'Where is it?'
This is what a gentleman (sounded disgusted, a boomer for sure) asked me on an investor call this week during Q&A. “Where is what?” I asked. “The money,” referring to the bear-market declines and his portfolio balance. When anyone asks “where is the money,’’ Fundstrat says tell them the answer is the USA. About $100 trillion of the world’s $300 trillion in household wealth resides in the U.S., according to Credit Suisse’s annual global wealth survey. Boomers—those above 60—control 76% of this wealth, vs. a mere 5% for millennials. The American Association of Individual Investors survey, arguably the best way to measure boomer retail sentiment, tells us the boomer investor is very bearish. Weekly sentiment was below 20% in back-to-back weeks ending May 15. The last time this happened was March 4, 2009. An excellent cornerstone for the Wall of Worry. The S&P 500 is back above two key moving averages—its 200-week seasonal moving average, a proxy for the secular uptrend, and the 15-month seasonal moving average, a proxy for most cyclical (2-4 year) bull cycles. The lack of a meaningful pullback from resistance in the 2,800-3,000 zone implies a stronger bullish bias, with monetary and fiscal policy support limiting the downside. With the market oscillating between growth and value, Goldman Sachs says investors should focus on stocks, not the index.
Since the S&P bottomed in mid-March, high beta has outperformed low beta by roughly 40%, the strongest beta rally since the first few months off the 2009 market low. This was on full display this week, as Industrials broke out vs. Utilities, Consumer Discretionary hit 2-month highs vs. Consumer Staples, banks firmed and copper held its own. With more than 90% of stocks above their 50-day moving averages, the broader market is overbought, but Strategas Research considers it a “good overbought” as it’s rare to see momentum surges of this intensity. Their presence suggests mixed short-term results as strength consolidates, with returns well above average longer term. The other big development is the equal-weighted S&P—its 10-day performance vs. the cap-weighted index falls in the 95th percentile, reflecting improvement in the smaller weights (Financials, Industrials, Materials and Energy). The sweet spot for this risk-on rotation—value on Tuesday posted its best single-day performance since 2009 and its fourth best day in 30 years—comes as economies reopen, more fiscal programs are implemented (more below) and Covid-19 cases in the U.S. are at new daily lows. These conditions, and the belief the bottom is in, favor cyclicals that have survived this "Greater than Great Depression," as Fundstrat puts it. Trading at 1.5 times price-to-sales, their valuations are extremely attractive relative to the broad market (at 2.1x) and the big tech stocks (4.3x). Evercore ISI views the backdrop for risk-taking as “outstanding,” with opportunities across growth and value—a stock picker’s market. Geopolitics and the pandemic offer the “biggest V-Rally Wall of Worry in a century,’’ it says, with “governments throwing $10 trillion at what potentially looks to be a $5 trillion problem.” It sees 3,600-3,800 on the S&P very much back in play longer term. “The economy is healing, go buy it.” So now we’re talking a V?!
Cornerstone Macro isn’t as enthusiastic. It doubts the ability of cyclical stocks to sustain their latest move, citing prior failed rallies off the March 23 lows. Mega-cap growth stocks, representing more than a quarter of S&P market cap and back at pre-Covid peaks, are still king until proven otherwise. There is still downside risk to negative Covid, economic and geopolitical news. China-U.S. relations, which hung over the market for more than a year before the virus hit, have worsened (more below), raising the dollar-yuan level above where it stood before last October’s Phase One trade deal, a sign it’s likely dead. Both U.S. and European markets are close to correction territory in time and price, TIS Group says. It puts downside risk at 2,870 on the S&P, and then potentially 2,713, and also doubts value is ready to overtake growth for market leadership. Willie Sutton was inarguably America’s most famous bank robber. He never injured a soul, but took on almost a hundred banks and departed three of America’s most escape-proof penitentiaries. Sutton is famous for two things: His fascinating career as an illegal withdrawals specialist (bank robber, that is) and for a pithy rejoinder supposedly uttered in response to an interviewer’s query about why he robbed banks. Lore has it that the bank robber replied “Because that’s where the money is.” Sutton denied ever having said it. “Why did I rob banks? Because I enjoyed it. I loved it. I was more alive when I was inside a bank, robbing it, than at any other time in my life.” Where is the money?? It’s with aging, worried, sometimes disgusted boomers ... decorating that Wall of Worry.
- Might it be a V? Continuing claims fell by 3.9 million in the latest week, well below consensus, suggesting re-employment is occurring faster than anticipated. With noise in the employment data over the coming months, continuing claims are likely to be the most important labor market indicator. Also, Jefferies Group says recent real-time data on activity amid small businesses, which have been at the epicenter of the crisis, show encouraging trends.
- I wouldn’t even dream of buying my shoes online! Foot traffic through all of Simon Property Group’s 48 retail outlets increased by more than 4.5 times during the week leading up to the long Memorial Day weekend when compared to the first two weeks of April. However, it remains nearly 60% below pre-lockdown levels. The Conference Board’s consumer survey showed most Americans think the shock will prove temporary, in line with a natural disaster vs. a normal recession, and are focusing intended purchases on major items and autos, and not vacations.
- Don’t fight the Feds The European Union (EU) and Japan stepped up stimulus in a big way this week, bringing their efforts in line with the U.S. at roughly 40% of their economies' respective GDPs. It marked the first time EU policymakers acted as a unit as opposed to a collection of individual countries by proposing distributions to member countries based on their need, not their size. In another hopeful sign, four weeks into the lockdown relaxation process, there has been little sign of a resurgence of virus cases or deaths or a second wave in Europe, nor in Asian countries that are ahead on the virus curve.
- The gloves are off China is vowing to hit back over any U.S. reaction to its decision to extend mainland security laws to Hong Kong. TIS Group said a new White House report admits our government has underestimated China’s intentions over the past 40 years, and Jefferies believes whatever the outcome of November’s election, Beijing has concluded a new Cold War is a distinct possibility, making it less likely to play nice in its dealings with Hong Kong and Taiwan and more determined than ever to end its dependence on U.S. technology.
- Housing has a ways to go April’s pending home sales fell nearly 22%, well below expectations, with the 35% year-over-year (y/y) decline more than doubling March’s drop-off. Because pending sales tend to lead existing home sales by 1-2 months, the report dampened excitement over more positive recent news on new-home sales, builder confidence and home prices.
- Deflation vs. inflation Core PCE decelerated in April to 1% y/y, half the Fed’s target rate. Supply chain disruptions and social distancing are making some products and services more expensive, such as imports and airfares, but the drop in aggregate demand likely will remain much bigger than any decline in aggregate supply, making deflation the bigger worry, Deutsche Bank says. We won’t see inflation until the stimulus money goes into the economy and not assets, Ned Davis says, noting demographics, globalization, technology, a debt bubble or just preferences have favored the latter so far.
What’s the use of all that money if you can’t spend it? The money supply is growing at nearly a 30% annual rate, twice as fast as during any point in the inflationary 1970s. But the cause is not so much the Fed’s dramatic expansion of its balance sheet as the limited opportunities to spend, Applied Global Macro Research says. Household spending flows are running roughly 30% below incomes. In April alone, consumer spending fell nearly 14% while stimulus-infused incomes jumped more than 10%, pushing the savings rate to a record 33%. While restoring financial liquidity, unprecedented Fed easing won’t likely have much economic impact until consumer demand and bank lending perk up.
Does valuation really matter? Strategas Research’s been getting that question a lot in the wake of a ballooning Fed balance sheet now at $7 trillion and growing. It says the data suggest the answer’s the same whether central banks are flooding the system with liquidity or not: valuation has almost no predictive short-term power (a year or less) and a pretty strong relationship with long-term returns (10 years). In between, financial repression just heightens the frustration among value-oriented investors.
Election risk Odds in the betting markets as to whether President Trump will be re-elected remain aligned with S&P performance, with the betting markets now seeing a close race—a major shift from February when expectations were high that Trump would win and the Republicans would keep the Senate. RBC says presumptive nominee Biden’s VP choice could be telling and notes buzz about Warren is growing. It views the election as a key risk for stocks this summer and into fall.