“It is better to be roughly right than precisely wrong.” – John Maynard Keynes
Investors have come to realize the equity market certainly doesn’t like uncertainty, but even with an abundance of it, U.S. equities made a new all-time high and is now rebounding from the September swoon. The health of the President, the progression of COVID, the outcome of the election, and the status of another round of stimulus are just a few of the issues facing investors right now, but the market has been able to grin and bear it and push higher.
Yes, there are many worries out there, but Mr. Market is telling another story. This equity rally is accompanied by across-the-board strength. Last week these advance/decline lines all made new all-time highs:
- Dow 30
- S&P MidCap
- S&P 500
- Nasdaq Composite
- Nasdaq 100
- S&P 100
This isn’t bearish action, but it will get lost in the narrative as the negative “What IF” scenarios dominate the dialogue.
The Dow Transports and the Semiconductor index making new highs is one thing and one thing only, Bullish. It tells me the major global recession or slowdown that so many are professing because of a “second virus wave” or the multitude of other issues is more noise. It’s more talk from frustrated analysts that were looking for more lows back in April of this year. More hyperbole from pundits who are simply dazed and confused by the market’s action.
The “geniuses” who were waiting for a stimulus bill to be passed before committing funds to this Bull market or were positioned for the market to roll over because there is no “deal” have been run over. The same holds for the analysts who keep warning investors how the “second wave ” of the virus is going to cave in the economy and the stock market.
The “past” can afford us an idea of the risks involved when investing in the markets, but it doesn’t tell you where and when those risks will come from going forward. Trying to predict the future is impossible. Reality then forces every investor to analyze the present, while understanding the past. You have to make high probability decisions in the face of uncertainty, but those probabilities aren’t etched in stone.
That sounds like a maddening challenge for market participants. Hence the wide spectrum of opinions that are handed out daily. This bull market cycle has perplexed many experienced investors, and 2020 has simply humbled many “experts”. That was confirmed by the continued skepticism being shown for the better part of this rebound, and it continues today as the S&P is near an all-time high which comes after a total economic lockdown.
It is my conclusion that many “experts” have been trying to use their historical notes and theories for how they assumed the markets should react. Their signals and patterns haven’t worked as well as they once did in markets that have now evolved. The ability to remain flexible and open to change with the environment is key. Those who have led the parade in being incorrect are the people or firms who are the most entrenched in their own views. It seems “flexibility” does not exist in their strategy. It might be better to take the view of how you would handle the market in the present than speaking to how you would have handled it in the past.
No matter how certain you are in your market views, no one really knows exactly how things will play out. That brings me to the other important factor in forming my investment strategy. Keep it simple. Complex strategies may be fine for some, but the average Joe and Mary investor will have a hard time keeping it all together when the situation gets tumultuous.
After that is accomplished, you have to be willing to accept the adage stated in the opening quote.
“It’s better to be roughly right than precisely wrong”.
The Week On Wall Street
When trading started this week, small caps have been the major standout in October with the Russell 2000 ETF up over 8%, putting it 3% above its September 2nd high. Meanwhile, it’s all about “rotation” as the S&P 500 and Nasdaq 100 have lagged significantly and are still down from their September 2nd highs.
What is also surprising is that while the Nasdaq 100 is up 68% off its March low, the Russell 2000 isn’t far behind with a gain of nearly 65%. However, not many are talking about the breadth of the rally off the lows. All we have heard from the naysayers in the last four months is the “overpriced” Nasdaq Composite. Allow me to reiterate a bit of common sense. Investing with blinders on yields poor results.
You may also be surprised to see that while the Nasdaq 100 is up 68% off its March low, the Russell 2000 isn’t far behind with a gain of nearly 65%.
Due to the Columbus Day holiday, it was a quiet start to the week in terms of data related to earnings and the economy. Not so on the equity front. The Holiday was celebrated with Fireworks and the theme was “green”. All major indices were higher on the day. The S&P gained 1.6%, Technology was led by “Big Tech” as the NASDAQ Composite rallied 2.5%. Only the Material sector which led all sectors last week closed in the red. Technology, Communication Services, and Consumer Discretionary were all up well over 2%. I saw several individual stock “breakouts” across all sectors.
Earnings season kicked off on a good note with positive results but it was time for investors to take some profits. Nothing unusual after four solid days of gains. In a sign of a strong uptrend, late-day buying pulled all of the indices off of their lows. For the day the NASDAQ was flat, while the Dow 30 and the S&P 500 were both down approximately 0.50%. The Dow Transports -0.70% and the Russell 2000 -0.65% suffered the biggest losses on the day.
The “reopening” stocks were not in favor, and the two sectors that remain in Bear markets Financials (XLF) -1.9% and Energy (XLE) -1.5% were the biggest losers. Large-cap Biotech (XBI) bucked the selling trend and gained 1.3%.
More backing and filling, more testing of support levels as the S&P meandered around on Wednesday and again on Thursday. Risk-off was in vogue as all major indices except the Dow Transports and the Russell 2000 extended their losses to three days. That action signaled more “money rotation”. Late day strength brought the S&P and the Dow 30 back to the flatline on Thursday. The “Buying” carried over to the early trading on Friday, before the mid-day gains were all given back.
The trading week ended with the S&P 500, Nasdaq Composite, and the Dow 30 posting modest gains for the week. The narrative all week from the financial media was the daily virus counts. At some point even they will start to realize the global markets are looking at different data points.
With COVID case counts on the rise throughout the country, you would think that Americans would be a bit more concerned about getting on airplanes. Rather than hunker down, though, Americans have been increasingly spreading their wings.
The latest passenger throughput numbers released by TSA showed that on Sunday, October 11th, 984,234 passengers went through security checkpoints at US airports. That was the highest single-day reading since March 16th. That increase also helped to push the seven-day average of traffic to new post-COVID highs. After rising and then falling back down after the Labor Day holiday, air passenger traffic has “surged” in recent days to push the current seven-day average up to 819,384 passengers per day.
Those stats may now get a boost. According to Israeli Ambassador to India Ron Malka “All the thresholds have been passed” for a rapid coronavirus detection test that gives results in under a minute. Developed by Israel and India, it should be ready in “a matter of days”.
U.S. chain store sales increased 0.4% in the first two weeks of October ending the 10th, according to the Johnson Redbook report versus September, after an unchanged print in the first week. Sales were up 1.2% y/y in the October 10 week versus the same week last year versus a 2.1% y/y gain in the prior week. For October, the monthly pace accelerated to a 1.2% y/y rate versus 0.9% y/y previously. According to the report, sales improved heading into the Columbus Day weekend, in part supported by cooler temperatures.
Retail sales increased by 1.9% with ex-auto sales rising 1.5% in September, double expectations. Those follow respective August gains of 0.6% and 0.5%. Sales have been on the rise for the last five months, including record gains in May after historic drops in April. Sales excluding autos, gas, and building materials climbed 1.5% following August’s 0.3% (was 0.6%) rise. Gains were broad-based.
Even without additional fiscal stimulus, retail sales rose by the most in three months, suggesting consumers remain in good shape
Consumer sentiment ticked up 0.8 points to 81.2 in the preliminary October report after rising 6.3 points to 80.4 in September. The highest level since March. Before the pandemic started to take its toll, the index was at 101.0 in February. All of the strength was in the expectations component which improved to 78.8 from September’s 75.6.
The NFIB Small Business Index rose 3.8 points to 104 in September, a historically high reading. Nine of the 10 Index components improved and one declined. The NFIB Uncertainty Index increased 2 points to 92, up from 75 in April.
NFIB Chief Economist Bill Dunkelberg:
“As parts of the country continue to open, small businesses are seeing some improvements in foot traffic and sales. However, some small businesses are still struggling financially to operate at full capacity while navigating state and local regulations and are uncertain about what will happen in the future.”
The Census Bureau updated business formation stats for Q3, and as indicated by high-frequency data from the Atlanta Fed, business formation exploded in Q3. As shown in the chart below, total business applications rocketed upwards by 1.57 million, a record increase.
Stripping out businesses that are unlikely to result in hiring, the numbers are much smaller in absolute terms but still rose 79% to a record pace. Finally, applications for businesses with planned wages surged 70% from a record low in Q2 to the highest levels since 2008.
In all three instances, the recent behavior is a complete reversal of the post-crisis period, when the prolonged recession led to a huge decline in business starts. That’s a good sign for the breadth of the economic rebound, as business formation tends to lead to higher productivity thanks to more innovation and investment.
Here is more anecdotal evidence that doesn’t match the “narrative”. Ethan Allen (ETH) is a manufacturer and retailer of home furnishings. The company reports a 10.8% year-over-year increase in retail orders and adds that “orders and backlogs continue to grow”. Also, the company raised its forward guidance.
Not all restaurants are struggling. The parent company Brinker International (EAT) of the Chili’s franchise hit a new 52-week high this week. The reason, Brinker’s post-pandemic earnings per share could reach $5 or above.
None of these reports indicate the U.S. consumer is weakening or in trouble. Nor is it a sign that the lack of additional stimulus is hurting the “average” consumer.
The “narrative” simply doesn’t match what is happening on the ground and it is why the stock market is near an all-time high.
The headline and core CPI rose 0.2% in September, as expected. There were no revisions to August’s 0.4% gains. The increase saw the 12-month rates edge up to a 1.4% y/y versus 1.3% y/y for the headline, and hold steady at 1.7% y/y as it was in August. This is a fourth consecutive monthly increase after three months of declines from March through May as the pandemic and lockdowns hit. Most components posted modest gains.
Headline PPI rose 0.4% in September, with the core rate up 0.4% as well, both hotter than forecast, following respective August gains of 0.3% and 0.4%. The core price ties August for the firmest since April 2019. Prices have recovered from big and record drops in April of -1.3% for the headline and -0.4% on the core.
Philly Fed manufacturing index surged 17.3k to 32.3 in October, double expectations, and an eight-month high. The index has been in expansion for five straight months, bouncing from the three months of pandemic lows that included a -56.6 print in April.
The New York Fed’s manufacturing index fell more than expected and is much more modestly in the upper half of its historical range. The headline index was expected to fall to a reading of 14 from 17 last month, instead, it fell further down to 10.5. These readings are still indicative of further improvements to business conditions but just at a slower pace than September, and expectations are still higher than they have been for much of the past couple of years.
Industrial production dropped -0.6% in September, and capacity utilization fell to 71.5%. These are much weaker than expected. Industrial production was up 0.4% in August and 4.2% (was 3.5%) in July, and has bounced from the record -12.7% (was -12.9%) April plunge. August’s capacity utilization was revised higher to 72.0%.
“After falling in back to back weeks, seasonally adjusted initial jobless claims rose to 898K this week which was weaker than the forecasted decline to 825K and last week’s level of 845K last week. Now just below 900K, claims are at their highest level since the week of August 21st (before the change in seasonal adjustment methodology meaning comparisons are not exactly like for like) which was also the last time claims were above one million. Additionally, the 53K week over week increase was the largest increase since the week of August 14th when claims rose by 133K.”
“Reporting of claims is a bit tough to decipher on whether the uptick in claims is a material worsening in the data as COVID cases have been on the rise or more simply seasonality. Pandemic Unemployment Assistance (PUA) claims would seem to more give more credit towards the latter.”
“For initial claims, Pandemic Unemployment Assistance claims fell to 372.9K this week, down for a fifth straight week. Behind the first week that PUA claims were reported (April 17th), that is the lowest count of initial PUA claims.”
“For total claims (regular and PUA combined), this week’s reading of 1.26 million marked a new pandemic low.”
The IMF revised its outlook on growth, noting in its blog that the downturn will be “less dire” than that projected in the June forecasts. The IMF said the plunge in growth from the pandemic would have been much worse if not for the “sizeable, swift and unprecedented fiscal, monetary, and regulatory responses.” However, the Fund still warned that the “ascent will likely be long, uneven, and uncertain.” Improvement in most of the advanced economies supported the new projections, with growth shifted into 2020 from 2021 in most cases.
World output is now estimated at a -4.4% rate this year and 5.2% for 2021 versus June forecasts of -5.2% and 5.4%, respectively. Advanced economies are expected to post a -5.8% rate of decline for this year versus -8.1% previously projected and bounce at a 3.9% rate in 2021 versus 4.8% previously. The U.S. pace is now estimated at -4.3% for 2020 compared to -8.0% and rise 3.1% in 2021 versus 4.5% previously.
The Port of Los Angeles moved 779,903 Twenty-Foot Equivalent Units in September, a 2.7% decrease compared to 2018’s record-breaking September. After three quarters of 2019, total volumes have increased by 4.7% compared to last year, which was the busiest year ever at the Port.
China’s vehicle sales rose 12.8% year over year 2.57M vehicles, up from August’s 11.6% growth, according to the China Association of Automobile Manufacturers. Sales of passenger vehicles rose 8% for the month.
September trade data from China last night showed a much larger increase in imports than exports. Year over year, imports were up over 10%, while exports were flat. Exports were down 1.7% month over month sequentially after a seasonal adjustment versus imports up 3.8% MoM sequentially.
The latest report on preliminary machine tool orders in Japan did not disappoint. The bounce in international orders continues to fuel overall improvements in CAPEX purchases from Japanese equipment makers as orders rose 7.1% month over month in September to the highest levels since February for total orders and to the strongest levels since October of 2019 for foreign orders.
India’s fuel demand in September rose for the first time since June as easing coronavirus restrictions supported economic activity and travel, but consumption remained weaker than a year earlier.
Consumption of refined fuels, a proxy for oil demand, rose 7.2% in September from the prior month to 15.47 million tonnes, the first monthly increase since June when demand rose to 16.09 million tonnes.
Earnings season kicked off this week, and while results were impressive, the price reaction was a “sell on the news” event. While these “opening week” results are not a “trend,” it will be interesting to see what develops as the season unfolds.
The stock market wants to look ahead and right now uncertainty is creeping in because of the negativity floating around due to the ever-present virus situation. I’m more concerned about what companies are telling me when they report rather than the “opinion” of the local media personalities.
Last quarter we were flooded with companies raising guidance and the task is to see if that trend continues.
The Political Scene
I’ve made several comments over the last couple of weeks discussing the unlikelihood of another round of stimulus passing before the election. The political incentives just aren’t there as the GOP has no reason to meet the large demands of the House while Democrats have no incentive to meet the smaller bills being proposed by the GOP.
In the interim, the financial analysts are being rolled one after the other to explain how the stock market can’t continue higher without it. Meanwhile, other than the schizophrenic traders, the stock market continues to be unfazed by the mishandling of this situation by Congress.
As the election approaches, there are four possible scenarios: A Democratic Party trifecta, a Biden victory with a GOP Senate, a Trump victory with a GOP Senate and Democratic House, and a GOP White House with a unified Democratic Congress.
Finally, if the GOP maintains control of the Senate and Biden wins the election, most analysts see only a very small $500B bill getting through the Senate.
Keep this in mind when considering both the market reaction to election news, and forecasting economic activity next year; the presidency is less important than how Congress swings as a function of the presidency.
The Fed & the Yield curve
A trading range under 1% for the 10-year Treasury note has been in place for quite some time. The 10-year note continues to bounce around and closed trading at 0.76%, falling 0.03% for the week.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, 2020, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
The 2-10 spread was 30 basis points at the start of 2020; it stands at 62 basis points today.
AAII’s reading on bullish sentiment was just 0.04 percentage points higher this week at 34.78%. That is still the highest level of optimism since April 9th’s reading of 36.6%. Not many have “bought into” this Bull market.
EIA weekly data showed larger-than-anticipated draws in all products. Domestic production was down by 500k barrels which were partially netted out by reduced throughput to closed refiners (-277k). Reduced imports and exports basically netted out.
Overall there was strong demand. While gasoline demand fell a bit (320k barrels), jet fuel, distillates, etc., up quite a bit (total demand up by 1.13m barrels). Distillate demand, in fact, was higher than an average week in the last five years.
Overall, U.S. crude oil inventories are about 11% above the five-year average for this time of the year. Total motor gasoline inventories are about 1% below the five-year average, and distillate fuel inventories are about 19% above the five-year average.
WTI remains in a tight trading range as investors grapple with a slowdown in Europe. The commodity closed at $40.89, up by $0.35 for the week.
The Technical Picture
After rallying hard on Monday, the S&P went into a period of “payback”. As each day went by, the index tested various short-term support levels.
Finally, some upside probing appeared on Friday, but gains were quickly snuffed out. This week provided little clues as to the near-term direction of the S&P other than to say a period of sideways consolidation may now rule.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long-Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
‘A cure must not be worse than the problem’ is a thesis that is more relevant than ever in the current situation.
Debt is a perennial worry. It’s a natural human tendency to think of debt as bad that by incurring debt we are living beyond our means. But much of what you hear about debt in the U.S. is hyperbole. Furthermore, it has been part of the scene for decades.
There is any number of reasons that are being given as to why the equity market has been so strong:
- The “hope” of a stimulus deal.
- Biden wins the election.
- Trump wins the election.
- The election doesn’t matter because the Fed is seen as “lower for longer”.
- Therapeutics in the fight against COVID continue to improve.
- Seasonality is now in favor of the Bulls.
So which one of these is the reason why the market has done well lately? An investor can assume it’s a combination of them all to some extent. I’m not sure I can buy into any of that this year given the remaining uncertainty over the election.
What I am convinced of is the global economy is coming back, and despite the constant talk of how the “virus isn’t under control”, etc., the data continues to look better. What is occurring is what I believed all along. We will learn to live with the virus and just move on. That viewpoint seems to annoy the geniuses who seem to have the entire situation figured out as they remain slaves to their emotions.
2020 is a perfect example of why I let “others” play the “reason” game. In the past few weeks, the market has once again done the opposite of what most expected it do (as it very often does). It’s also why I don’t think we should assume the market will behave exactly as most expect it to given the outcome of some event like a presidential election. The market just doesn’t usually do what the public thinks it’ll do as a result of some popular narrative.
The move of the past few weeks, in particular, has probably been frustrating to anyone who may have sold earlier in the year in anticipation of wild downside volatility. That is also the expectation that many now have for the market as we got down to the election wire. That mindset led to failure earlier in the year, and it may do the same today. Embracing that view distracts an investor from the other issues that are going on around them. Get caught up in ONE topic and you have increased the chance for failure.
What I hear today are the retorts from many indicating that they are searching for reasons for the stock market to go higher and they can’t be found. Trust me when they do find them, the market will be higher and might be headed down. That is how the stock market works.
With major indices still sitting near highs, the price action in the stock market continues to suggest the state of the economic recovery is more robust than the consensus believes.
When it comes to investing money, I’ll listen to that message before I take the advice of the analysts that have touted their views which have been dead wrong during 2020.
While they pound the table about uncertainty, let me remind all:
“The only certainty is continued uncertainty.”
That leaves THEIR message worthless.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week, I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.