“If you are going through hell, keep going. But please stop screaming; it’s bad for morale.” – Winston Churchill
During my investment career, I have been associated with people that have a Ph.D. in this, a Ph.D. in that, and those that have a high school diploma. The successful investor realizes the role that human emotion plays in managing money. It’s not about the number of degrees, it is about common sense. Over and over, we talk about avoiding the noise. The reason is simple. Once that is accomplished it gives you the chance of applying that common sense to the situation.
Our minds take us to a place where we believe our own experiences. Unfortunately, they make up a tiny fraction of how the world and markets work. Think about it for a minute. Someone who started investing and has seen nothing but improving markets has a far different view from anyone that started investing in 2007. Each has a myopic view of the total picture, yet both believe their views ARE the way the markets will evolve. Of course, nothing could be further from reality.
Investors also get trapped when they refuse to have an open mind when investing. The cornerstone of economics is that things change over time because as we have seen, the situation doesn’t stay too good or too bad indefinitely. However, the last situation we experience, like the end of a movie will stay with us for a long time. It’s why so many people just could not buy into the fact that the financial crisis was over and things were about to change. The stock market signaled that, but few listened. Then, when there was a rebound that indicated a true change was taking place, many still would not believe or get on board the train. They were convinced the train was going to go over a cliff.
This confirms why an investor has to watch the data, lose the emotion, and the closed mind approach. Once an investor grasps the fact that the data and the market itself will tell us when to change, they give themselves a better chance to be successful. This is very important in today’s market backdrop. A recent “shock” to the economy and now debate over what any recovery might look like.
Pessimism is intellectually seductive, and the arguments always sound smarter, because they dovetail with our worries. That has been proven over and over in market history. It sounds smarter. “Sounding” smarter doesn’t necessarily produce positive results. Once we add money and investing in the mix that is filled with pessimism, it takes on a whole different look. In our capitalist mindset, losing money is tantamount to a crime. It’s embarrassing and something no investor wants to talk about, yet losing money is a part of the investment cycle.
This horrific economic situation is far different from all of those times when we saw so many pessimists cry wolf over this or that issue. Every time we were able to see how they were exaggerating or citing “facts” that were questionable. At the end of the day, they were proven to be wrong. The devastating and chilling economic data of today is very real. It is not imagined nor exaggerated.
So we find ourselves in a complex and perplexing situation, dictating that investors need to walk a very fine line now. We have already seen how it hasn’t paid to toss in the towel because of this virus event, nor can we be confident to say investors should be ‘all in”. However, that doesn’t mean we should stop watching the data for other signs. The word “change” is always important as the stock market always seeks out the direction of change.
While we have witnessed a period of change since the March lows, my message has been the same. This continues to be a market of stocks that requires an investor to maintain “balance”.
Monday started with a ‘gap up” opening as investors noted Fed Chair Powell’s interview, where he noted that “There’s no limit to what we [Fed] can do.” That was the start of the fire and the gasoline that kept the blaze going was positive remarks from Moderna (NASDAQ:MRNA) that phase one results from its COVID vaccine study showed promising results and was tolerated well by subjects.
A glimmer of hope on the “virus” with the backing of the Fed and the DJIA rose 3.8%, S&P up 3% to a new reaction high, with the big winner of the day was the Russell 2000 up 6%. The NYSE advance/ decline ratio was 7 to 1, and up volume was 90.6% of total volume.
After an impressively strong start to the week, where equities opened higher and kept going from there, turnaround Tuesday showed up with a late-day selloff. The NASDAQ was able to stay in the green at the close but the other major indices all finished with losses. The S&P was down -0.6%, and the Russell 2000 gave back 2% of its outsized gain from the day before.
No sooner than the S&P 500 saw a disheartening sell-off to close out the day on Tuesday, the indices came back as the S&P 500 rallied 1.6%, setting another new reactionary high. From there it was sloppy trading, a headline here, a headline there, and the indices stayed in a very narrow range. Thursday saw the S&P closed down 0.75%, but advancing issues led decliners by a 5-4 margin. Somewhat of a positive. The S&P is up less than 1% for May and now is down about 9% for the Year.
The narrow trading at the end of the week may be setting the stage for a quick move-in either direction.
Two macro situations dominate the scene today. The Fed’s aggressive QE4 actions have increased the amount of money sloshing around in the economy. While GDP growth has plunged, thanks to the induced economic coma from the lockdowns.
How each of these situations gets resolved will go a long way in how our economy looks down the road.
Philly Fed index rose 13.5 points to -43.1 in May after dropping -43.9 to a record low -56.6 in April. New orders climbed to -25.7 after dropping to -70.9 which was a historic nadir.
University of Michigan’s sentiment has stabilized after falling to a 10 year low. That is pretty surprising given one component of the survey.
In this month’s survey, the index that tracks instances of unfavorable news mentions hit a record high of 141. This series goes back to 1959, and never before has it been near current levels. The prior high for this index was back in the depths of the financial crisis when the index peaked at 133.
Adjusted for seasonal factors, the IHS Markit Flash U.S. Composite PMI Output Index posted 36.4 in May, up from 27.0 in April, but indicating the second-sharpest decline in business activity since the series began in late-2009.
Chris Williamson, Chief Business Economist at IHS Markit:
“The severe drop in business activity in May comes on the heels of a record downturn in April, adding to signs that GDP is set to suffer an unprecedented decline in the second quarter.”
“Encouragement comes from the survey indicating that the rate of economic collapse seems to have peaked in April. In the absence of a second wave of COVID-19 infections, the decline should moderate further in coming months as measures taken to contain the coronavirus are steadily lifted.”
“However, the sheer scale of the current downturn and associated job losses, and the fact that some restrictions will need to stay in place until an effective treatment or vaccine are found, highlights how a full recovery is unlikely to be swift.”
“We anticipate that GDP will decline at an annualised rate of around 37% in the second quarter, and it will take the economy two years to regain the pre pandemic peak.”
Initial jobless claims fell -249k to 2,438k in the week ended May 16 following the -489k drop to 2,687k previously This brings the 4-week average down to 3,042k from 3,543k.
NAHB homebuilder sentiment for May helped to confirm that housing data continues to hold up better than other areas of macroeconomic data. NAHB’s Housing Market Index has collapsed over the past few months and is sitting around some of its lowest levels in years. The index rose from 30 in April to 37. That 7 point month over month increase was the largest monthly increase for the index since another 7 point gain in June of 2013.
Housing starts dropped -30.2% in April to 0.891 million, a little weaker than analysts expected, after falling -18.6% to 1.27 million in March and -3.1% to 1.56 million in February. Starts are down -19.2% y/y. The April pace of starts is the lowest since February 2015.
Existing home sales report beat estimates with an April drop of “only” -17.8% to a 9-year low clip of 4.3 million from 5.2 million in March and a 5.7 million expansion-high in February. Existing home sales are tracked at closings, so April sales declines likely reflect disruptions in March as well as April. It’s noteworthy that in the first half of 2020, existing home sales will set both an expansion-high and a likely recession-low.
Lawrence Yun, NAR’s chief economist:
“The economic lockdowns occurring from mid-March through April in most states – have temporarily disrupted home sales. But the listings that are on the market are still attracting buyers and boosting home prices.”
“The median existing-home price3 for all housing types in April was $286,800, up 7.4% from April 2019 ($267,000), as prices increased in every region. April’s national price increase marks 98 straight months of year-over-year gains.”
“Record-low mortgage rates are likely to remain in place for the rest of the year and will be the key factor driving housing demand as state economies steadily reopen. Still, more listings and increased home construction will be needed to tame price growth.”
Total housing inventory at the end of April totaled 1.47 million units, down 1.3% from March, and down 19.7% from one year ago (1.83 million). Unsold inventory sits at a 4.1-month supply at the current sales pace, up from 3.4-months in March and down from the 4.2-month figure recorded in April 2019.
The flash IHS Markit Eurozone Composite PMI rose from an all-time low of 13.6 in April to 30.5 in May, its highest since February. By remaining well below the 50.0 no-change level, the PMI registered a third successive monthly fall in output and continued to indicate a rate of contraction over anything seen before the COVID-19 outbreak. The prior low of 36.2 was seen during the peak of the global financial crisis in February 2009.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at IHS Markit:
“The eurozone saw a further collapse of business activity in May but the survey data at least brought reassuring signs that the downturn likely bottomed out in April. Second quarter GDP is still likely to fall at an unprecedented rate, down by around 10% compared to the first quarter, but the rise in the PMI adds to expectations that the downturn should continue to moderate as lockdown restrictions are further lifted heading into the summer.”
“All eurozone countries eased their COVID-19 containment measures to some extent in May, helping to moderate the overall rate of economic decline. “However, while a further loosening of restrictions is anticipated in coming months, some measures to contain the virus are likely to remain in place until an effective treatment or vaccine is found.
Japan’s economy contracted -0.9% in January-March, or at an annualized pace of -3.4%. The world’s third-largest economy was in a technical recession even before a state of national emergency was declared over the coronavirus outbreak.
The headline seasonally adjusted IHS Markit / CIPS Flash UK Composite Output Index, which is based on approximately 85% of usual monthly replies, registered 28.9 in May, to remain well below the crucial 50.0 no-change thresholds. Although the index was up from 13.8 in April, the latest reading still signaled a far steeper pace of contraction than at the worst point of the global financial crisis (index at 38.1 in November 2008).
Chris Williamson, Chief Business Economist at IHS Markit:
“The UK economy remains firmly locked in an unprecedented downturn, with business activity and employment continuing to slump at alarming rates in May. Although the pace of decline has eased since April’s record collapse, May saw the second largest monthly fall in output and jobs seen over the survey’s 22-year history, the rates of decline continuing to far exceed anything seen previously.”
“Travel and tourism firms, hotels, restaurants and producers of consumer goods such as clothing were again the hardest hit, reflecting virus containment measures, but this remains a shockingly broad-based downturn with very few companies left unscathed by the COVID-19 pandemic.”
“An improvement in business confidence about the year ahead for a second successive month is welcome news, and the easing of restrictions in coming months should help boost activity in some sectors as we head into the summer.”
“However, the UK looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer COVID-19 cases. Virus related restrictions, widespread job insecurity and weak demand will be exacerbated by growing business uncertainty regarding Brexit. We are consequently expecting GDP to fall by almost 12% in 2020. While the quarterly rate of decline looks likely to peak at around 20% in the second quarter, the recovery will be measured in years not months.”
Earnings season has now officially wrapped up with Walmart (WMT) reporting a strong quarter. Several other notable retailers including Home Depot (HD) beat, Kohl’s (KSS) miss, Lowes (LOW) beat, Target (TGT) beat, Ross Stores (ROST) miss, and BJ’s Wholesale (BJ) beat, all reported this week as well.
According to Refinitiv, the current consensus estimate for 2020 and 2021 S&P operating EPS is $128 and $166 per share, respectively. Many believe backend loaded $128 may be too high. Some of the analysts I confer with are using $125. I realize that comes down to splitting hairs but these economists have a habit of doing just that.
Understandably they are in uncharted territory relative to understanding the impact of shutting down a levered economy and believe until there is a vaccine, any reopening could be subpar. Most of the estimates I have seen are using a 20% growth rate on the 2020 estimate which translates to $150/share. Allow me to take my shot at splitting hairs as well and say that could prove to be too low.
The Political Scene
Testimony by Fed Chair Powell and Treasury Secretary Mnuchin on implementation of the CARES Act on Tuesday underscored building bipartisan consensus around state/local government support, adjustments to the Paycheck Protection Program (PPP), and adds to the position that the Fed is poised to do whatever it can to support the market. The hearing highlighted that only approximately half of the fiscal relief passed has been fully deployed.
Powell clarified that the Main Street Lending Program and Municipal Lending Facility will be operational by the end of May or early June, which should provide lawmakers with greater insight. The testimony also highlighted that pressure on China’s access to U.S. capital markets will be a significant issue over the coming months, and may gain greater prominence given Sen. Marco Rubio’s appointment as temporary chair of the Senate Intelligence Committee.
The U.S. Senate has passed legislation that would delist foreign companies from U.S. exchanges if the Public Company Accounting Oversight Board (PCAOB) is “unable to inspect” the audits of foreign companies for three years. This legislation is aimed at Chinese companies listed on US exchanges and is the latest escalation of the U.S.-China tensions in Washington, DC. The legislation, S. 945, the Holding Foreign Companies Accountable Act, cleared the Senate in a unanimous vote, signaling widespread support for the effort. No vote is yet scheduled in the House, but we believe there will be a significant push for the legislation to be taken up in the coming weeks, and we believe it is only a matter of time before this bill (or something similar) is signed into law.
The 10-year Treasury bottomed at 0.40% over the worldwide fears that are present. The 10-year note yield rallied off those lows to 1.18%. A trading range has been established under 1% now with the 10-year note closing the week at 0.66%, up .02% from the prior weekly close.
With strong demand for the 10-year even at these low yields, investors are still exhibiting a good degree of concern.
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3-month/10-year yield curve once again on February 18th, and that inversion ended on March 3rd. The 2/10 Treasury curve is not inverted today.
The 2-10 spread was 30 basis points at the start of 2020; it stands at 49 basis points today.
The percentage of investors reporting as bullish in AAII’s survey rose to 29% this week off of the recent low of 23.3% last week. At that level, the bullish sentiment remains low below levels seen as recently as the last week of April when it was at 30.6%.
The bulk of market participants remain bearish. A little over 45% reported as such this week which was an improvement from readings of over 50% over the past two weeks. Similar to bullish sentiment, that leaves bearish sentiment at its lowest level since the last week of April.
Bearish sentiment in AAII’s weekly survey has come in at least 1 standard deviation above its historical average for 11 straight weeks now. That is the fourth-longest streak on record.
WTI Has rallied but it is approaching likely resistance.
It was only a month ago that it appeared that the oil market was broken and the commodity would never go up again; since then, oil has rallied and energy stocks have done marginally well vs the rest of the S&P 500. Now, though, it might get a little tougher, as WTI nears what should be a likely resistance area from the breakdown in early March.
If it can clear the $35-36 zone, there’s not much standing in its way until ~$40-41, but the former zone could be a big hurdle. Also, Energy has recently started to trade sideways again versus the S&P 500, so the outperformance has stalled for now.
Crude oil inventories experienced their first draw since January 17th. Inventories falling during this time of year is seasonally normal with this week’s draw larger than average at 3.1 million barrels. That is as domestic production fell for a seventh consecutive week (the longest streak since a 12-week long streak in 2016).
Domestic production is now at its lowest level since October 2018. Meanwhile, gasoline demand fell for the first time in five weeks while refinery throughput picked up a bit, leading inventories to rise by 2.83 mm bbls. Non-gasoline inventories also rose this week by 15 mm bbls as overall product exports continued to fall.
The price of crude oil closed the week at $33.44, which was an increase of $3.76 for the week and it has gained $13.96 in the last 3 weeks.
The Technical Picture
The S&P 500 has seen plenty of ups and downs lately but it is noteworthy that the index has not had three straight down days since early March. It has been very choppy and remains so. A break above the resistance and the bias should be to the upside; a break beneath support and the bias should be to the downside. Within the range, anything goes.
Today’s close at S&P 2955 leaves some question marks in the very short term. There was no follow-through in the early week rally, but there was no clear breakdown either. All three DAILY moving averages (20,50,200) are now sloping higher.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
“We can’t’ keep everyone alive.”
I wonder what the reaction would be if someone that was advocating the economy stays open during the COVID virus scare uttered those words. Ironically the Governor of New York stated just that, realizing that indeed we can try our best but it’s simply not possible, no matter how hard we try.
Oh what a web we weave ….
In a region of the world that witnessed a devastating impact from COVID 19. The Prime minister of Italy:
“Italy is embarking on an era of “responsibility and coexistence with the virus.
“We cannot continue beyond this lockdown — we risk damaging the country’s socio-economic fabric too much. The “damage” to the national fabric if the shutdown is not lifted “could be irreversible.”
French Prime Minister Édouard Philippe:
“We must learn to live with the virus”
A “lengthy lockdown would have “negative repercussions”, including “children not going to school”, a “lack of visits” between family and friends, and a “lack of investment”. All this risked “the economy falling apart”.
The message presented here last week was a reality check of sorts.
If the delay, watch and wait crowd is sent to the back of the room, all won’t be lost. I remain selective and patient while watching for signs of rational behavior to take over.
At some point, the realization that the only way to avoid a complete financial disaster that will affect those millions and take years to overcome is to learn to live with this disease. That HAS to become the mainstream mindset.
Perhaps we are finally witnessing the first signs that will bring back a balanced approach to the virus scare. A scare that has brought a harsh sense of reality for some as suicides increase dramatically. Ironic that this type of news comes from a state that has been determined to stay locked down despite a death rate of 0.008% from the virus.
Individual Stocks and Sectors
A sign of the times and a reason why the “work from home” concept will reshape how “digital “ companies will operate in the future. Companies that will not only endure but thrive in this new environment remain attractive.
Following up on the opening quote from Mr. Churchill, it seems plenty of market participants are screaming these days. Most are yelling that this is a BEAR market rally, but in reality they can’t understand how it continues. BULLS are screaming because many of them are watching the action from the sidelines wary of all of the poor economic data. BEARS are screaming because every time they believe they have the “perfect” setup, something comes along to destroy their best-laid plans.
Anyone telling investors they know what is going to happen vis a vis the markets as this forced economic shutdown story evolves is a charlatan. This year we have watched 35+ million individuals file for unemployment and see the NASDAQ composite up year to date. We have to wonder how many saw either of those things coming and when we put them together what their forecast would have been.
The investing backdrop may not be as good as many would like to see it, but while things are far from perfect, they may be showing slow signs of improvement. The results of all these on-again, off-again headlines lately is a market that jerks higher and lower with every news announcement. Then quickly reverses course with the next headline.
Many who manage their money rely on conjecture to form their investment strategy. They say they are following a “feeling” they have, rather than listening to the message of the market. Time after time we have heard; the stock market is seriously overvalued now. No one can decide on what the post COVID economy will look like. Then the inevitable words; surely after this rally, a sharp market pullback is inevitable. Many are assuring us the March lows will have to be tested.
The problem is no one can tell us that is the way this will play out. There is no mystery, and it is very simple, to have rallies, you need to have declines and vice versa. Investors need to take this one day, one week at a time.
Nobody should be a “Perma” anything. But if you must err to one side or the other, as a default setting of sorts, the right way to lean is obvious and shared by most successful investors. Optimism as a default setting is the only way to successfully fund a retirement over the long stretch. Unless you believe that you have the god-like ability to dance into and out of the markets with good timing consistently. If you do have that ability, then there is little reason to read further.
The mere mortals like myself need to remain flexible, open-minded, and ready to change when change is warranted. We need to avoid emotion at all costs as we assign a probability of any issue that surfaces occurring. As we look ahead there are positives, and keeping them in mind now is important. That said, we all should be aware of the devastation currently hitting the economy. And if growth doesn’t start a sustained upturn, more and more headwinds will strike.
In the final analysis, there are important questions for investors to try and answer. Will the economy be largely back to normal and on the way to a full recovery by the end of the year? Has the damage done by the virus and the lockdown been so extensive that investors will conclude that it will take years to get back to the level of economic activity achieved in 2019?
I will be looking at another list of items that could influence those answers and present serious problems for the market down the road. Assigning a probability of each of them occurring is the next step.
- Additional Layoffs, A Second Wave Of The Virus, No Vaccine
- Political Wrangling Over Additional Stimulus
- Negative Interest Rates
- Democratic Sweep Come November (an observation, not a political statement).
This fragile economy cannot withstand any negative shocks such as regulatory impediments or tax increases that will hamper business growth no matter how well-intended they may be. Proposals include a corporate income tax rate increasing to 28% from 21%. That would be a follow-up blow to the already weakened corporate profits picture. For investors, these proposals would surely be considered market UNFRIENDLY.
Enjoy the Memorial day weekend.
Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.
In different circumstances, I can determine each client’s situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.
to all of the readers that contribute to this forum to make these articles a better experience for everyone.
Best of Luck to Everyone!
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the rally with NO hedges in place.
This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me.
IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each situation is unique.
Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control.
The opinions rendered here, are just that – opinions – and along with positions can change at any time.
As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die.
Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.
The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can’t expect to capture each and every short-term move.