Dear Valued Clients and Friends –
The market dropped 500 points yesterday but today rallied back ~140 points. One big tech name today was a huge part of the S&P/Nasdaq rally … Overall the market is squishy right now and I elaborate on some technicals below.
*FactSet, DJIA, Sept. 22, 2020
The market drop yesterday (at one point down nearly a thousand points, but closed down ~500) allegedly started with a report that a number of global banks had “moved illicit funds” over a 20-year period from 1997-2017. No doubt, this was but one factor with talk of another lock-down in the UK being another, and concern about greater political (and societal) drama (in the aftermath of the Justice Ginsburg passing) being another.
Let’s go around the horn today with ample COVID information and perspective, and plenty on the public policy front, housing, and Fed as well …
COVID Health Information
- The idea that confirmed cases have grown over the last week is absurd, and in fact, the reduction is not greater than it is simply because of a change in methodology in Arizona’s and Texas’ technical reporting. I do sense a new round of media hysteria around things coming, but maybe I am just being cynical.
- The Center for Disease Control’s website has updated their Infection Mortality Rate estimates. A 99.98% survival rate for ages 20-49 (a 0.02% mortality rate).
*Center for Disease Control, Sept. 22, 2020
- The big surge of cases throughout Europe is getting very little attention in the American press, and I imagine there are a few possible reasons why that may be. Since playing stupid appears to be all the rage these days, I will pretend I also don’t know why that may be, and just point out that maybe, just maybe, the press has decided that it really is hospitalizations and deaths that matter, not the mere existence of cases, and decided to not cover Europe because of this positive and encouraging development?
- The testing in Sweden has hardly gone down as the grey bars show below, and the positive tests certainly have as the yellow indicates (this covers the last eleven weeks of activity). I am not sure, candidly, if there are scientists who do not believe Sweden has achieved some degree of herd immunity, but I do find a lot of studies in my research each day indicating the belief that they have.
* Pantheon Macroeconomics, Sept. 21, 2020
- Today’s testing data shows over 831,000 tests done today, with a positivity rate of 4.79%
* The COVID Tracking Project, Sept. 22, 2020
- It seems to me Orange County readers are due for a little update on things. COVID hospitalizations are down over 75% from their peak in July (same percentage drop for ICU, by the way). The 178 patients currently hospitalized for COVID (we have 6,600 hospital beds) are declining 4.5% on average every three days. The positivity percent is 3.1%, and new daily cases are down 83% from the July peak. OC actually today dropped into the next lower tier, but has to hold that for 14 days before it is recognized as such (those rules are subject to change)
*Orange County COVID-19 Dashboard, Sept. 22, 2020
- Pacifica Christian High School opened up today, on campus. It’s big news!
- New York
- I thought this chart I found from Bloomberg is an interesting aggregation of the state of New York City economically. It combines their total restaurant reservations, subway traffic, and the stock of their largest office landlord. Subway activity has tripled in the last from the bottom. Restaurants went from down 100% to down 80% (they open at partial capacity indoors next week). And the office stock is up 25% from its recent bottom. I have been in New York for a month (I fly back to California for a couple weeks tomorrow) and it has been very encouraging to see the gradual pick-up of activity and energy in the city. And yes, of course, more work still has to be done (more midtown employees back in their offices, schools re-opening, restaurants allowing indoor dining, etc.).
* Worldometers.Info, Sept. 22, 2020
Stock Market Today
You could argue the market action yesterday reflects a prior expectation of fiscal stimulus coming, with that expectation now fizzled in light of expected trauma out of the judiciary fights ahead. It has not been my opinion at all that the market was asking for a fourth relief bill (see August action despite month-long lack of deal, and even in September the selling has been largely focused around excesses in the technology sector). But yesterday’s market seemed to have a particular disappointment in “reflation” (small cap, high yield, metals, industrials were all lower, and the yield curve was flatter).
* Strategas Research, Daily Technical Strategy Report, Sept. 22, 2020, p. 4
I do think the test of whether or not markets hold in the coming days will come down to the equal-weight S&P … The Nasdaq/big tech can continue letting froth out, but short term the equal weight S&P holdings its 200-day moving average likely means the spill over stays contained short term.
* Strategas Research, Daily Technical Strategy Report, Sept. 22, 2020, p. 9
I understand the heavy speculation around whether or not the judicial brawl we are about to see will help or hurt the cause of a new relief bill. But one thing I would point out that may also be impacting the way some think about it … with the loss of the $600/week supplement from the Federal government (on top of state unemployment insurance funds), those receiving Pandemic Unemployment Assistance dropped from 870k the week prior to 660k last week, as 24% drop in a week, suggesting the impact of incentives at play.
Is a phase IV deal less likely now in light of a huge fight ahead around replacing Justice Ginsburg? I certainly don’t see how it has gotten more likely. I do not know if the calculus has changed or not – one could argue that it was not going to happen anyways, and that may be true. What I do know has not changed by Supreme Court drama is this: a deal will not happen if one side believes it politically disadvantaged for them for one to happen, and a deal will happen if both sides believe it is politically advantaged to them for one to happen.
Oil and Energy
WTI Crude bucked the trend the last 24 hours, closing at ~$40 today despite the equity volatility of the last 48 hours.
I wouldn’t be surprised if there was a little fade into the end of the year on housing transactions, just as a response to the heavy lift seeing in late Q2 and Q3. Mortgage applications for new purchases have dropped from +30% YOY to “only” +20% (still robust even though slowing in the growth rate).
*Pantheon Macroeconomics, U.S. Economic Monitor, Sept. 22, 2020
All that said, the NAHB Builder Survey Index is still at an all-time high for optimism … Existing home sales moved even higher from the strong July number in August … Inventories remain very lean (low levels since 1999) … New housing supply is desperately needed to balance prices.
I read a report from an economist who I like a lot yesterday who said that the Fed has provided markets “clear guidance” on its rate policy – that it would not hike until maximum employment and inflation at 2% tracking to “moderately exceed that pace for some time.” My economist friend will forgive me if I don’t have the foggiest idea how this constitutes “clear guidance.” Here is what is clear – they are not going to hike for a long, long time.
At the same time, this economist took the Fed to task for not providing clear guidance on their QE policy. What would trigger a change in the pace of the Fed’s bond-buying? What does it mean that the Fed “has the flexibility to adjust” and would do so “when it thinks it is appropriate.” I concur with Ian that this is hardly clear, but I also think economic actors know darn well what Ian wants the Fed to come out and say: “QE is for markets, not the broad economy.” I believe the Fed can’t say that, but I certainly believe it is true. Providing liquidity to capital markets and tightening credit spreads has a huge impact in credit and equity markets, and there is a “broad economy” impact out of that. I don’t believe QE adds lending power into the banking system, because I don’t think the banking system was short of lending power – the banking system was short of qualified borrowers and demand. On the margin QE does hold down rates, but even then the Fed will have to implement yield curve control to effect the shape of the curve in years to come.
Ultimately, QE was (post-financial crisis and post-COVID) a means of getting liquidity breathed into credit markets, impacting capital flows, and it did exactly what the Fed wanted. What remains unclear is: (a) What the Fed’s tools are next time markets revolt, and (b) How these bond purchases will ever get off the Fed’s balance sheet. As I have been trying to say ad nauseum since the financial crisis, there is no precedent in history for a central bank that levers up its balance sheet, ever levering it down.
Futures are up ~100 points.
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.