MARKET RECAP

Stocks were basically flat in the US and down 0.55% outside the US. The action has been in small stocks, which are at a record and are up by 25% since November 5.

After months of negotiation and congressional approval, Trump suddenly decided he didn’t like the stimulus bill, but the market wasn’t disappointed, figuring congress will now come back with an even bigger package. Trump wants $2,000 in direct payments instead of $600. In a world where debt doesn’t seem to matter, why not (according to Trump)?

Household spending fell in November for the first time in seven months, down 0.4%, more evidence that the virus is taking its toll. Household income dropped by 1.1%, the third decline in four months. Consumer confidence is falling, down by 4.3 points, according to the Conference Board. However, income is up 2% since February, and savings rates are at historically high levels. So whenever the virus gets under control, there is the possibility of pent-up demand will increase economic activity. The Atlanta Fed’s GDPNow model is projecting Q4 growth at an annualized rate of 10.4%.

After four years the finishing touches are being put on a Brexit deal that would govern trade, totaling almost $900 billion, between Britain and the EU. The deal, for the most part, would allow tariff-free trade between the two sides and reduce paperwork at the border. It would also allow Britain to sign free trade deals with other nations.

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MARKET RECAPS

US stocks were up by 1.02% and international stocks by 1.23%. As the market continues marching higher, signs of excessive optimism are all around. A recent Bank of America survey of professional money managers are underweight cash for the first time since May of 2013, holding only 4%. Individual investors are piling into speculative stocks with outsized best on call options. Bitcoin has broken out to new highs, now over $20,000. Value Line, a long-time investment research firm, calculates an 18-month target price range for the companies that it follows, the projection for the average stock is now 4%, the lowest number ever. At one point this year, when stocks were at their low, it was 72%. Speculation is running high in the IPO market. In this week’s Barron’s 2021 Outlook article, experts say stocks will gain 10% next year. More government stimulus and a faster-growing economy will provide the fuel for higher equity prices. The consensus is for the fastest economic growth in the US since 1984, +5%, and S&P earnings of about $170.

At a news conference this week, Fed Chair Jerome Powell did say that price/earnings ratios were on the high side but said that the equity risk premium was reasonable given low Treasury yields. Right now, the forward p/e based on 2021 earnings would be the highest p/e ratio since at least 2004 (see below). The problem is what happens when yields begin to rise. That may be a long way off, or maybe not, if the vaccine puts an end to the crisis and consumer spending explodes, setting off inflation, forcing rates higher, which would require a reset to lower p/e ratios.

Growth on the virus stalled out for a couple of weeks pre-Thanksgiving, but as the experts predicted, the holiday put in motion another huge surge in cases. The Pfizer vaccine began its initial rollout this week, and the Moderna vaccine was approved on Friday. So, as the vaccines slowly rollout, the economy is getting closer to a return to something close to normal.

The surging virus is cutting into economic activity. Retail sales were down by a seasonally adjusted 1.1% in November from October, and October was revised down from +0.3% to -0.1%. Restaurants, department stores, and car dealerships were all down while groceries and building materials were higher. First-time unemployment claims were 885,000 last week, the highest level since September.

The electoral college declared Joe Biden the next president of the United States. Trump’s lawsuits challenging the election were all dismal failures. Congress still has not agreed on a relief plan, the two sticking points are aid to state and local governments, and business liability protection.

A recent ruling in a US District Court is sending shivers through the leveraged buyout industry. Judge Jed S. Rakoff ruled that creditors of retailer Nine West can file a lawsuit for $2 billion in damages against the company’s board of directors. The ruling stated that the board acted “recklessly by failing to adequately assess an LBO-buyers post-transaction solvency.” Brian Quinn, a corporate law professor at Boston College says “It could be a game stopper for the private equity business.” Basically, the Board sold off important Nine West brands leaving the remaining entity as a much weaker unit, with too much debt, which led to bankruptcy. Because of that, they are now liable. The ruling can be overturned on appeal, but for now, this can impact private equity going forward.

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MARKET RECAP

Stocks were down by 0.69% in the US and 0.42% outside the US. Stimulus talks, which are on a constant stop and go, were in stop mode most of the week so that hurt stocks. Plus, the virus has been ramping up significantly since Thanksgiving and that is raising concerns of more restrictions on economic activity. As an example, indoor dining in New York was halted.

Despite the slight decline in the overall US market, the IPO’s were flying high, bringING back memories of 1999. DoorDash was up 86% and Airbnb 113% on their first day of trading.

Another sign signaling overvaluation, US investment-grade corporate bonds now yield less expected inflation. As of last Friday, the expected inflation rate over the next decade was measured at 1.89% (the difference between nominal and inflation-adjusted yields on 10-year US bonds), greater than the 1.85% yield on investment-grade corporates. This is the first time that has happened and it is mainly driven by negative real yields on US Treasury’s pushing investors up the risk scale, such as into these bonds, thereby pushing their yields down.

The European Central Bank ramped up its bond-buying program by more than a third and will introduce new low-cost loans for banks, in an effort to help governments and businesses as they fight through the current tidal wave of the virus. With this effort, the ECB has now poured in $3.62 trillion into the eurozone economy.

Unemployment claims jumped significantly higher, up by 137,000 to 853,000, last week. Consumer spending was up in October for the sixth straight month, according to the Commerce Department. And the Institue for Supply Management reported that the manufacturing and services sectors expanded in November.

The government reported a record deficit for the first two months of the fiscal year, up 25% from last year to $429 billion. Federal spending was up by 9% while revenue was down by 3%.

Net worth of U.S. households hit a record, a Federal Reserve report showed. Most of the benefit has gone to wealthier Americans who are invested in equities.

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MARKET RECAP

Stocks advanced again last week, with US markets up by 1.77% followed by international markets at 1.48%. For November, stocks rallied 16.59%. It was the best November since 1928. Bonds declined by 0.57% for the week as the yield on the 10-year Treasury rose by 13 basis points.

91% of S&P 500 companies are trading about their 200-day moving average, the highest percentage since July of 2013.

Super-low interest rates and hopes for a spectacular recovery are fueling the rally. Industrial metals are anticipating a surge in activity, copper is at a seven-year high, and the other industrial metals are all way up in price.

But the anticipated slow-down in the labor market that we have written about in the last couple of months appears to be here. Non-farm payrolls were up by only 245,000 in November, down from 610,000 jobs in October. The unemployment rate did fall to 6.7%, but that was due to 400,000 people leaving the workforce. The weak report might spur Washington to move quicker on a stimulus plan. The latest proposal centers on a $900 billion stimulus package.

22 million jobs were lost at the beginning of the pandemic, and the US has regained 12 million of those. Government payrolls were down by 100,000 while hiring was up in transportation and warehousing, reflecting e-commerce, which has been the big beneficiary of the virus.

Over the last decade, equity taken out of the stock market, mainly via stock buybacks and takeovers, outpaced equities issues, via initial and secondary stock offerings, by a 3 to 1 ratio. But this year, the numbers have evened out. That makes the stock rally this year even more impressive, as stocks are up 18.65% without that tailwind. But it might be giving a message on valuation, with companies selling stock into the market to “sell high” and holding back on buybacks given high prices and valuations.

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HIGHLIGHTS

• US markets hit record highs.
• Trump, while still contesting the election, announces he will cooperate on transition.
• Extreme bullish sentiment.
• A very strong preliminary Markit Composite Index report.
• But jobless claims are up for the second week.
• The pace of the increase in the virus is slowing but Thanksgiving might provide another jump.

MARKET RECAP

The Dow broke the 30,000 barrier on Tuesday for the first time and is now up about 60% since the March low. In the last couple of weeks, positive vaccine news gave the market a possible end date on the pandemic, and Trump announced on Tuesday he would cooperate with Biden on the transition, those were enough reasons for investors to move stocks to the historic highs.

This is a market that can really do no wrong. It continues to move higher, counting on a booming recovery when the virus ends, while simply ignoring a virus that seems to be everywhere and its economic fallout.

The rally has been broadening as more stocks are joining in. The Russell 2000 index small-cap companies reached a new record and international stocks are close to topping their 2018 peak.

Bullish sentiment is everywhere, and in the past, that has sometimes been a precursor to either underperformance or a decline. The chart below shows bullish sentiment as measured by the AAII (American Association of Individual Investors) versus the S&P 500. Bullish sentiment hit very high levels two weeks back.

Likewise, CNN’s Fear and Greed Index came in at 92 this week, indicating extreme greed.

There is some good news in the economy, even in the face of rising virus numbers. The IHS Markit composite index of US business activity increased to 57.9 in November, up from 56.3 in October. The increase, which is a preliminary estimate, would be the fastest pace of growth since March of 2015 and represents a positive divergence from Europe, where their measure has been sinking.

But there is also more negative news. Jobless claims rose for the second week in a row, now at 778,000 from 758,000 last week.

As for the virus itself, the pace of growth seems to have slowed, but there is the threat of another ramp up coming off the Thanksgiving holiday.

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MARKET RECAP

US stocks were down by 1.22% while international equities finished 0.91% higher. Good news from Moderna was offset when the Treasury Department announced it would not continue five special lending facilities, as well as a JP Morgan projection that it sees the economy contracting in Q1 of 2021. Fed Chair Jerome Powell said the next few months will be challenging and asked for more fiscal support, but that does not seem likely until the Biden administration takes power.

Following up on the Pfizer announcement from one week prior, Moderna announced on Monday that its Covid vaccine is 95% effective based on early trials. That is a huge win for science and puts a rough end date on the epidemic of 9-months to a year, but in the meantime, the virus is just exploding. Maybe, hopefully, the growth of the virus is beginning to slow in the USA, the 7-day moving average has stayed at about 165,000 for five days. Of course, it might just be a pause but the trend has been relentlessly higher since the beginning of October until now.

Home sales hit a 14-year high in October as sales increased for the fifth straight month. After years of disappointments, home sales have been the bright spot in the Covid economy, as ultra-low interest rates and a desire to get into individual homes have driven purchases.

October retail sales were disappointing, rising just 0.3% in October, lower than the 0.5% consensus estimate. Jobless claims increased by 32,000 last week. 742,000 were filed last week. More increases might be on the way as Boeing, Disney, and Exxon have recently announced job cuts.

Running out of legal options, Trump’s lawyers are making even more bizarre allegations, claiming the election was stolen via a massive conspiracy involving Democrats and foreign governments, including some help from Hugo Chavez who died in 2013! To date, there is no evidence of any kind of widespread fraud, and many of Trump’s lawyers have said they do not believe there was widespread fraud. Trump fired the official who was in charge of election integrity after he said there was no fraud. Jeffrey Engel, a presidential historian at Southern Methodist University said that other candidates have challenged election results in the past when there were clear and legitimate circumstances, but “all of them recognized that the unity of the country was more important.”

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HIGHLIGHTS

• Biden will be the next President although Trump does not concede defeat.
• The Blue Wave does not happen.
• The market likes the mix of power.
• US stocks up by 7.35% in the biggest election week rally since 1932.
• The economic rebound continues but the virus numbers continue to soar.
• Negative-yielding debt hits a record $17.05 trillion.

MARKET RECAP

The market was anticipating a Biden romp, a blue wave, and a huge fiscal package that would offset higher tax rates. Investors figured that was a good formula and stocks ran up in anticipation. What they got might even be better. Biden will be the President, a Senate that might lean Republican, and the Republicans even managed to pick up seats in the House. What it all means is the US gets a civil, decent, and more predictable President, someone that will act as a unifier and a leader for all, and that will be restrained from doing anything too crazy given the mix of the Senate. The market liked the look of that and turned in its best week since April, up 7.35%, it was the best election week return since 1932, and that was coming off the worst pre-election week ever.

Of course, Trump refused to concede defeat, embarrassing himself in the process,  claiming the votes that put Biden over the top were illegitimate and filing lawsuits wherever possible. But no one is buying it, Biden will be the next President after the lawsuits run their course.

While the political news was good, the virus news wasn’t. The virus is taking on an exponential growth rate and that is bound to impact the economy until it gets under control.

In the meantime, the economy continues to rebound. The Institute for Supply Management’s manufacturing index increased to its highest level, 59.3, since 2018. New orders reached its highest point in 17 years. The October payroll report was also strong, as the US added 638,000 new jobs and the unemployment rate fell to 6.9%.

Stocks are getting support from interest rates that basically don’t exist, at least above zero. Bloomberg reported that negative-yielding debt hit $17.05 trillion on Friday, surpassing the August 2019 mark. On top of that, the Fed is buying $120 billion per month in treasuries and agency mortgage-backed securities each month. The Fed’s balance sheet has ballooned to $7.1 trillion from $4.1 trillion at the end of February. And as we have shown in the past and below, there is a strong correlation between Fed assets and the stock market.

More than 25% of all investment-grade debt now yields less than zero. That has pushed investors into equities as well as riskier fixed-income investments like high-yield and leveraged loans. While the price of the riskier fixed-income products has risen, the fundamentals haven’t. The artificially low investment-grade yields are masking potential problems in these debt markets. A problem maybe not for now but probably for later.

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HIGHLIGHTS

• US stocks ball by 5.6% and international equities were down 5%.
• Good economic reports.
• Q3 GDP expands by a record amount.
• Biden leads going into election day.
• Lockdowns beginning in parts of Europe as the virus explodes there and in the US.

MARKET RECAP

US stocks fell by the most since March, dropping 5.6%. It was the worst loss ever in the week preceding a Presidential election. While stocks fell, the ten-year yield reached its highest level since June, the exact opposite of how treasuries normally act in a falling equity market. High tech valuations, a fast-expanding virus in Europe and the US, and then throw-in election worries and you have what it takes to tilt the market way off balance.

US equities hit their high on 9/2 and then sold off by 9% through 9/24. A subsequent rally ended on 10/12 when stocks could not break through the September high. The market is now down 7.5% from the high.

The economic news for the week was good. GDP was up by a record amount in the third quarter. Jobless claims fell to a 7-month low, coming in at 751,000. Personal income rose in September by 0.9% and personal spending was up by 1.4%. Corporate earnings are down 12.5% from last year but 9% higher than was forecast, according to Lindsey Bell, the chief investment strategist at Ally Invest.

Real GDP shot up by a record 33.1% in Q3, which followed a 31.4% drop in Q2. Net, net, the US is down about 3.5% from the pre-crisis peak. To close the remaining gap, the service economy is going to need to get back to normal, and that will be almost impossible if the virus keeps impacting economic activity.

With the election just a few days away Biden leads by more than 8 percentage points based on recent surveys, but Trump is counting on inaccurate polling to pull the surprise victory. The pollsters, who completely miscalled the 2016 election, say don’t count on it, with the likely outcome being between a somewhat close contest with a Biden edge that can be disputed and spillover to the courts, to a Biden blowout win. The bigger question is can the Democrats take the Senate. Assuming a Republican victory in Alabama, the Dems will need to win four seats currently held by Republicans to gain control. With Colorado, Maine, and Arizona leaning to the Democrats, “North Carolina or Iowa could be the tipping-point states,” according to Jessica Taylor, editor of the Cook Political Report.

Germany and France implemented a new set of lockdowns to try to get the virus under control. France will lockdown for at least one month. People will have to remain at home, nonessential businesses will close. The German lockdown is less restrictive but will close restaurants, bars, gyms, and theaters. Here in the US, the surge of the virus is now at record levels.

A second wave in pandemics is common. The Spanish Flu of 1918 was marked by an initial breakout in the spring of 1918 followed by a second wave from September to November of 1918. The Asian Flu of 1957 had its initial wave in the US in October of 1957 and then the second wave in January and February of 1958. The Hong Kong Flu of 1968 started in July of 1968 and lasted into the winter of 1969 and then a second wave appeared late in the fall of 1969 and ending in the winter of 1970.

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HIGHLIGHTS

• The US falls while international stocks rise.
• Strong earnings report.
• Signs of a weakening employment market.
• The Covid surge is back in full force.
• Treasury yields are rising on the long end curve.

MARKET RECAP

Stocks fell by 0.40% in the US as hopes for a stimulus package wavered up and down during the week. Overseas, the markets did better, advancing by 0.60%. Earnings so far have been positive, 83.7% have beaten forecasts and the average earnings have topped expectations by 17%, this is compared to 65% and 3.5% on average, respectively.

The size of the labor force fell in more than half of the 30 states that showed a decline in unemployment rates last month. That is a signal of a weakening labor market. The unemployment rate is a function of people finding new work, those who cannot find work, and others who left the workforce entirely. When people stop looking for work, it pushes the unemployment rate down, even though it is actually indicative of weakness, not strength.

The Covid virus is back at full strength in the US, reaching the highest level since July as communities across the country open up. The virus is now beginning to circulate in higher numbers in rural type areas and people in their 30s and 40s are the main age group, compared to 18-24 in the previous peak. The surge is arriving earlier than was expected. The numbers are also surging in Europe.

The 10-year yield has ticked up to 0.87%, which is the highest yield since June, as the bond market begins to anticipate a Democratic sweep and a massive stimulus bill. The deficit could expand by $5 trillion-plus under such a scenario. The difference between the 10-year and 2-year yields reached 71 basis points on Thursday, which is the most since February of 2018.

China posted 4.9% growth in the third quarter, slower than what was expected but still good relative to the rest of the world. Its growth rate continues to catch up with last year. China is the only major economy to grow this year.

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