The market is offering a lot of options.
Tis the season, right … stocks for everyone’s stocking? You know, I never thought I would so quickly don the “Dow 30,000” hat that my daughter gave me as a gag gift for my birthday last year, reminding us that with the Dow was just under 26,000 at that time. But with the Dow, S&P 500 and Russell 2000 at record highs and investor sentiment nearing—but not at—bullish extremes, the potential for near-term consolidation is real. Bank of America clients were record net sellers last week, when the S&P declined 0.8%. Three people close to me either wanted to know how my market giddiness indicator was doing, were calling a market top or were selling gold. Protesting too much, perhaps? Any pullback is likely to be shallow and short-lived as the risk-on tone is just too strong. More than 90% of the S&P is above its 200-day moving average, the best reading since July 2013. High-beta stocks are at new cycle highs and the Russell 2000 has busted through its 2-year range, both indicative of early stages in a prolonged up-cycle. In the 177 trading days since March’s market bottom, the S&P has rallied 62.5%, its best performance over that time span since at least 1951! Copper prices have firmed. Brent oil prices are breaking out. Cryptocurrencies are soaring. And the 50-day moving average on the 10-year Treasury yield topped its 200-day average for the first time in two years. If there’s any “vaccine fatigue” out there that would suggest “Sell!” at the next positive announcement, Strategas Research isn’t seeing it. To my family and friends who are thinking about selling, are you sure you want to fight the tape?
The economy’s still very young recovery keeps surprising. Indeed, it may be time for a rethink of what’s happening. Sectors most affected by shutdowns/restrictions (airlines, hotels, restaurants, etc.) already are operating at weak levels, suggesting limited downside amid a possible new wave of constraints. Meanwhile, sectors largely unaffected by such measures keep growing. This includes e-commerce as well the big-ticket items, autos and housing (more below). Manufacturing and large-scale services remain on a tear (more below). So even if the next few months get a little rough—jobless claims appear to be noticeably rising (more below)—there’s a lot of potential upside. Nonfarm payrolls so far have recovered only half of their March-April losses, and despite its record jump, Q3 GDP was still 3.5 percentage points below its pre-Covid peak. This slack, an all-in Fed and a likely jolt of more fiscal stimulus (perhaps $1 trillion if the GOP holds the Senate and up to $3 trillion if it doesn’t) before widespread vaccinations are bullish. After years of extremely slow but positive real economic growth—real GDP growth averaged only 2.3% annually from 2010 through 2019—some forecasters think annualized growth could exceed 5% next year. That would represent the strongest expansion in more than 35 years!
So, what should I buy? Versus the S&P, the relative forward earnings-per-share (EPS) for small-cap stocks is at January highs while the price recovery has been far less. Big epicenter stocks (large-cap cyclicals) that tend to do best early in an expansion reflect similar characteristics. Though their performance largely has matched fundamental improvement, with prices back to pre-pandemic levels and relative EPS back to where it was in March, their merit lies in continued earnings expansion as the recovery picks up steam. After underperforming for years, “equal-weighted” is starting to sustain leadership across an array of indexes. Leuthold Group notes Value Line’s equal-weighted measure of 1,700 stocks has nearly matched the 10% gain of the cap-weighted S&P since year-end 2019, while its relative EPS is doing much better, suggesting catch-up potential. There also are a lot of reasons to like international stocks, whose economies are more extensively comprised of cyclically oriented sectors. They underperformed the U.S. the past five years except for 2017, when there was global synchronized growth. With vaccines on the horizon and economies all over awash in stimulus, the world seems poised for another global expansion. Leuthold thinks international stocks could take over leadership in 2021. Me? I’m keeping an eye on big tech stocks, which are now underperforming on a relative basis, a source of cash to buy cyclical sectors. These massive profit machines with fat margins and tons of cash almost certainly will benefit as growth picks up and pent-up demand takes off. They might get hot again before we need to worry about euphoria. Working virtually for months now, with the Mister nearby, he’s become a market watcher. After purchasing a trendy electric car this summer, he loved it and wanted to invest in its stock. I won’t mention the ticker, but the Mister is in a fabulous mood this Thanksgiving. I hope you enjoy some turkey this week … but try to keep it out of your portfolio!
- The ‘V’ lives In initial surveys for November, Markit manufacturing and services gauges unexpectedly jumped to respective 6-year and 5.5-year highs. The performance pushed the composite index to its highest since 2015. Elsewhere, Evercore ISI’s survey of trucking companies rose to its highest level in 15 years and October durable goods orders rose a better-than-expected 1.3%, with core orders representative of business investment up a sixth straight month.
- The ‘V’ lives New home sales remained strong in October, coming in at an above-consensus 999,000 annual rate, up solidly from the preliminary September read but down slightly from its upwardly revised 1 million pace. Year-over-year sales soared 41.5%. Also, mortgage applications jumped again in the latest week and Case-Shiller and FHFA gauges showed housing prices continuing to climb.
- The ‘V’ lives This morning’s GDP report showed third-quarter corporate profits made a complete rebound to their 2019 peak, increasing odds that employment and capital expenditures are better in Q4.
- Covid weighs on consumers … Conference Board confidence tumbled in November to its lowest level since August as soaring Covid-19 cases and diminishing fiscal aid caused current conditions and expectations components to deteriorate. Michigan’s final read on consumer sentiment for the month slipped to a 2-month low.
- on jobs … Jobless claims unexpectedly rose a second straight week to a 5-week high amid a new round of layoffs caused by new Covid-19 restrictions at establishments. It’s the first time new claims have risen consecutive weeks since July, the last time the U.S. experienced a surge in Covid cases. Continuing claims, however, fell again, implying another decline in the jobless rate.
- … and on spending Consumer spending moderated in October and personal income shrank on a slowing job market and decline in Covid-related aid. (And yet, the National Retail Federation expects holiday sales to rise as much as 5.2%, posting a strong finish to the year).
Is that a dirty swan lurking about the coop? … Mathematician Nassim Taleb, author "The Black Swan" (widely read during the global financial crisis), offers this on the 1,001 days in the life of a turkey. For 1,000 days, it’s fed every day and comes to believe friendly members of the human race are looking out for its best interests. On the Wednesday afternoon before Thanksgiving, it incurs “a revision’’ of that belief.
… on the bright side The average cost of a Thanksgiving dinner for 10 will be $46.90 this year, the American Farm Bureau Federation estimates, the lowest since 2010!
SMH When getting married, 70% of millennials would consider a lab-grown diamond, which costs around a third less than a mined one.