Leavin' on the midnight train
We're going to be hearing about Georgia ad nauseam in coming weeks.
With Arizona called, all eyes are on Georgia. The Jan. 5 runoffs there appear to be why Republicans stood by President Trump’s refusal to acknowledge defeat: they need his fired-up supporters to help retain the Senate. It’s also the reason a stimulus deal with more airline aid could come sooner than later. Delta is a major employer in the Peach State. What else might be included? Another round of Paycheck Protection Program loans for smaller businesses, some extension of jobless benefits, state & local government aid and possibly more stimulus checks. The total is likely to be closer to $1 trillion than $2 trillion, well below what House Dems have been seeking. It will be interesting to see if President-elect Biden weighs in. While Dems spent record amounts in many incumbent GOP Senate races, their return on investment was minimal. For its part, the GOP already has raised $32 million for its Georgia candidates, incumbent Sens. David Perdue and Kelly Loeffler. Some think as much as $1 billion could pour into the state in coming weeks. Another barrage of advertisements by either party could backfire by angering fed-up voters. Since 1988, Republicans have won six of seven statewide Georgia runoffs. If they hold the Senate, Biden will be the first Democratic president since 1884 to start his presidency with a Senate of the other party. The market would be just fine with that.
Even with daily Covid cases at new highs and hospitals at record admissions, the data continues to confirm a V-shaped recovery, with the claims-implied unemployment rate falling to 5.1% (more below). Part of this reflects more targeted restrictions versus last spring’s widespread virus lockdowns. Curfews are emerging as the most popular policy response, aimed particularly at bars and restaurants which by far are the largest sources of spread. Meanwhile, the Pfizer and Moderna vaccine news has companies, consumers and investors looking past the coronavirus to discount a return to economic normalcy by late 2021. This is pushing against the negative dollar narrative, with 10-year Treasury yields breaking out of their tight trading range to 8-month highs. Rising yields and a steepening curve lessen potential dollar volatility, which could be a headwind for market multiples, and argue against a longer-term rotation out of technology stocks, this week’s action notwithstanding. The average momentum stock that was trading roughly 85% above its 200-day moving average a few months ago is now just 35% above, a potential longer-term buy. The dollar arguably is biased higher on widening yield and growth spreads between the U.S. and Europe, where Covid is having a much more severe impact at this stage.
Questions about the staying power of the latest strong rotation toward value and small caps aren’t necessarily misplaced. Indeed, this week marks value’s eighth attempt this year alone to establish sustained leadership. The others proved fleeting and, as was the case with Pfizer, news driven. Without additional positive news flow, value’s latest run could peter out again. Value multiples already have gone up (recent value rebounds have been driven by rising P/Es), financial conditions have been and will remain easy, and we’re still quarters away from realizing a full earnings rebound (though Q3 proved to be a big upside surprise, more below). Still, value stocks outperformed by nearly six percentage points on Monday, the biggest 1-day relative return in seven decades. Relative returns of three points or more in one day are rare, and when they have occurred, Empirical Research says value stocks outperformed over the next six months in all episodes save one—at the end of April this year. Monday also marked only the eighth time since 1957 in which market technicals sent such a strong “risk on” signal. Prior periods have tended to see cyclical value stocks outperform defensive names and small caps outperform large caps. What else might value like? Divided government and more stimulus. Georgia. Forget the midnight train. There is enough time to walk there.
- More earnings upside? With the reporting season almost over, forward earnings are continuing to be revised up and Q3 results are on track to decline about 11%, far less than expected and well above Q2’s 32% plunge. Travel-related businesses and the energy sector accounted for essentially all the decline, with half of index constituents experiencing an increase in profit margins. Empirical expects consensus for 2021 earnings to recover to just above 2019’s high-water mark may prove too conservative.
- Inflation is not a worry Both headline and core consumer prices were unchanged last month, and year-over-over-year (y/y) eased to 1.2% and 1.6%, respectively, well below the Fed’s relaxed 2% target. Producer prices also remain muted, up 0.5% and 1.1% y/y, respectively, at the headline and core levels.
- Global recovery picks up steam The Organization for Economic Cooperation and Development’s widely followed global leading indicator rose again last month and has now recovered 90% of its pandemic plunge.
- Will a worried consumer keep shopping? The fourth-largest monthly decline in nearly 50 years pushed Michigan consumer sentiment to a 4-year low in October. Covid worries drove the drop.
- Small businesses worried While the NFIB optimism index held in October at its best reading since February, uncertainty about future business conditions hit a 4-year high. Job openings and hiring plans also pulled back, signaling a potential slowing in the jobless rate’s decline going forward.
- Labor market far from normal While initial and continuing jobless claims fell more than expected to their lowest level since March, they remained more than triple pre-pandemic levels. Notably, some 21 million Americans were receiving some form of unemployment assistance in the latest survey week, up from just 1.45 million a year ago and nearly double the official number of unemployed in October.
The last time I’m going to talk about Trump, I promise With some 5 million ballots still to be counted, Biden has received more raw votes than any presidential candidate in history, and his popular vote share of 50.8% tops Reagan’s 50.7%. But Biden also will have the most opposing votes, which together with 2016 puts total raw votes over the two elections to 135.5 million, more than a million above Obama’s over his two elections. It came down to Pennsylvania, Michigan and Wisconsin, which Trump carried by 77K votes four years ago but is losing by 215K now. He becomes the only president to be impeached, lose the popular vote twice and lose reelection.
I wonder if most Americans care about the Senate Yardeni thinks the market may have experienced its “Santa Claus” rally on Monday, almost two months ahead of schedule. The reason? The Jan. 5 runoff elections could weigh on investors as that date nears on worries a Dem sweep would eviscerate James Madison’s constitutional system of “checks and balances.’’
2021 could be great! The last five economic expansions have lasted eight years on average (ranging from five to 11 years), with the S&P 500 rising 250% on average (with a range of +100% to +400%). It’s believed the current recovery began this summer.