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@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.
@theMarket: Markets Are in a Tug of War
The number of COVID-19 cases and deaths are surging way beyond those cases earlier in the year. That could indicate tough going for the economy over the next two quarters. On the other hand, two highly effective coronavirus vaccines have been announced, but won't be widely distributed until next year. In the middle sits the stock market investors.
We know that financial markets are discounting mechanisms, meaning that investors usually buy or sell stocks based on what may happen in six to nine months from now. At that time, so the story goes, at least two vaccines will be readily available to most of the public. One may be ready for limited distribution before the end of the year if all goes well. That should cause the economy to rebound and unemployment should decline. That is a bullish case for equities, so investors would normally anticipate that and buy now.
However, in the near term, the next three-four months, thanks to this second coronavirus surge, the economy is expected to slow, and unemployment to rise. The expectation that little to no fiscal stimulus is forthcoming from our divided government adds to investor worries. The impact on the economy in the short-term could be severe as a result. It is fairly certain, according to most economists, that the reason the economy bounced back as quickly as it did from the first nationwide shut-down was the quick response by the government to monetary and fiscal stimulus.
As of this week, there are no plans for a countrywide shutdown. Instead, individual states, cities, towns, etc. are closing some things down and leaving others open (schools versus bars and restaurants for example). Most businesses are simply ignoring all of it, while trying to convince workers that everything is all right when it isn't.
As a result, the coronavirus case numbers are increasing exponentially. Worse, there appears to be no way to prevent it. Next week, a large segment of the population is already making plans to visit the family for Thanksgiving week, despite medical advice to the contrary. The way we are headed, I expect that the caseload in hospitals should continue to mount. Friends, families and neighbors will continue to die and, at some point, a partial or total shut-down of the economy could occur out of necessity.
If so, this time around I expect there won't be an immediate stimulus response from the government. That could do lasting damage to the economy and prolong the time required to recover. Despite pleading from the Federal Reserve Bank and just about every economist in the nation, both the president and Congress are not listening. Both parties are far too engrossed in debating who won the election (or who will win the Senate in January) to worry about another couple hundred thousand deaths, let alone jobs and the economy. It is the America we live in.
Normally, the week leading up to a national holiday such as Thanksgiving, is positive for stocks. This year, the averages will likely be tugged in two directions — the bearish, daily rise in COVID-19 cases versus more good news on the vaccine front. It doesn't take a rocket scientist to predict the bad news should get worse, which leaves the markets dependent on more vaccine news to remain buoyant.
@theMarket: Vaccine Hopes Send Stocks Higher
The first real hope at ending the global coronavirus pandemic was announced on Monday. Drug company partners, Pfizer and BioNTech, announced their COVID-19 vaccine, which exceeded expectations. The news sent world stock markets screaming higher.
Later in the week, some profit-taking developed, but overall the news was met with relief and cautious excitement. Most investors expected the Pfizer drug would be, at best, 60-70 percent effective, so when the company announced it was more than 90 percent effective in preventing COVID-19, stocks soared.
While this was great news, there are a few drawbacks to the vaccine. For starters, Pfizer can manufacture only a limited quantity of the vaccine next year. Analysts are using a guesstimate of 1.3 billion doses. If that sounds like a lot, it is, but much of that supply (80 percent) is already spoken for by the U.S., Canada, Japan, the E.U. and the U.K. Second, in order to work, you need two doses. The most optimistic assessment is that no more than 12 million vaccine treatments could be available by the first quarter of next year.
The other issue with the vaccine is that it needs to be maintained, stored, and transported at really low temperatures — minus-176 degrees Fahrenheit. To give you an idea of what that means, your typical American freezer runs at about zero degrees Fahrenheit. As such, in order to be effective, the vaccine requires a super-cold freezer, which is unavailable in most hospitals, clinics, and doctor's offices and that's in a developed world country. Low and middle-income nations (think emerging markets) would not be able to take advantage of this vaccine easily, even if it were available to them in 2021.
Some of the market's euphoria wore off as the facts became known, but it was interesting to watch what market sectors did well, and what didn't, as the week progressed. Cyclical areas of the market and value plays did the best on Monday and Tuesday. Small-cap stocks and financials also led the indexes higher. Interest rates on long-term bonds rose, while gold and silver plummeted. Technology shares, long the market leaders, also sat this one out.
This all made some sense. A successfully-administered vaccine would ultimately put an end to the pandemic. In turn, global economies would begin to rise. Those sectors that had been hurt the worst by the coronavirus would benefit the most, while the "defensive plays" — stay-at-home stocks and technology shares — would no longer be the only game in town.
Higher economic growth would also mean greater inflation risk, so bond holders would want a somewhat higher rate of interest to compensate for that possibility. Higher rates are good for financials, so bank stocks gained.
As is usually the case, once investor excitement dissipated a bit, profit-taking set in during the latter part of the week. Traders snapped up some oversold tech shares, while taking profits in some airlines, cruise lines, and the like. The question is what happens next?
As readers are aware, I have been warning for months to expect a pandemic "dark winter" in the U.S. and some other parts of the world. In November so far, more than one million new cases of COVID-19 have been confirmed throughout the U.S. It will likely get worse. Should lock-downs nationwide occur, or more likely, selected closings on a state-by-state basis, which is happening as I write this, it could hurt investor sentiment, as well as economic growth and employment. That may keep a lid on the averages in the short term.
As a contrarian, the recent surge in optimism in the AAII Investor sentiment Survey is also somewhat troubling. Bullish sentiment improved by 17.9 percent last week. That brings the number of bulls to 55.8 percent. That is a seven-month high, while the number of bears declined to 24.9 percent. Those numbers make me cautious in the short run.
As for politics, in the face of the worst surge in coronavirus cases and deaths thus far, there is silence from the White House. I won't comment other than to say that the markets have already given their verdict, and nothing that has transpired this week has changed that narrative. Market catalysts that could drive the markets higher would be additional good news on additional vaccines, which is expected, and some progress on a stimulus package to help the nation through the next few months. I expect one or maybe both to happen, although a stimulus breakthrough is a long-shot. Until then, expect some volatility.
I still believe we continue higher through the end of the year. For now, let's pencil in a possible S&P 500 Index target of 3,800.
@theMarket: Markets Enjoy a 'Biden Bounce'
The nation spent most of the week wondering who won the presidential elections. While lawsuits, protests, and dueling press conferences occupied the airwaves and internet, global stock markets spent the time discounting the results. Have markets already picked the winner?
A Joe Biden win, with a Democrat House, and a GOP-controlled Senate was the conclusion reached by the markets on Tuesday. The "blue wave" that investors had expected and believed would unleash trillions of dollars' worth of stimulus, run up the national debt, and cause long-term interest rates to rise, was off the table. Instead, we would face at least two, if not four, years of political inertia. As I have written before, the financial markets thrive on the status quo and on deadlock. As such, the focus this week was on buying up equities that investors believe will benefit from a new political landscape.
"But wait a minute," say the bears, the vote is just too close to count in several states to make such a prediction. The make-up of who controls the Senate may come down to two Senators in a Georgia run-off in January. And what about the avalanche of lawsuits that the Trump campaign has announced?
None of the above seems to matter to the bulls. Biden's chances keep improving all week in most states, which add fuel to the equity bonfire. Trump's lawsuits were expected. The president telegraphed his intent to sue even before the elections. Investors do not see any proof that there was any wrong doing outside of the usual snafus and mistakes that take place in every election. As for the Senate, right now the numbers are split evenly between the two parties. Until and when that changes, there is gridlock on the legislation front.
Under the present market scenario, any disappointment that investors won't be getting a $2 trillion-plus new stimulus package (as presented by the Democrats before the election) has been somewhat alleviated by the belief that a smaller package could be passed before the end of the year. Senator Mitch McConnell said as much this week.
This is important, because the second wave of coronavirus is already underway, and is expected to worsen in November through January. We need a stimulus package passed now in order to help the economy (not to mention the nation) through this winter.
A blue wave stimulus package, most believe, would have had to wait until February when the Democrats took control of the House and the White House. By then, the damage would have already been done. Funny enough, with a divided Congress and new president, investors now believe the chances of compromise are higher than previously.
Bond markets have also breathed a sigh of relief. Without a humongous stimulus package, the government would not be racking up as much debt to an already-ballooning deficit.
On the tax front, equity investors have decided that a divided Congress would also put an end to all of Joe Biden's talk about individual and corporate tax increases. It is doubtful, believes Wall Street, that a Republican-controlled Senate would be enthusiastic about passing any increase in taxes.
On the healthcare front, while both sides might agree to some necessary compromises to fix the holes in Obamacare, there likely would be little movement toward more government control of the nation's health care system as threatened by Bernie Sanders and the left.
This belief that changes in taxes and healthcare policies would no longer be a threat to investors is one of the reasons the technology and healthcare sectors took the lead in this week's rally. Globally, Emerging markets and China stocks also did well. The thinking here is that while Biden may still be tough on China, his actions will be more measured and diplomatic. The unsuccessful on-again, off-again tariff strategy of the previous administration would likely take a back seat to coordinating a policy with other nations that might also harbor China trade grievances.
That said, I expect some pullback in the markets after this week's run up, but that doesn't make me bearish on the stock markets. Instead, I still see gains throughout the remainder of the year and new highs for the S&P 500 Index and NASDAQ. The U.S. dollar may also continue to slide. In which case, foreign markets (especially emerging markets), resource plays, basic materials, industrials, and precious metals sectors should continue to gain as well.
However, I remain greatly concerned that in the weeks ahead the pandemic will get much worse across the nation. COVID-19 cases and deaths are expected to rise. Most of the macroeconomic numbers still indicate a rebound in the economy, but that is backward looking data.
Rural hospitals, especially in those parts of the country that have not followed medical protocols, look to be coming apart at the seams. I expect the government will continue to sit on its hands (except to pass a smaller stimulus bill) and hope for a breakthrough on the vaccine front. But hope is not a strategy. If the economy and employment gains slow and even reverse in the meantime, investors would probably be looking to the Fed once again to save the markets, and I expect they will.