Capital Wealth Planning: Record Highs – It’s All About Stimulus
Monday Morning Observations
It’s All About Stimulus
“Isn’t it funny how day by day nothing changes,
but when you look back – everything is different.”
– C.S. Lewis
Stocks were higher across the board with all the major indices closing at all-time highs as investors took the disappointing jobs report as a catalyst for a bipartisan stimulus package for Main Street.
The Dow Jones Industrial Average gained another 1% last week to finish at a new record high of 30,218.26. The S&P 500 also ended the week at a new high watermark of 3,699.12, up 1.7%. The NASDAQ jumped another 2.1% to close out the week at a fresh high of 12,464.23.
To say that the economic news cycle has been eventful and full of exuberance would be an understatement. Day by day, single headlines may not be apparent, but when you look back and put the pieces together, the picture becomes clearer.
A lot of obstacles are being removed. On the bullish side…let me count the ways:
- Core inflation @1.2%, further away from the Fed’s 2% target.
- The major indices achieve new all-time highs.
- The major indices were all up over 10% in November.
- All U.S. stock indices positive YTD.
- COVID-19 vaccines rolling out this month in U.S. and this week in UK.
- M&A activity increasing (i.e. CRM acquires WORK for $27.7B).
- Pelosi and Mnuchin back on the phone talking about a $908B stimulus package (for economic context see last week’s MMO).
On the bearish side…let me count the ways they aren’t:
- Private payrolls (ADP) rose by 307,000 in November (475,000 expected).
- Federal Reserve Chairman Jerome Powell spoke, calling the outlook “extraordinarily uncertain.”
- Volatility (VIX) remains above 20, despite new market watermarks.
The wildcard…when bad news is good news:
- The worse-than-expected employment report for November showed that we added the fewest number of jobs in six months, which is bad news for sure. However, Wall Street is now confident that this will force Washington’s hand into passing the much needed targeted stimulus bill – which would be really good news. (For more on that topic, please see my interview below from Yahoo Finance.)
On a 7 to 4 decision, the bulls have it – for now at least.
This pandemic brings out the nostalgia for social contact in most of us. The time for celebration is coming soon, but we are not there yet…the bubbly will need to remain on ice a bit longer. True to ourselves, we cherish this strong December start, but have to dig down into the data to be able to chart our course going into year-end.
For the past few years, we have all noticed the rotation to “risk assets” and the penchant for growth sectors over value. However, consumer discretionary and consumer staples lead the “hot list” for November, while technology, energy, and financials lagged. There is a lot of debate going on whether the “digital economy” (growth) is going to overtake “value investing.” Those of us that have been around a bit longer still remember the 2000 dot-com market crash, and remember the arguments then, challenging the traditional P/E valuation methodology with the new “eyeballs count” math. The current talk is about monetizing “subscribers” (a.k.a. clients) as a “new normal.” It’s not the year 2000 and things are much different in today’s digital economy. To us, it’s not an either-or equation. At CWP, we invest in both growth and value companies. We look for strong earnings, a solid balance sheet and a history of increasing dividends.
Isn’t it ironic we are dealing with more mundane issues like vials, needles, and refrigeration to distribute vaccines to the public and put an end to the pandemic…sorry guys, but you can’t get a shot online, or order it from Amazon (not yet anyway).
A second occurrence, one that has not gotten much attention around the water cooler – the Treasury yield curve. Tens have climbed out of 0.65% last July to 0.97%, still low in nominal terms, but that is more than a 30% yield swing. The two-ten spread has widened, as the investors seek a fair return to take the credit risk of our national $27+ trillion public debt. The widening spread is an indication of growth, and while the Fed keeps its toe on the markets’ credit spreads, there is enough demand out there to sustain a healthy positive slope in the yield curve. Mortgage rates have moved up accordingly, but buyers are comfortable, and the housing industry keeps selling homes as fast as they can build them.
All these esoteric arguments can be summed up by saying that when we look back, we notice things are different, but the outlook forward resonates positive going into year-end. The U.S economy was doing well before it got derailed by the pandemic, but now that we see science coming to the rescue, the momentum to recover what was lost and more is based on realistic old fashioned data, not illusory “new normal” aspirations.
Is it time to celebrate? Not quite. We still need to work on completing some version of a fiscal stimulus package, and we need efficient distribution of the vaccine, alongside public acceptance and cooperation on preventive measures. In spite of the new all-time high watermarks, volatility is not going away. Should Congress falter and Cares Act benefits end in December, Mr. Grinch may show up and ruin the holidays. We have alluded to the reality of the disparity between Wall Street and Main Street. It is an issue that needs to be confronted if we want a “happy ending” for 2020…and more so, a smooth recovery with less uncertainty for 2021.
Our strategy is very clear, and our values are anchored in time-tested principles. Benjamin Graham left us with his wise advice: “the intelligent investor must never forecast the future exclusively by extrapolating the past. The essence of investment management is the management of risks, not the management of returns.” Let’s move forward…
For those of you who missed my Yahoo TV hit from last week, you can see the replay below:
Oil Prices – West Texas Intermediate crude enjoyed a fifth weekly advance and finished at $46.26 per barrel after OPEC reached a supply compromise.
Gold – Gold experienced its first weekly gain in a month and closed at $1,834.92 an ounce.
U.S. Dollar – U.S. dollar was off again last week and is still hovering around a two-year low.
U.S. Treasury Rates – The yield on the benchmark 10-year jumped to 0.97%, a level that really hasn’t held since March.
Asian shares were lower in overnight trading.
European markets are trading mixed.
Domestic markets are indicated to open in the red this morning.
There will be a busy economic calendar this week, but the stimulus talk should dominate the headlines. In addition to the stopgap debate in Washington, the FDA meeting on Thursday to rule on the emergency uses authorization for the Pfizer and BioNTech vaccine will be a major focus. This should be the first step toward a real defense against the rapidly spreading virus.
Later in the week, we also have CPI and PPI inflationary data points to see where inflation is headed during the resurgence of COVID cases.
Stay healthy, be well and have a safe week!