Dear Valued Clients and Friends –
The market dropped 400 points today despite opening up over 200 points. The 600-point intra-day reversal was led by the Nasdaq’s almost 400-point intra-day reversal, bringing the recent peak-to-trough drop now to ~9.6%, so not quite 10% correction territory on a closing basis.
* FactSet, DJIA, Sept. 10, 2020
There was not a particular catalyst to the sell-off. The weekly jobless claims number came an hour before the market opened and the tick down did not begin until ninety minutes after the market opened. The fact that the Democrats blocked the Republican stimulus bill from coming forward for discussion was obviously not a surprise. The selling pressure in big tech just hasn’t settled yet, and that is where we are.
Weekly jobless claims stayed around 850,000 on the week, and continuing claims stayed around 13.4 million …
Okay – around the horn we go!
COVID Health Information
- I haven’t changed my mind – I still believe severity is what matters with COVID, in so much as ICU/hospitalizations when they risk overwhelming medical resources and capacity, and then obviously the tragedy of mortality, are the two events that policy must be centered around. The mere existence of cases, let alone asymptomatic ones are lightly symptomatic ones, may very well have contagion implications (those connections are really, really thin), but are not the key data point from which public policy can be created (and all the economic implications that go therewith). That said, if I were solely focused on case growth, and not of the mindset that some level of living with COVID was inevitable, I would point out for those people that cases themselves are now down 46% from the July 22 peak.
- As a follow-up to Tuesday’s report that the Astra Zeneca/Oxford vaccine trials were put on hold over a potential side effect in one patient, as of press time there was still not enough info to know if this represents a challenge to the project or not. I did read yesterday of a plethora of possible medical explanations, and clearly more time is needed to know and understand the direction of this clinical trial.
- The co-morbidity data at the CDC’s own website provide a lot more practical information on where the most sensitive vulnerabilities lie. I reiterate that the 5,692 death certificates in the COVID count that list “intentional and unintentional injury, poisoning, and other adverse effects” remain a shocking and bizarre data point, but also a reasonably small percentage of total deaths in the COVID count.
* Pantheon Macroeconomics, Sept. 9, 2020
- Today’s testing data shows over 618k tests done today, with a positivity rate of 6.1%.
* The COVID Tracking Project, Sept. 10, 2020
Key State Info
- New York
- I know it is hard to see, but I circled the dark blue bars at the bottom that note the positive tests in New York state relative to total testing. This sub-1% positivity rate has been maintained for months now. Restaurants can open up for indoor dining at the end of the month at 25% capacity (the ones that are not already out of business).
*New York, Information on Novel Coronavirus, Department of Health, Sept. 10, 2020
- The LA County Public Health Director stated that she did not expect K-12 schools to open until “we are done with the election.”
* Worldometers.Info, Sept. 10, 2020
Stock Market Today
The market was up > 2% yesterday but only 68% of companies were up, reflecting pretty light breadth and possibly explaining weakness today.
*Strategas Research, Technical Strategy Daily Report, Sept. 10, 2020, p. 2
The Nasdaq is still 17% above its 200-day moving average so it is very hard to call it “oversold” yet.
Bond yields have not moved up or down through any of this, really reinforcing that this does not yet appear to be a market adjustment as much as re-positioning around frothy positions.
It can’t be considered a surprise, but the Democrats in the Senate blocked the GOP “skinny” bill from moving forward (after the GOP gathered 52 votes for its passage). The bill would have paid out $300/week in unemployment benefits, provided $105 billion to schools, and $258 billion for the PPP program. It also would provide liability protection to businesses seeking to re-open.
My own view now is that any kind of stimulus bill is now dead until after the election, and perhaps then as well, as both sides have figured out it is not doing them harm politically to not re-load stimulus, and then blame it on the other side.
Oil and Energy
WTI Crude hanging in there around $37 … The energy sector the only area in my Election White Paper report coming in tomorrow’s Dividend Cafe that is listed as both a RISK and an OPPORTUNITY. You will see why …
Do you think the U.S. corporate bond market would have tolerated $1.5 trillion of new issuance if the Fed were not intervening in the markets? Is bond issuance usually harder or easier in tough economic times? The truth is that the Fed’s interventions have certainly enabled this level of issuance, but that has very little to do with their direct purchases. Corporate bond issuance is aplenty because the market knows the Fed is there, they have put their loaded bazooka on the table, they have created the low rate and high liquidity environment needed for such a bondapalooza, and no one is remotely worried about defaults.
*Strategas Research, Daily Macro Brief, Sept. 9, 2020
Now, is this a good thing? Well, borrowing costs are lower which ticks profit margins up. Cheap funding for growth initiatives is readily available. What could go wrong?
On those two counts, certainly this is a bullish development for endebted corporate America. But two things must be remembered: Debt pulls future spending into the present, and future debt is a liability that must be factored into net present value.
There is no free lunch. The question about the ultimate efficacy of this reflated credit market – short and long term – really comes down to the productive use of the debt. I have no doubt that Fed activities here will prove productive for some already-productive companies, and will prove distortive for already-struggling companies. Same as it ever was.
On another note, the Fed’s Main Street Lending program has bought $1.2 billion of loans through the end of August (it is a $600 billion facility). This represents 118 loans, 11 of which were for less than $1 million.
As a reminder, our special national video call on the election and potential market impact will be this coming Monday at 11am PT/2pm ET.
And tomorrow’s Dividend Cafe will be entirely devoted to that very subject!
Futures are up 75 points but the night is young.
Be well, be safe, be free.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
This week’s Dividend Cafe features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.