sits with a 10% gain in 2020 and just 2% from the September all-time high. The news on the “vaccine” confirms the bullish stance that was ridiculed this year.
What we have seen play out before our eyes are examples of the learning process that teaches us the keys to how the stock market works. Patience is yet another building block in the process. While the naysayers had the microphone for quite some time, they didn’t take in all of the information to make their decisions as they rushed to judgment. In the scope of the learning process, that is an amateur mistake. The sad reality is that when it comes to investing, amateurs are simply tossed to the side of the road. It is only after the lessons of the market are learned and adopted as a strategy that the “amateur” tag is removed.
Before the breakout rally on Monday, there could be any number of reasons why the stock market has reacted the way it has since Election Day, and most of the opinions carry some sort of “bias” or “agenda” to them. Last week I mentioned one possible scenario that I am contemplating. It is one that has Goldilocks making another appearance on Wall Street. I’ll refrain from jumping to conclusions and keep an open mind until more evidence is presented.
A Biden victory plus a GOP Senate (high probability) suggests a few reasons for the market to be cautiously optimistic. No Dem sweep likely means no big tax hikes or rollback of the GOP tax cuts at least for the next two years when the 2022 mid-terms occur.
Before the election, investors were worried that a Dem sweep would mean a significant capital gains tax hike to go along with any number of tax hikes on income or corporations. The changes are that the “perceived” trade wars have ended. Perhaps we hear a tad more moderate tone when advancing many of the business regulations that were removed. Instead of putting a ball and chain and handcuffs on Corporate America, maybe duct tape around the wrists of businesses will suffice.
Sweeping reforms like the Green New Deal that are typically viewed as bearish for the market are seen less likely and have tossed some life back into the energy sector. There also is a possibility that “Mega-Cap Tech” gets hurt. Both Democrats and Republicans are mad at Big Tech for different reasons, and because neither side has full power to get its way on this issue, it’s more likely that nothing gets done at all. If that is the case, it is a HUGE positive for Corporate America.
There are dozens and dozens of additional theories for why the market would like or dislike President Biden with a split Congress, but what I just outlined are high on my list. Issues that can have the most impact on driving equity prices.
When it comes to COVID, the market is more and more looking past the virus with a vaccine on the horizon and better understanding that case count headlines aren’t the be-all-end-all. With the S&P now at an all-time high, the S&P is looking past the “dark winter” scenario that has America huddled in their homes to the green shoots that pop up in the spring.
Depending on what scene is embraced by an investor could very well turn out to be another lesson learned.
The stock market was already looking to continue the big rally from last week, but the news that Pfizer’s (NYSE:PFE) COVID vaccine showed 90%+ effectiveness against infection sent the “risk-on” trade into overdrive. The biggest beneficiaries of the COVID economy were weak as expected, as money rotated into the reopening trades. Just as the fear of the pandemic sank markets back in March, hopes for a vaccine are having the reverse effect.
Most if not all of the large-cap tech winners were sold off pushing the NASDAQ Composite to a loss (-1.5%) on the session. That large-cap selling near the close of the day also weighed on the S&P 500 and the Dow 30. The clear winner was the IWM small-cap index with a 3.7% gain that is confirming the breakout we talked about on Friday. Financials (XLF) and Energy (XLE) were bought vigorously as well, rallying 7.5% and 12.5% respectively.
The whipsaw rotation in the wake of Monday’s vaccine news once again had cyclical stocks doing relatively well on Tuesday while the technology stocks were getting sold. What is good news for the broader economy has actually been bad news for this year’s biggest winners. Overall, equities had a much calmer session on Tuesday as the major indices saw a mixed performance. While the S&P 500 fell 0.14%, the Nasdaq was down a more dramatic 1.37%. Meanwhile, the Dow and Russell 2000 were up 0.9% and 1.75%, respectively. Crude oil continued to press higher reaching $41.36.
The week continued with money moving around from sector to sector depending on the headline of the day. More COVID cases saw the NASDAQ break its two-day losing streak outpacing all the averages on Wednesday with a 2+% gain as the “new economy” was back in focus. The recently outperforming small caps, Energy and Financials, saw some profit-taking after posting outsized gains in the last few trading sessions.
Thursday saw the S&P post back to back losses dropping 1% on the day. Weakness was seen across the board, but the NASDAQ was the least affected falling by 0.65%. Investors can’t make up their minds whether they should follow the positive “vaccine” news or the negative COVID cases now as the battle between the old versus new economy stocks was unfolding.
On Friday, it appeared many had made up their minds. The S&P shrugged off the “Dark Winter” rhetoric, looked at the beaten-down cyclical sectors, and pushed ALL of the major indices to new highs. All 11 sectors and every Dow 30 component were higher on the day. The Russell 2000 rose 6% for the week and eked out a new all-time closing high confirming the breakout we discussed during the week. Joining the new high list, the Dow Industrials and Dow Transports were both up 4% on the week, while the S&P gained 2+% closing at 3,585. The rotation out of tech continued as the NASDAQ posted a small loss this week.
The stock market is holding class now for anyone that wishes to attend.
When dealing with the equity markets, perception is the key to success. Oftentimes that perception is changed with “noise” from those that refuse to count the data in their rhetoric. With an apparent Biden administration ready to take over, many are now of the belief that all will be well on the global scene. All has been well despite the narrative of how devastating the “perceived” trade war has been.
As far as the stock markets are concerned, the “numbers” don’t fit the narrative. In the last four years, the S&P is up 59%, the Dow 30 gained 50%, and the Nasdaq outpaced both of them rising by 129%. The key combatant in this “trade war”, China, saw its market increase by 50%. Only Mexico, Spain, and Brazil posted losses in that same time period. Emerging markets (EEM) were up 34%.
NFIB Small Business Index remained at 104.0 in October, unchanged from September’s historically high reading. Four of the 10 components improved, five declined, and one was unchanged. Although all of the data was collected before Election Day, a 6-point increase in the NFIB Uncertainty Index to 98 was likely driven by the election and uncertain conditions in future months due to the COVID-19 pandemic and possible government-mandated shutdowns. The uncertainty reading was the highest one since November 2016.
October CPI was unchanged for both the headline and core indexes. Those are softer than expected and following gains of 0.2% for both in September. The 12-month pace slowed to 1.2% y/y for the headline from 1.4% y/y in September and to 1.6% y/y for the core versus 1.7% y/y previously.
The surprising -4.8 point Michigan sentiment fall to 77.0 from a seven-month high of 81.8 in October almost entirely reflected expectations plunge to 71.3 from a seven-month high of 79.2, alongside a down-tick in the current conditions component to 85.8 from 85.9. Both of the Michigan sentiment inflation metrics rose by 0.2% to 2.8% from 2.6% for the one-year measure and to 2.6% from a seven-month low of 2.4% for the 5-10 year measures.
This past week the BLS reported record low layoff rates and strong hiring rates that reinforced the more positive tone from October’s Employment Situation Report last Friday.
U.S. JOLTS reported job openings rebounded 84k to 6,436k in September. That follows the -345k drop to 6,352k in August which broke a string of three straight monthly gains as the job market recovered from the pandemic plunge early in the year. Openings totaled 7,046k a year ago. The JOLTS rate was unchanged at 4.3%. September hirings fell -81k to 5,871k after bouncing 49k to 5,952k (was 5,919k). The hiring rate dipped to 4.1% after holding steady at 4.2% in July and August. It was at 5.4% in May. The quit rate edged up to 2.1% after dipping to 2.0% in August from 2.1% in July. The JOLTS data, though lagged a couple of months, remain volatile as the labor market is buffeted by the pandemic, the various degrees of reopenings, and uncertainties over further fiscal stimulus packages, and the expiration of benefits.
Initial claims have continued to fall with this week marking yet another low of the pandemic. U.S. initial jobless claims dropped -48k to 709k in the week ended November 7 following the -1k dip to 757k in the last week of October. Though down from their record peak of 6,867k from the March 27 week, claims remain elevated versus the 201k level at the end of January. Meanwhile, the 4-week moving average declined further to 755.25k from 788.5k at the end of October. Continuing claims contracted -436k to 6,786k in the October 31 week after diving -601k to 7,222k in the week ended October 24. This is the first time below 7 M for continuing claims since March 20, when the measure totaled 3,059k. The insured unemployment rate was 4.6% versus 4.9%.
The job picture continues to slowly improve despite the surge in covid cases.
Contrary to the “we need more stimulus” rhetoric, it seems the masses aren’t being forced out of their home during the pandemic. MBA data released this week showed delinquency and foreclosure figures for the third quarter. Delinquencies improved in the third quarter with the rate falling from a nearly decade high of 8.22% to 7.65%. That decline is consistent with the delinquency rate from Black Knight which showed delinquencies fell from 6.88% in August to 6.66% in September.
The MBA also released its quarterly reading on foreclosures. Moratoriums and other freezes have led the foreclosure rate to continue to fall to fresh lows. The MBA’s reading, which goes further back, fell to 0.59% in the third quarter, the lowest reading since 1982.
The 3Q20 earnings season has far exceeded expectations, but the markets seem more concerned with positive future guidance given the uncertainty surrounding the recovery. I see those concerns as unfounded. The data does not support that view. Ultimately, until the virus is fully curtailed, the Info-Tech, Communication Services, Health Care, and Consumer Discretionary sectors remain at the “top of the ballot” given their favorable earnings and sales growth due to their position in the top portion of the economic recovery. I start my research using the data, not the “spin”.
Those that are paying attention realize there is plenty of visibility out there. Companies are raising guidance at an extraordinary rate in this quarter. Despite the recent COVID spikes, CEOs seem to be confident in their forecasts. Anyone that doesn’t have these statistics at their disposal is flying blind. The Savvy Investor Marketplace Service starts every day knowing what companies are not only beating earnings but also raising their forward outlook.
The Political Scene
There is still some uncertainty, but Biden looks to be in the White House and the GOP has the edge to keep control of the Senate. In terms of the presidential race, Biden has been declared the winner by the media, but as we have seen, there will be “challenges” to some state results and the electoral college waits until that process plays out.
As of today, the GOP is the slight favorite to hold on to the Senate. It has secured 50 Senate seats. That includes the Maine seat as that race is over, and the same can be said about the senate race in North Carolina with both seats held by republicans. Both Georgia seats will be involved in a runoff on January 5th as neither candidate secured the 50% threshold to capture the seat.
A 50/50 tie would mean the tie-breaker falls to Kamala Harris. That scenario suggests no one will have a clear or strong majority. So it would seem doubtful that any radical (market negative) changes will get passed as there exists conservative on both sides of the aisle that will keep an equilibrium in place.
Democrats are certain to hang on to the House but they will be working with the smallest majority in a while. Once again sweeping radical legislation is apt to be kept in check. This probably means no major Senate rule changes, which means the labor agenda and carbon restrictions probably can’t pass. No court-packing or adding states either. In other words, no “extremes” all of which could be construed as market negatives.
As noted, a Biden White House and GOP Senate is the best outcome for markets. Generous subsidies for alternative energy become unlikely as well if the GOP keeps the Senate.
The most likely bipartisan bills that could matter to markets would be another economic stimulus package, followed by an infrastructure bill. Keeping the onshoring agenda in place. We could also see modest drug price controls.
All of these probably would have been the same if Trump remained in place. So far the market is generally seeing the picture as somewhat of a status quo on any meaningful changes. Of course, this remains a “wait and see”, “work in progress” outlook for investors.
Therefore all of this confirms my initial view as mentioned last week.
It’s business as usual and there exists a possibility that Goldilocks will make an appearance in 2021.”
In some respects, this is about as divided a government as we have seen, and IF the economy continues to improve, we will watch Goldilocks come back to Wall Street.
I will have more thoughts on the policy implications of the various scenarios as soon as we get more clarity. Investors’ focus should remain on any actions imposing roadblocks that could botch the trajectory of the recovery.
In comments to the Economic Club of Memphis, Fed’s James Bullard said the economy has recovered more quickly than expected. That’s largely been the result of “exceptionally effective monetary and fiscal policies.” The rebound in employment was faster than projected as a lot of the layoffs were temporary and he could see the unemployment rate falling substantially. Bullard added the labor market recovery is “48 to 50 months ahead of where it was following the 2007-09 recession.” But he also said downside risks remain “substantial, and continued execution of a granular, risk-based health policy will be critical in the months ahead.”
Fed’s John Williams said the economy is on a positive trajectory with the recovery better than expected. He does see the economy slowing as a result of a rise in virus cases. Regarding the recent pop in interest rates, he said the selloff was a function of the good news on a vaccine, a better outlook on the economy, and not an inflation fear. He did note, however, that a better-than-expected performance of the economy could pull forward rate hikes. But for now, low rates will continue to support the economy.
The 10-year Treasury rallied to its highest level (0.98%) since March before giving up some ground to close the week at 0.89% up 0.06% for the week.
There is no problem with the yield curve today. The 2-10 spread was 30 basis points at the start of 2020; it continues to widen standing at 72 basis points today.
In this week’s AAII sentiment survey, 55.8% of respondents reported as bullish which is in the top 94% of all readings throughout the history of the survey dating back to 1987. It is also the highest bullish sentiment reading since the first week of 2018 when 59.75% reported as bullish. The 17.8% increase this week was also the largest weekly increase in bullish sentiment in over a decade and the top 2% of all weekly changes. The last time bullish sentiment increased by as much or more was the week of July 15th, 2010, when it rose 18.4% to a much more modest 39.3%.
Can a market pullback be far behind?
Crude oil has so far broken and stayed above its moving averages this week even despite a surprise build of 4.2 million barrels in inventories compared to the anticipated draw of 1.9 million barrels (the largest build since July 17th). While it was the opposite result of forecasts, in recent years rising inventories have been the norm for the current week of the year.
The product picture was better as gasoline inventories drew on demand which rose to its highest level since October 2nd. Meanwhile, non-gasoline product inventories drew by the most since March.
The commodity closed the trading week at $40.15, up by $2.80, putting the price of WTI back to where it was in mid-October.
The Technical Picture
The S&P 500 continued to surprise as it broke out of its recent trading range setting another hew high in 2020.
As we have seen in the past, when indices rise in concert, that is a sign of strength, but it can also be a sign for a “pause”. I don’t see a need to make forecasts based on a “feeling” or a “guess”, so I will leave that to others to decide. Suffice to say if you have stayed the course, you were rewarded this week.
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.
I mentioned in an earlier missive that generally speaking the stock market sees the political situation as more of a status quo situation. A backdrop where any market negative radical legislation is more than likely not in the cards. Market observers were pleased to hear that may be the case when it comes to any potential economic lockdowns. Representatives of team Biden indicated they weren’t in favor of such measures.
There is a tremendous price that is being paid by isolating children during the COVID-19 incident and we may be in the first inning of this event. Mental health-related hospital emergency department visits rose 24% for children ages 5 to 11 and 31% among adolescents ages 12 to 17 from March to October. That is “Emergency visits” and one can only imagine what is also taking place under scheduled procedures.
It’s one of the reasons SAVVY selection Acadia Healthcare (NASDAQ:ACHC) is posting blowout results. This operator of behavioral healthcare facilities has seen demand skyrocket recently.
Individual Stocks and Sectors
Is It Finally Value’s Time?
That question is on the mind of just about every analyst and investor out there. Every financial network is dedicating hours of coverage to the topic of how investors should position themselves now.
I’ve dealt with that question for weeks now. All of the details on that strategy are available in my daily updates to subscribers. My job is to take the data provided and formulate a view that you all hopefully find helpful in your own investment process.
There remains a contingent that says the stock market is delusional. I’ve disagreed with many of the naysayers since April and so far that has produced positive results. At various stages of the market’s recovery, it was more or less looking past the virus towards the day when a vaccine entered the picture. After all, the price action was telegraphing the forward-looking approach that told us the virus wasn’t going to dominate the scene “forever”.
Investors also witnessed companies representing a large swath of the economy doing extraordinarily well. So if the vaccine took longer than anticipated, there was already a portion of this economy that was very robust. The data was clear, and it was telling investors that news since the early summer. Now that the vaccine has arrived, we should take into account all of the information surrounding this medical breakthrough.
Rest assured there will be many that will now downplay the breaking news on the virus as they will no doubt highlight all of the “negatives”. In keeping with my view to look at all of the info available, any investor should acknowledge that this won’t be a quick and easy fix. Rolling out vaccines to the global population will be a bumpy process, but the logistics can be managed if the underlying vaccine is constructive.
While this vaccine news is phenomenal for risk assets it will also take a long time to get enough doses out into the population as a whole and fully suppress it. The anti-vaccine sentiment is already on the high side, and that could ultimately prevent the maximum benefit of the rollout. This is not intended to detract from the positive nature of the news, but we also need to understand capturing its benefits will take some time.
However, investors who wish to be successful need to know how the stock market works.
There is little reason to suggest the equity market will all of a sudden change in its forward-looking view. Yet there are plenty who continue to deny the reality of the situation. The technical market view is already telling us it is going to take this news as nothing but positive while fully understanding the hurdles ahead. Let’s also not lose sight of the fact that this isn’t the only medical breakthrough that is on the scene. There will also be other vaccine alternatives and more advancements in therapeutics that will come to fruition. This isn’t 1918.
Lessons have been taught this year but there are so many that haven’t paid attention to. So please allow me to review today’s lesson. The recent broad market strength means that more individual stocks have joined the party and that culminated on November 13th when the S&P recorded its 23rd all-time high in 2020. While the Dow Transports, Dow Industrials, and the Russell 2000 also set new highs this week, flashing a Dow Theory Buy signal. I don’t see that price action as “delusional at all.
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.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
Savvy investors have followed the yellow brick road to portfolio gains in what many have called one of the most difficult investment environments they have ever seen.
The reason; The Savvy Investor Marketplace service is all about teaching investors how the stock market works. It leaves the constant mood swings that have market participants confused and dazed out of the equation. Jumping to conclusions and guessing are attributes of amateurs that have led investors astray.
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.