My pet peeve is people like you ...
… who say, “Historically the market, etc. … ” when we are in unprecedented times. Well, that was kind of snarky. This came from a gentleman during Q&A after an end-client presentation. I wish he would read my weekly. My use of “unprecedented” in it has been unprecedented. With much of the data backward-looking and the C-suite pulling guidance, price signals and historical context are about the only help available. Strategas Research sees a market ready to consolidate into election-year seasonality, though it finds stocks’ resiliency amid persistently bad macro news (this week, Buffett’s unusual caution, a German court ruling questioning ECB stimulus and unemployment tripling to 14.7% on 20.5 million lost jobs) to be notable. I’m seeing lots of data suggesting the market’s gotten ahead of itself. A sustainable rebound typically doesn’t come until ISM Manufacturing has bottomed, and it’s expected to fall even further this month after hitting an 11-year low in April. In his letter to shareholders, Jamie Dimon, who marked the cyclical bottom in 2016 with his personal purchase of JP Morgan stock, said the bank had stopped buying back stock in preparation for a downturn. The banks subsector has been the worst performer year-to-date, down 39% to an all-time relative low vs. the S&P 500. Financials’ share of the S&P is near 2009 lows. Renaissance Macro also expects weakness in coming weeks, citing concerns about credit and record 2-year Treasury yield lows. History suggests something in the range of a 10% pullback. This expectation is consensus, BTW. A Renaissance Macro Twitter survey shows 74% of respondents believe the next 5% in the S&P will be to the downside.
Lots of us can’t work from home. States continue to reopen—26 representing 58% of GDP are doing so in phases. This comes as nearly three in every four Americans say they would return to work immediately if allowed, according to a survey cited by Jefferies. Respondents were most excited about slowly revisiting restaurants and hair salons/barber shops. (My hair cannot understand why salons are in phase 2!) This gradual reopening coincides with most consumers in solid shape. The personal savings rate shot to a 39-year high in March, and the combination of fattened jobless benefits and stimulus checks is expected to drive consumer disposable incomes higher this quarter and next despite soaring unemployment. Moreover, just as states have begun to ease restrictions, consumers have received $250 billion in tax refunds over the past three weeks. Gasoline demand jumped a third straight week and has recovered 40% of its mid-March drop-off. Renaissance Macro says this shows the economy hit bottom before shelter-in-place orders were lifted.
Following April’s strong bounce, sentiment remains bearish if not as extreme as it was from early March through mid-April. (Evercore ISI says for only the eighth time in its work, sentiment was stuck in its proprietary extreme pessimism zone for 45 trading days through April 28.) Pessimism feeds volatility—through May 5, the S&P went 51 consecutive trading days with moves above 1%, a rarity. After exiting extreme pessimism, the S&P historically has tended to be flattish for a month, followed by above-average median gains three, six and 12 months out. Despite last week’s speedbump, Jefferies thinks the S&P may soon cross the 200-day average of 3,005. The violence of the bear-market sell-off suggests small caps could lead the way. Even though the recent outperformance of small caps to large caps falls in the 99th percentile, consensus remains that small-caps don’t stand a chance given the nature of the crisis. Index leadership still reflects a flight to large-cap safety, but those names are overcrowded and valuations are much more reasonable on the cheaper end. Indeed, while off mid-March’s twice-in-a-century highs, valuation spreads around the world are still elevated, Empirical Research observes, with enough fear embedded in the system to suggest abundant opportunities. At this moment, the Russell 2000 Growth to Russell 2000 Value ratio has moved to an all-time high. A lofty forward P/E (although on a trailing basis, it’s near its average since 1983) and price-to-book in the 88th percentile of historical valuations may be concerns. But large dispersions within the index are an ideal environment for stock pickers and active strategies. And for true long-term investors. Are you a long-term investor??
- Team U.S.A.!! While everyone else is relying more on automatic stabilizers, the U.S. used a substantially larger core fiscal response and the Fed was the most aggressive central bank in the world. This suggests U.S. stimulus is packing the biggest punch, ISI says. Goldman Sachs observes that, with credible institutional frameworks and developed financial markets, developed-market countries can run substantial deficits without driving interest rates and inflation higher. Emerging-market countries can’t.
- How’s all this debt going to be funded? Obviously, taxes will be raised where possible, but Credit Suisse says it’s unlikely to sufficiently address the worst fiscal position in the U.S. since 1944. It believes the majority of global debt is headed for an extended period of negative real interest rates. That’s a net positive for equities. It expects a potential negative Treasury Inflation-Protected Securities yield of 2% that will justify a P/E of 20x or higher, making equities the most attractive asset class as earnings likely are to grow in excess of the risk-free rate for many years. It says the “new gold standard” will be companies with better credit ratings and higher yields than government bonds.
- The new “gold standard” might include gold The services ISM, which collapsed in April, historically is a meaningful indicator for gold prices and is sending its first buy signal in over 10 years, Renaissance Macro says. Gold also tends to track closely with debt issuance and we know where that’s going.
- Innumerable small businesses make recovery complicated Despite making up 26% of payrolls before the pandemic, small businesses accounted for 30% of the 20 million layoffs in April’s ADP payroll survey. This suggests many of these jobs, and businesses, may not come back.
- Oil should not be overlooked Even though its price has rallied sharply, oil’s rally likely will run out of gas as a drawdown in its humongous surplus inventory won’t begin in earnest until the second half of 2021, Cornerstone Macro says. Importantly, ISI’s quant work continues to show oil having an unusually large influence on the overall market, sectors and factors.
- Shocking virus concentration in the elderly A Fundstrat analysis of CDC statistics for nursing homes in 10 states representing half this country’s population found those homes have a combined 671K residents, or 0.4% of the population; account for 18% of Covid-19 cases, 44 times their population ratio; and account for 42% of deaths, 102 times their population ratio. N.Y. Gov. Cuomo said a study of 1,300 hospitalized Covid patients found 59% to be over 60 and 96% with a chronic disease.
Bad news for the bears Weekly momentum indicators suggest pullbacks are likely to be shallow, and Leuthold Group shares that bear-market rallies that top 30% are rare—just twice during the 1929-32 market crash. All other cyclical bears since 1900 have been declared dead after a 30+% rise.
I need some new shoes A survey by analyst Chuck Grom found 44% of Americans willing to go back to restaurants, 41% to off-mall stores and 39% to malls even without a vaccine.
Americans don’t care about sanitizing and takeout is crushing cooking So says a Google search analysis that found an "upside breakout" (3X above all-time highs) for the following words: bike (and cycling, bicycle, etc.), painting, nursery, gardening and Home Depot.