Soft Where?

Soft where?  Markets rose yesterday led by recently bloodied tech stocks as earnings continue to trickle in, beating low estimates at a record rate. Investors are hopeful for a meaningful stimulus package as lawmakers wrangle in DC while drugmakers are gaining ground in their search for a COVID vaccine.

 

N O T E W O R T H Y

 

Narrative check-in.  I am a forward-looking, glass-is-half full sort of person.  That attitude helps me focus on what could be just around the corner, the next block, ten blocks from now, etc.  It also helps me persist after setbacks, which are part and parcel when dealing with the markets.  Let’s be clear, there are different types of optimism. There is blind optimism, which can be dangerous, and there is measured-optimism.  Measured-optimism is like optimism with a sense of reality.  I think of myself as a measured optimist.  I get my sense of reality through my experiences in finance, both good and bad, over the past 30+ years… my wife also plays a big roll in providing me with a sense of reality (you can chuckle, but it is true).  Getting a sense of reality is critical when dealing with markets, because when things are going your way it is easy to get caught up in a narrative that makes you believe that the good times will go on forever and that you can’t be wrong.  Now, the thing about markets is that they, themselves, are really good at giving investors a sense of reality on their own.  The author Mark Twain wrote “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, May, March, June, December, August, and February.”  It appears that Twain, too, had a sense of reality.

 

As we closed out 2019, things were going well for the markets. We were making new highs, unemployment was at record lows, the economy continued to churn out growth, and a pesky trade spat between the US and China looked like it was about to ease up a bit.  Sure there were risks floating about.  The economic expansion was exceptionally long… the longest in modern history… leaving many believing it to be a bit long in the tooth.  Corporate earnings growth was slowing as the benefits from the 2017 tax package were beginning to wear off, leaving many analysts wondering if growth could be sustained.  The last thing on anyone’s’ mind was a pandemic.  The optimism of 2019 spilled over into the beginning of 2020 and stocks made new records.  That would have been a good time to employ that sense of reality.  I hate to bring it up, but the S&P500 made an all-time high close on February 19th.  I can still hear the words “markets made another new high today” as many probably thought “no big deal, this happens all the time these days”.  Not two days later markets began their epic fall, dropping  by -34.07% in just 23 sessions! Reality check… courtesy of the stock market.  But things got better for those that stayed the course and those that had the courage to buy the dip.  Stocks climbed by +44.87% from their lows through yesterday’s closes. So, what has changed since March?  Well, most importantly the Fed has been on an epic stimulus binge pouring liquidity into the banks and markets through lending and quantitative easing.  In April, the Federal Government passed the CARES Act, which provided a massive $1.8 trillion fiscal stimulus measure.  Both quite positive and supportive to risk assets. Unemployment has skyrocketed at a record pace as companies scramble to stay afloat.  The economy has fallen into a recession and we are about to get a first glimpse of Q2 GDP (Thursday) which is expected to show a record quarterly decline. Many states have locked down, most have reopened (in different fashions), and some reopened states are slipping back into restrictions in response to fresh spikes in new virus cases. Though the absolute number of cases is not really the best way to look at things as they increase with testing, they can give us some high level perspective.  US Confirmed COVID cases on 3/23 as markets hit their lows was 43,843.  As of yesterday, that number was 4,294,770, a +9,685% jump.  Deaths are a harder number to argue, and they have risen from 786 to 148,056 during that same time period.  I will spare you the math… the death rate is declining thanks to advances in treatment protocols. We have learned that an existing antiviral drug Remdesivir shows promise in lowering the mortality rate of patients, which is very positive.  Many companies, large and small, are in a race to produce a viable vaccine.  Some notable ones have just begun or are about to begin Phase 3 trials on possible vaccines that have shown great promise in smaller, earlier stage trials.  Based on experts opinions, we could have a vaccine approved as early as 1Q21 with limited distribution capability to front-line and healthcare workers, with broader availability increasing throughout 2021.  The economy is expected to rebound in the 3rd and 4th quarters as lockdowns continue to ease, though the intensity of the rebound will be dictated by the pace of reopening.  Next year’s GDP growth is expected to be positive but tepid, at best, also dictated by the pace of re-opening.  Heightened unemployment is likely to be with us beyond 2021 as it typically lags economic recovery. Individual companies are reporting earnings and beating very low expectations at a record pace and a scant few of them are willing to offer any guidance for upcoming quarters.  Their ability to survive and return to thrive will be dictated by the pace of the recovery and the strength of their financial positions.  The months and quarters ahead will be a true test of their balance sheets and cash flow statements.  So where are we?  The optimist in me sees encouraging signs on the virus therapy front, but the realist in me still sees the long row to hoe in the next 9 -12 months.  That same realist knows that long term investors will fare well if they maintain their patience.  I will leave with you a quote by billionaire hedge fund investor Seth Klarman.  “The single greatest edge an investor can have is a long-term orientation.”

 

THE MARKETS

 

Stocks climbed yesterday on hopes for a new congressional relief package.  Recently beaten-up tech stocks led the way higher yesterday.  The S&P500 rose by +0.74%, the Dow Jones Industrial Average climbed by +0.43%, the Russell 2000 Index advanced by +1.16%, and the Nasdaq Composite Index jumped by +1.67%.  Bonds slipped slightly and 10-year yields climbed by +3 basis points to 0.61%.

 

NXT UP

 

– Case-Shiller Home Price Index (May) is expected to have grown by +0.3% month over month compared to a +0.33% growth in the prior month.

– Consumer Confidence (July) may have slipped to 95.0 from June’s 98.1.

– Richmond Fed Manufacturing Index (July) is expected to have risen from 0 to 5.

– This morning, Polaris, Otis, TransUnion, DR Horton, Westinghouse, Zebra Technologies, Pfizer, Laboratory Corp, Altria, Rockwell Automation, and Raytheon beat estimate, while 3M, Harley Davidson, McDonald’s, and JetBlue disappointed Wall Street analysts. After the market we will hear from Fortive, Starbucks, FireEye, Akamai, ONEOK, Visa, eBay, Maxim, Avis, and Amgen.

 

 

daily chartbook 2020-07-28

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