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@theMarket: Equities Register New Highs, Until They Don't
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New highs are getting so common that investors are disappointed when markets fail to achieve them at least weekly. That should tell you something about the future direction of stocks, at least in the short term.
As investors piled into stocks again this week in anticipation of unending spending by the federal government, it might be time to take a few profits. Don't take that statement the wrong way. I am not calling for an end to this run-up in stocks. I think we could actually kiss the 4,000 level on the S&P 500 Index before we face a really big correction.
But that is only about a 3.5 percent move higher from here, something we could do between now and February if we get more good news out of Washington. That would be a good time to get a bit more defensive. Unfortunately, most investors will wait until markets go down before thinking of selling. It is all about that tussle between fear and greed.
Do you want to go with the flow, or do you want to make money? A gradual cashing in on some of those gains you have made will do two things. Number one, you get to book profits. No one ever went bankrupt booking profits. Possibly even more important, you start to build a little cash on your books, which you can then use to buy back stocks at cheaper prices. It also gives you the opportunity to adjust your portfolios. You may be overweight in large caps, for example, and want to have more exposure to small caps, or you may want to add to some investments that might outperform under a new White House administration.
Investor sentiment is wildly bullish. As such, there is no question in my mind that the stock markets have hit the exuberance stage, at least in the short-term. The anticipation of mega-trillions of dollars of additional stimulus spending, which is "right around the corner" will do that to you.
Despite all the good cheer, it would be a mistake to believe that the Biden administration has the ability to right every wrong and to do so in record time. I do believe there is an urgency in passing a relief bill, followed by a stimulus bill, but Congress may feel otherwise. Several Republican senators are already digging in their heels over the expected price tag of Biden's package.
Much has been said about President Joe Biden's experience and relationships, especially in the U.S. Senate. I believe he will need that and more to forge compromises with his Republican counterparts while keeping the progressive wing of the Democratic party in line. Yes, Biden can be applauded for getting right to work in taking executive actions in a number of areas that needed addressing, but that is not why the market keeps making record highs. Investors expect a quick passage of a $1.9 trillion relief package. As such, it is vulnerable to any cracks in that narrative.
My own expectations are that the final price tag will be lower than $1.9 trillion. It may also require more time than investors expect so that a final passage could take until the end of February. The president's infrastructure bill, assumed to be equal to or higher than his relief bill, might take even more time to affect a compromise if it comes to fruition at all.
I know all of this might sound like a big downer, so color me a skeptic. By all means, continue to celebrate and profit from the market's advances. But as you do, why not peel off a few investments along the way, just in case.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.
@theMarket: Same Old Stimulus Song
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Investors should know better by now. Stimulus talks have been going on since July 2020, but politicians in the capital appear to be stuck on the same old issues. Unfortunately, the deadline for a 2020 compromise bill is less than three weeks away.
It is anyone's guess whether the nation's economic and pandemic plight will win over partisan politics. It hasn't so far. The financial markets are not taking kindly to failure at this point. The all-time highs we have been enjoying for the last two weeks have been built on investors' near certainty that at least $900 billion in new Federal stimulus money would be forthcoming shortly.
Those funds were supposed to help bridge the gap in both human suffering and economic growth between now and the time the coronavirus vaccines will be readily available throughout the nation. Normally, when such an important binary event is in the offing, we would expect an 11th-hour deal to be struck. Should this time be any different?
In addition, there is another piece of legislation that also needs to be passed. The one-week Federal budget extension is also in play and without it the nation would experience another government shutdown. Delay allows both parties to garner all the media coverage possible. It is the consummate blame game and political theatre at its best (or worst). But what if a stimulus deal doesn't happen? Or the government does shut down?
In all likelihood, the stock market will decline, but any sell-off would probably be limited. I give a government shutdown a low probability, but a new stimulus bill could be a toss-up. I suspect more aid is being held hostage at this point by Georgia's run-off senatorial elections on Jan. 5. Both parties are attempting to influence voters' preference before the elections. The stimulus bill appears to be the trump card and will happen if one side or the other feels its passage gives them a winning hand. What happens after the elections could also be important for the stock market.
If the Democrats win (and thus take command of both houses of Congress), most equity strategists are expecting a knee-jerk decline, as Wall Street starts to discount a potential increase in corporate taxes (as Biden has promised during his election campaign).
That tax risk might be partially off-set by expectations that the Democrats will want to spend a whole lot more in stimulus than under a Republican-controlled Senate. If the GOP wins the Senate race in Georgia, Wall Street believes tax increases and a large stimulus package are probably both off the table. If that sounds too neat and tidy, it probably is.
My own take is that neither party will have a functional majority in the Senate, and maybe even in the House, no matter who wins in Georgia. As a result, I am not expecting anything "big" to get done on either taxes or stimulus. In the meantime, any downside volatility created by all this political noise would give investors the opportunity to buy stocks at lower prices. Why buy? As I have explained many times in the past, the key to the economy and further gains in the stock market have always hinged on beating the coronavirus.
It is simple really; while all of this political drama plays out, the new COVID-19 vaccines should continue to be distributed. More businesses should re-open as a result, and the economy should right itself on its own over time. As it does, the stock market should begin to discount an even stronger rate of economic growth in 2021. If so, we will be off to the races.
That gives you the broad-brush strokes of what I am expecting in the financial markets over the course of next year. There will most likely be potholes along the way. The vaccine distribution, for example, will probably not go as smoothly as most expect. We are already getting reports of some serious side effects from some patients after receiving the second dose of Pfizer's vaccine.
If the two parties somehow re-learn the art of compromise (something that I believe has been the secret of America's strength and success since its founding), then we should expect even higher gains in next year's U.S. market. If not, I advise looking elsewhere for better performance.
The Retired Investor: Markets Ignore China Sanctions
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During the past few weeks of this presidency, both the Trump administration and Congress have levied additional sanctions against the People's Republic of China. Financial markets and U.S. corporations have largely ignored those efforts; here's why.
Investors have learned over the past four years that tough talk on trade tariffs, blacklisting and other threats were largely ineffectual in curtailing the world's second largest economy. The facts are that U.S. tariffs on Chinese goods have been a failure. Our trade deficit with China is higher now than it was before the trade wars.
China's trade gap with the U.S. was 43 percent bigger in September, for example, than when Donald Trump took office. The surplus overall is 18.86 percent higher than a year ago and the trade gap between the two nations is on track to exceed $600 billion by the end of this year. That would be the highest since 2008.
The only difference investors could see in all this expended energy is that U.S. corporations (and consumers) have had to pay more for some imported Chinese goods. Aside from that, our farmers lost billions of dollars and had to be compensated by additional tax dollars for losing market share to Brazil and other nations in certain agricultural products like soybeans.
Last week, on the financial front, the delisting of Chinese companies under the House passage of the Holding Foreign Companies Accountable Act, looks good on paper, but not so much once you read the fine print. The act would require U.S. regulators to review the audit books of all U.S.-listed Chinese companies. If they refuse or fail to come into compliance under U.S. acceptable accounting standards, they will face delisting.
Conveniently, the bill's authors failed to mention that U.S.-listed Chinese companies are already audited by the largest U.S. accounting firms. The "Big Four" accounting firms (PWC, Deloitte, Ernst & Young, and KPMG) apply the same standards in auditing these Chinese companies as they do in auditing companies in the U.S. and Europe, as well as their clients around the rest of the world.
In addition, the Securities and Exchange Commission (SEC), which is charged with enforcing the act, has already made quite a bit of progress in developing a workable framework that would solve these issues. The SEC proposes having Chinese companies listed in the U.S. audited and reviewed by firms located in jurisdiction that are accessible to U.S. regulators.
The China Securities Regulatory Commission (CSRC) appears to have no problem with that solution or the act. The CSRC already assumes that Chinese companies listed on U.S. stock exchanges follow U.S. laws and regulations for financial reporting and information disclosure. From Chinas' point of view, anything that can help regulate and identify the few bad apples among thousands of listed Chinese companies is a welcome addition to their own regulatory efforts.
For Wall Street, the delisting threat may, at most, create some minor short-term sentiment that could pressure Chinese stocks, but there is simply too much at stake to see a wholesale delisting of Chinese stocks. There is almost $2 trillion of U.S. money invested in Chinese equities today. Companies such as Alibaba, Baidu and JD.com have become as familiar to Americans as IBM and delisting the lot would throw the financial markets into chaos.
The U.S. strategy of blacklisting certain other Chinese companies such as telecom giant, Huawei, plus dozens of other companies, has done as much harm as good to the U.S. and its corporations. Our semiconductor sector, for example, has experienced severe supply dislocations and costly business interruptions because of the Huawei crackdown.
Dozens of other firms that the Commerce Department has added to its "entity list" have caused unexpected repercussions as well. Many of these Chinese firms are accused of either helping to spy on China's minority population, the Uighurs, or of having ties to China's military. Many of them are customers of our own technology and cloud-based computing firms. Some U.S firms may have had joint ventures with these companies or garnered a substantial portion of business from these companies.
From my perspective, the incoming Biden Administration gives the U.S. a chance to re-examine the direction our country has taken in answering the "threat of China." If Director of National Intelligence John Ratcliffe was right when he said last week that "the People's Republic of China poses the greatest threat to America today," then we better up our game in ways that may not make great headlines, but instead protect our interests far more effectively than they have in the past.
@theMarket: Markets Bet on Stimulus Sweepstakes
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The first week of December saw all three major averages climb to minor new highs. The trigger was more good news on the delivery timetable of the coronavirus vaccines. The expected speedy distribution of the first batch of wonder drugs encouraged investors, even while the number of COVID-19 deaths and cases nationwide continued to skyrocket.
In addition, a new dose of hopeium has infected investors on the stimulus front. The Democrats $2.2 trillion proposal has gone nowhere since July, thanks to the Republican-controlled Senate. The Democrats then reduced their price tag in an effort to forge a compromise before the election, but the Republicans refused to spend more than their initial $500 billion offer.
The House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer, have dropped their offer once again this week. It now matches a new bipartisan proposal of $900 billion that could forge a compromise bill during the next two weeks. Friday's November non-farm payroll report may have clinched the deal.
Job gains were much worse than expected with U.S. employers adding 245,000 jobs versus 465,000 jobs that were anticipated. December's data could see the job gains disappear altogether. That might jeopardize the outcome of the January 5th run-off senate elections in red state Georgia for Republicans.
I see politics at play. Senate Majority Leader Mitch McConnell, while suddenly finding "fiscal responsibility" after four years of unbridled deficit spending, has been steadfast in his refusal to compromise on his $500 billion stimulus package. This is despite the pleas of the vast majority of governors, and state legislatures from both parties, for help from the federal government. Before the elections, even our lame-duck president had pleaded with the Senate to pass at least a $2 trillion stimulus package to no avail.
The Democrats' new willingness to compromise further can be credited to President-elect Biden, who indicated to his party leaders that some relief for the nation is better than no relief. This week's labor report places McConnell between a rock and a hard place. If he goes along with too much stimulus, he will risk the ire of conservative voters in Georgia. On the other hand, too little stimulus, and he will galvanize more Democrats to come out and vote in an already tight race.
The betting at present is that a deal will get done but investors have been burnt several times before in this stimulus sweepstakes. Regardless of the bickering, the clock is ticking, the COVID-19 deaths are mounting, and the cold weather has arrived. But I suspect the markets will continue to ignore the gathering storm clouds unless a real darkness descends, and investors get spooked.
As most American investors continue to focus on the U.S. stock market, a number of other equity markets are notching up some great gains. Emerging markets, which are typically resource-heavy nations, are enjoying both the benefit of a declining dollar, as well as price increases in natural resources.
My attention is also focused on equities in Southeast Asian nations such as Japan, South Korea, Taiwan, and Vietnam. Indonesia and Thailand may be next year's story. These economies are recovering quickly, thanks to a concerted effort to combat the spread of the coronavirus. Even China, despite the continued bashing from the U.S., is pulling ahead of us on most fronts and enjoying the benefits. I expect that next year we will see those markets continue to do well, and in some cases, outperform the U.S. stock market.
On the home front, investor sentiment continues to be frothy. The technical charts and other variables I look at indicate a building of overbought conditions as well. In the short-term, the certainty of a stimulus deal could be worth another 100 points or so on the S&P 500 Index before we get another pullback. What could cause a decline? The coronavirus numbers might finally freak out even the most bullish of traders or it could be some other excuse. If so, it won't be a devastating sell-off (more like 3-5 percent), but it could arrive just in time for the winter holidays.
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In the meantime, I expect the cyclical and natural resource trades to continue, while technology takes a back seat. I would also look to add some precious metals to my portfolio during these next few weeks, if gold, silver, palladium, and platinum continue to fall. And for those speculators with a stomach for risk, Bitcoin also looks interesting to me on a pullback.
@theMarket: Market Cyclicals Take the Lead
It was a good week for investors, which is not surprising since Thanksgiving week has been kind to investors in the past. The question is, will December fulfill its role as one of the year's best months for stocks?
The short answer is yes, I don't see why not. My recent target for the S&P 500 Index is 3,800, but it is possible that I may be too conservative. An additional spike up to the 4,000 level might be in the cards sometime early next year, but one week at a time. What is the bull case for those lofty predictions?
I have long argued that a coronavirus vaccine was key to the economy and the market's future performance. We now have at least three vaccines with possibly more in the wings. That is a game changer, in my opinion. While distribution of these medical wonder drugs will take time, markets are discounting their successful distribution now, not when it happens in three to six months.
While I expect the present surge of COVID-19 will ravage the nation throughout the winter (as happened in the 1918 influenza pandemic), there is some hope that the government could come to the rescue in ways it has failed to do leading up to the election. Most observers around the world would give the U.S. failing marks in handling the pandemic. What is worse, there has been a notable vacuum in leadership in Washington since the election, even as deaths and cases skyrocket. That void in leadership is increasingly being filled by the president-elect by default.
Plans to combat the coronavirus and alleviate its worst impact on Americans, a viable and far-reaching program to distribute the vaccines, and the willingness to spend what it takes to accomplish that mission, have given the country and Wall Street new hope. Rather than Armageddon, which was predicted if Joe Biden and the Democrats won the election, the nation has been impressed by Biden's picks for cabinet positions this week. In addition, Janet Yellen's selection as U.S. Treasury secretary (the first woman to fill that post), has met with approval from the business and financial sectors.
It was Biden's election and his subsequent actions which has propelled the stock market to new highs in the past weeks. President-elect Biden's initial moves appear to have reassured Wall Street and many conservatives that his will be a moderate path forward. Until that proves wrong, the financial markets should continue to gain.
As I have been pointing out during the last two months, underneath the overall averages there has been a sea change occurring in the market's leadership. Technology, especially the large-cap leaders that have propped the market up in recent years, are relinquishing their leadership role (at least temporarily). In their place, industrial, transportation, materials, financials, and other cyclical parts of the economy have been given a new life, as reflected in their stock prices.
Basic materials, led by copper, a key ingredient of any worldwide economic recovery, have soared. Energy stocks, the worst performing sector of the markets by far this year, have seen double digit gains. The price of oil has lifted as traders anticipate additional demand by a world in economic recovery. Two casualties of this switch from tech to value and cyclicals has been the "safe haven" plays of the U.S. dollar and gold.
The dollar, as measured by DXY, an index that measures the value of the greenback relative to a basket of foreign currencies, is hovering just above a major support level at 91.75-92. A break below that would likely send the dollar a great deal lower. Gold has also fallen below the $1,800 an ounce level.
Normally, a declining dollar would be good for gold, since it is perceived as an alternative form of currency, but not right now. Investors believe that without the need for a safe haven, and with little to no inflation on the horizon, why hold gold? My own belief is that attitude is extremely short-sighted. I believe gold has a life of its own and fears of inflation next year could spark a resurgence. The precious metal may fall even further over the next two weeks, and if it does, I would be using that decline as a buying opportunity.
