I've never worn my new Pradas I've never worn my new Pradas http://www.federatedinvestors.com/mmdt/static/images/mmdt/mmdt-logo-amp.png http://www.federatedinvestors.com/mmdt/daf\images\insights\article\shoes-shopping-small.jpg August 20 2020 August 7 2020

I've never worn my new Pradas

Some aspects of life and the economy are getting back to normal quicker than others.
Published August 7 2020

On an advisor call, which covered our second-half outlook, the election, value trade and a market that’s ahead of itself, a gentleman asked, “Aren’t you spooked about the government’s endless money printing?” His clients worry it’s all fake. My response was this uncertainty is why investors should have a balanced portfolio. Then I said, look at the bright side. Here we are having this meeting and I’m still in my slippers! And the advisor says, “I hope they’re fuzzy slippers.” What a time to be alive. An unprecedented recession, an unprecedented (so far) recovery, unprecedented stimulus.  At this point, much of the data outside of the critical job market has been very encouraging (more below). Even services surprised this week (more below). Really low inventories across industries suggest the pickup will continue, if not accelerate. One example: autos. Ward’s expects Q3 vehicle production to surge 200%, a result of truck and car sales jumping 67% in just three months, leaving new car lots depleted and forcing buyers to flock to used car lots, where sales are booming. Europe is experiencing a similar upswing. Life there mostly has returned to normal in terms of reopened borders, even among countries such as Germany where cases are on the rise again.

Despite a choppy 2-month trading range, Fundstrat’s proprietary long-term cycle barometer that tracks the percentage of stocks with rising monthly momentum climbed an additional 10% in July. This supports its view that the market recovery that began in March is still early in a 4-year cycle, with more upside likely through this year and into 2021-2022, aided by persistently negative real rates and investor sentiment that’s unusually negative. Leuthold notes the bull market that began about 100 days ago has seen improved participation and a strong rise in both trading volume and the number of S&P 500 advancers. With another likely (if delayed) dose of fiscal stimulus, possible Fed adoption of inflation averaging and decelerating Covid-19 case growth/hospitalizations, cyclicals and small caps stand to benefit, Evercore ISI says, with copper strength and dollar weakness providing tailwinds for Industrials and Materials. That said, Big Tech is still far and away leading the way, with the big five—Apple, Microsoft, Amazon, Google and Facebook—trouncing the 495 other S&P members. Having learned the hard way that valuation is often a poor timing tool, Strategas can think of only two catalysts that might end Big Tech’s reign as the only game in town—the development of a vaccine or some embrace of “pro-growth” fiscal policies that would stimulate new business formation (and there are indications business formations are on the rise). Without either development, it thinks the recovery’s pace may be too slow to allow a reversion in the growth vs. value trade.

While markets moved from despair to euphoria over one of the shortest periods in modern history, August is a notoriously difficult month from a seasonal perspective, Jefferies reminds, and September tends to be the worst. With the election season set to get in full swing (as much as it can in this pandemic), ISI recalls 2016 and 2012 saw pullbacks of 5% and 8%, respectively, from their September/October peaks into their Election Day lows, before finishing with a flourish. Low consumer confidence typically supports higher equity volatility and represents a key risk as the labor market recovery slogs along (more below). Of course, with the Fed and other central banks on steroids—money supply is growing at a 27% annualized rate—JP Morgan estimates “credit easing’’ policies among the G4 central banks (U.S., U.K., European Union and Japan) will push their combined balance sheets to $27 trillion (67% of combined GDP) by the end of next year. This makes it difficult to see a fundamental shift in the direction of equities. This monetary manna continues to hold bond yields near historical lows, making stocks highly attractive by comparison. Fundstrat calculates the P/E multiple on the 10-year Treasury is around 183x, vs. a forward P/E of 20.2x on 2021 S&P EPS. If you saw the fabulous heels lined up in my closet, getting dusty, you would be aghast at these frumpy slippers. My colleague who arranged this call with advisors and I were commiserating about our heels. She had an occasion to put on a pair the other day and her happy feet were rioting! Ugh. Happy feet, schnappy feet.

Positives

  • Outside of jobs, it sure looks like a V Citigroup’s Economic Surprise Index has vaulted to new highs, and this week’s latest batch of data is one reason why. Manufacturing and services ISMs surprised, led by new orders and production. ISI’s truckers’ survey, which has the highest correlation to GDP of its indicators, jumped to a 14-month high. And home builder confidence continued to trend higher on rising traffic and sales—pending sales are at their highest levels since before the global financial crisis.
  • It’s picking up all over In a clear sign that the global recovery is strengthening and broadening, 14 of 18 country PMIs grew at an average 53.1 in July, vs. eight of 18 that grew at a rate of 52 in June, according to countries Strategas monitors. Most surveys indicated new orders and production were the drivers.
  • E-commerce a big Covid winner Prologis Research reports that U.S. e-commerce penetration jumped to more than 25% in April from 15% at year-end 2019, pulling forward several years of adoption, with more than $10 billion migrating over to the digital channel. Fillogic (a logistics-as-a-service platform) believes that the U.S. is five times over-stored relative to the next closest industrialized nation.

Negatives

  • Jobs always lag in a recovery This morning’s headline jobs number mildly surprised, and the decline in the latest weekly jobless claims represented the biggest beats for initial and continuing claims since the virus crisis began. But the reality is monthly gains are slowing and jobs have only recaptured half their Covid losses, while claims remain at deep recession levels.
  • One area of housing that’s not so hot Of America’s nearly 43 million renters, almost half are “cost-burdened,” meaning more than 30% of their income goes to housing costs, according to the Joint Center for Housing Studies of Harvard University. Of those, about 10.9 million renter households are “severely burdened,” spending more than half their income on rent. The Covid-19 Eviction Defense Project estimates that between 19 million and 23 million renters are at risk of eviction by the end of September.
  • At some point, we’re going to have to pay the piper With June’s budget deficit alone reaching $864 billion, nearly as large as all of 2019, ratings agency Fitch revised its U.S. outlook to negative. It estimates that federal debt will exceed 130% of GDP by 2021. It wasn’t long ago observers pointed to Italy’s debt-to-GDP moving toward 130% as a potentially dire situation.

What else

Cyclicals actually getting some attention While S&P cyclical stocks as a group are still down about 7% on a relative basis since year-end 2019, compared to the S&P ex-tech stocks, cyclical sectors already have recovered nearly all of this year’s relative loss, Leuthold shares. Because Technology is having a remarkable—if not unique—year, its outsized performance is distorting how investors interpret the character of other sectors.

A mallvelous solution TIS Group’s commercial real estate contacts report rising interest in an idea that’s been circulating for years: building senior assisted-living facilities at shopping malls. With big-name retailers disappearing by the day, this could represent a source of revenue replacement for towns that are unlikely to see retail sales taxes ever come back and an out for mall developers struggling to adapt to the loss of so many anchor tenants.

Did you know? I always find interesting nuggets in this Bank of America feature. For example, did you know there will be more Nigerians than Chinese in the world by 2100? Or that a third of all content published in Bloomberg News articles uses robots to help write it? Or that cow burps emit more greenhouse gas emissions than cars worldwide (and they burp every 90 seconds!). Or that more people own a smartphone than a toothbrush in the world?

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Tags Equity . Markets/Economy . Coronavirus .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Citigroup Economic Surprise Index: A gauge that measures how regularly scheduled reports on the economy compare to the consensus of Wall Street forecasts.

Diversification and asset allocation do not assure a profit nor protect against loss.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Growth stocks are typically more volatile than value stocks.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

Stocks are subject to risks and fluctuate in value.

The Institute of Supply Management (ISM) manufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Institute of Supply Management (ISM) nonmanufacturing index is a composite, forward-looking index derived from a monthly survey of U.S. businesses.

The Markit PMI is a gauge of manufacturing activity in a country.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

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