The S&P 500 sees healthy gains during holiday week

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The holiday shortened Thanksgiving week began with a third consecutive Monday morning booster shot (AstraZeneca) which sustained throughout the week leaving the S&P 500 with a healthy 2.3% gain.

U.S. small cap, developed, and emerging market equities again outperformed U.S. large caps. The ‘risk-on’ trade took cyclical parts of the market higher with banks, energy, and materials leading the way while REITs, healthcare, and consumer staples lagged. The S&P 500 is now up 7.99% since Election Day and up 12.6% for the year. Commodity markets were up sharply with industrial metals and oil (+8%) rallying while gold lost more ground, now back below its 200dma. Longer duration treasury rates edged slightly higher with the 10 year U.S. Treasuary now at 0.84% but shorter rates remained anchored.

Market Anecdotes
• Alpine Macro addressed ‘bubble’ and mania valuation sentiments in a recent equity strategy piece highlighting the differences between Nifty Fifty ‘72, Tech Bubble (‘00), and FANMAG (‘20).
• Ned Davis made note of near-term excessive optimism they see in the market, likely stemming from recent vaccine and political developments.
• Leuthold Group highlighted the relatively attractive valuation for small caps, making the case that both SCV (17x) and SCG (24x) are historically cheap relative to historical averages. Small growth is trading at approximately 50% of valuation measures it reached in ‘00.
• Commodities, particularly copper, continued to benefit from the strong bid for cyclical assets, up 3.22% last week. For the first time since 2011, all 18 major commodity indices are above their 200 DMA.
• The Fed is expected to ramp up longer duration UST purchases in light of the Treasury announcement of sunsetting Fed bond facilities and may now be considering supplemental monetary action at their upcoming December meeting.
• The weekly Fed balance sheet report showed the consolidated balance sheet surging $67b to a new record $7.24t. The ECB balance sheet marked a new high last week as well.
• Biden has stepped up pressure on the Democratic caucus to move more meaningfully toward the Republican offer, putting his weight behind a compromise smaller lame duck package.
• Barings highlighted capital inefficiencies currently prevailing in private equity where 70% ($366b) of capital raised from ‘15-’19 is targeting large cap businesses which account for less than 1% of firms (2,000). Only 7% ($37b) of raised capital is targeting lower middle market businesses which account for nearly 96% of firms (440k).

Economic Release Highlights
• November flash U.S. PMIs (C, S, M) all came in handily above consensus and now are now deeply in expansionary territory at 57.9, 56.7, and 57.7 respectively.
• EZ PMIs (45.1, 53.6, 41.3) missed expec-tations while the U.K. (47.4, 55.2, 45.8) beat handily across the board.
• October’s Personal Income and Outlays report revealed disappointing personal income (-0.7% v 0.1%) but in line PCE growth of 0.5%. Core PCE price index was in line as well at 1.4% YoY.
• October durable goods report came in higher than expected across headline (1.3% v 0.9%), Ex-transports (1.3% v 0.3%), and core goods (0.7% v 0.6%) components.
• Conference Board consumer confidence for November came in short of consensus (96.1 v 98.0) likely reflecting the CoVid surge and policy uncertainty in the coming months.
• November’s final University of Michigan consumer sentiment reading fell to 76.9, short of con-sensus estimate of 77.2, likely a reflection of Republican initial sentiment after the election.
• Case-Shiller House Price Index continued its torrid pace in September, coming in well above expectations (1.3% v 0.5% MoM) (6.6% v 5.4% YoY) across the 20 metro region samples.

W E E K E N D I N G  11 / 27 / 2 0

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Vaccine news puts positive charge into equity markets

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Good news on the vaccine front last week put a positive charge into equity markets which after an up and down week left the S&P 500 at a new record high. Uncertainties of CoVid fiscal relief and a December 11th government funding deadline chipped away at Monday’s exuberance – the safe bet is that we’ll see more vaccine related news well before DC provides any clarity on the fiscal front. The S&P 500 ended last week with a 2.16% gain, taking YTD returns back into double digit territory (+11%). Energy, financials, industrials, and real estate led the way while tech, communications (FB, GOOG), and consumer discretionary (AMZN) lagged. Oil jumped 7% driving commodity markets higher while the yield curve steepened and the USD strengthened mostly against the safe haven Japanese Yen and Swiss Franc.

Market Anecdotes
• The extraordinary 90% efficacy of the Pfizer vaccine report was far in excess of market expectations, resulting in a massive rotation into cyclical recovery areas of the market and away from technology bellwethers that have been carrying the water most of the year.
• Pfizers’ vaccine trial and its 90% efficacy rate is on par with childhood measles and smallpox vaccines, far beyond efficacy expectations, and significantly greater than seasonal flu vaccines (30%-50%). Ten other vaccines are in late-stage trials as well and are expecting similar results.
• Early week reports on vaccine progress, while encouraging, do present risks to the near-term outlook. Logistical challenges, skepticism regarding safety, virus mutations, anticipatory rising yields, and waning urgency for fiscal support are all tangible risk factors looking forward.
• It’s become clear that weather does indeed influence CoVid transmission. With winter in the northern hemisphere we are seeing a surge in cases while reported deaths in the southern hemisphere are 61% below their July peak. U.S. positivity rates are the highest since May.
• The technical backdrop has improved significantly. Strategas noted a surge to 70% of new 20-day highs was one of the highest readings in over 50 years and a sign of encouraging internal momentum. Value, small caps, spreads, and market breadth are also painting a good picture. • Schumer/McConnell dividing line of $500b to $2.2t Hero’s Act and the nomination of Judy Shelton for Fed Governor may be setting markets up for some DC negotiation volatility. 13.5mm Americans currently receiving unemployment benefits will lose them at the end of the year.
• FOMC members were busy on the speaking circuit (virtually) last week making the usual post meeting rounds. Ten addresses throughout the week largely reiterating the Fed party line.
• The U.S. Treasury auctioned off $122b of new paper last week with each coupon being record sized. Thursday’s $27b of 30-year bonds was the largest duration issuance of treasury bonds in U.S. history. No surprise that the uptake was a bit weak.
• A worthwhile reminder is that negative real yields, while troublesome for bonds, are ultra-accommodative to equities. YTD 2020 has seen 5yr, 10yr, and 30yr real yields move from -0.05%, 0.08%, 0.50% to -1.23%, -0.83%, and -0.24%.

Economic Release Highlights
• AAII bullish sentiment which has been modest all year despite the rally, surged last week to 55.84% on election outcome and vaccine news. Bespoke noted this is the highest bullish reading since early 2018 and in the top 94% dating back to survey inception in 1987.
• Throughout the new bull market since the March lows, AAII’s sentiment reading has notably been a bit of a head scratcher as bullish sentiment remained muted despite the return to new all-time highs. In the last few weeks, optimism had been finally starting to rise but remained relatively modest.
• Headline and core CPI for October came in at 1.2% and 1.6% annual rates respectively while monthly rates for both measures were 0.0% on the button.
• The October NFIB small business optimism index came in slightly below expectations ((104.0 vs 104.8) but held onto September’s 3.8 point upside surprise. • September JOLTS job openings of 6.438 came in lower than expected reflecting a slight uptick in job market activity.
• November (p) UofM consumer sentiment fell unexpectedly to 77.0 (82.0 consensus) from prior month 81.8, in what may reflect the initial part of the election drama.

W E E K E N D I N G  11 / 13 / 2 0

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Markets surge in wake of presidential election outcome

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Equity markets surged (6%-7%) to their best showing since April last week as election outcomes began to materialize.

With Senate outcomes still in limbo, markets cheered what looks like a gridlock scenario with Vice President Joe Biden taking the White House and market friendly policy compromises thanks to mixed Congressional power. Healthcare and technology led the way while energy and real estate lagged. Commodities benefited from a risk on rally in oil and long treasury bonds surged initially on contested election news bits but stayed suppressed due to a reduced likelihood of a sizable CoVid relief package.

Market Anecdotes
• After the worst pre-election stock market week on record, the S&P 500 delivered its best week since April as the election outcome and policy handicapping began to clear up.
• Tax hikes, infrastructure spending, green new deal, healthcare reform, regulation, and tech sector vilification have taken a back seat under a divided government scenario. The end of the trade wars, more modest CoVid fiscal relief, and eliminated tariffs are also likely.
• Emerging markets have benefited materially from the GOP Senate / Biden White House driven by currency implications of a weak USD due to lower interest rates (growth), lower Treasury issuance (deficit spending), and more stable foreign and trade policies.
• With 89% reported, FactSet noted record beat rates of 86% and margins of 19.5% for a blended Year over Year earnings decline of -7.5%. Revenue is coming in at -2.1% with record beats (79%) and margin (2.6%) of beats.
• The October FOMC meeting happened last week. As expected, no change in policy and they stand ready to enact fresh QE along with other measures if deemed necessary.
• The Bank of England surprised the markets by announcing £150 billion of quantitative easing. This was £50 billion more than expected.
• BCA pointed out an important sub-component of last week’s GDP report is that the contribution from state & local government spending turned negative as it did in 2009/2010 where it remained a drag until 2014 – a significant contributor to subpar GFC recovery growth.
• CoVid is becoming more prevalent in the U.S. as the “third surge” does not seem yet to be slowing down.
• European and Canadian approaches to health policy/lockdowns are being closely watched as proxies for full spring 2020 style versus partial targeted approach.
• The September Black Knight Mortgage Monitor showed a slight improvement in delinquencies and record originations.

Economic Release Highlights
• The October jobs report was strong with 638,000 new jobs taking the unemployment rate down to 6.9% (7.6% expected) and non-farm, private, and manufacturing payrolls all topping expectations.
• October’s U.S. manufacturing PMI improved slightly to 53.4 while the ISM manufacturing surged and crushed expectations (59.3 v 55.7). The Composite improved from 54.3 to 56.9 in October.
• The global manufacturing PMI was 53.3, an improvement from 52.1 prior reading. The European Union registered a healthy 54.8, China 53.6, India 58.6 and Germany 58.2.
• October’s ISM services index softened slightly to 56.6 from last month’s 57.8 reading.

W E E K E N D I N G  11 / 06 / 2 0

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MARKET ANALYSIS