Dear Valued Clients and Friends –
The market dropped for the third day in a row, again led substantially by the sell-off in big tech (the Nasdaq is down 10% since last Wednesday’s late day high). The Dow is down ~1,600 points since mid-week last week, about half of the drop in the Nasdaq in percentage terms. Futures were pointing up ~200 points last night, but today the market opened down 400 points and chopped around throughout the day, taking two turns down in the final two hours of trading.
*FactSet, DJIA, September 8, 2020
Expect a bit more markets and economic coverage in this week’s missives than normal because the Friday Dividend Cafe will be exclusively focused as the special election issue. We are entering a new phase of the COVID economic recovery that I believe will move slower than the first half has moved. A lot of the low-hanging fruit of job recovery and activity-resurgence has taken place, but normalized conditions are a ways off and will likely see a slowdown in pace of recovery from here. Anyways, let’s go around the horn ….
COVID Health Information
- I am sure the Labor Day report of just 25,000 new cases yesterday was low around holiday reporting issues, The 7-day moving average is dropping ever so slowly, too, though, and we will see by the end of the week if the positivity rate has continued to drop (if so, it does really counter those worried that testing is not high enough; it is hard to argue testing is too low when the percentage of positives is collapsing even as total testing levels have dropped, and the Rt rate is dropping)
- The 7-day rolling average for daily mortalities is down 12% from the week prior and down 22% from a month ago.
- And this is what we should expect based on the COVID-like symptom improvements we continue to see … This straight from the CDC website (this data has proven to be, from my analysis, by far the best leading indicator we have):
*Center for Disease Control, COVID Data Tracker, Sept. 8, 2020
- I found it stunning that Sweden had more deaths from the flu in certain months in 1993 and 2000 than they did from COVID in the months of 2020
- The leaders of nine major pharma companies, all engaged in leading vaccine efforts, sent a public letter vowing to take no shortcuts en route to a COVID vaccine.
- Incredible news (I will keep this updated as long as Dr. Bostom keeps maintaining the source report): 26,000 alleged COVID positive cases on college campuses now; zero hospitalizations
*SOURCE: Dr. Andrew Bostom, Sept. 8, 2020
- The AstraZeneca/Oxford vaccine study has reportedly been put on temporary hold due to a potential adverse reaction from one of the participants. No information was available beyond this at press time, and the company described it as routine.
- Today’s testing data shows nearly 509k tests done with a positivity rate of just 4.3%.
* The COVID Tracking Project, Sept. 8, 2020
F.A.C.T. (Florida, Arizona, California, Texas)
Across what we formerly referred to as FACT states, the hospitalization collapse has made continued shutdowns more difficult to rationalize.
*Pantheon Macroeconomics, Weekly U.S. Economic Monitor, Sept. 8, 2020, p. 2
- Just 1,800 new cases today following the same number yesterday and 2,600 Sunday.
- The positivity rate in the whole state (off 110,000 tests) today was 2.4%, with a 2-day average of 2.6%
- Orange County was moved into the “red” category on the state website (downgraded from purple, which is worse). But, Orange County has to hold red for two weeks, so we will just sit tight.
- South Dakota
- Did you know in the entire state they have less than 70 COVID patients in the hospital right now? I didn’t.
- New York
- It will be interesting to see if the “return to work” dynamic picks up in Manhattan (I have been here off and on for over two months and have seen a very slight pick-up, but have believed it would take Labor Day, and the Sept. 21 return to school, to see a bigger tick up). Seeing the largest financial employer in the city (JP Morgan) make even a modest move like this towards employees being back in the office is a step in the right direction.
* Worldometers.Info, September 8, 2020
Stock Market Today
The 10% move down in the Nasdaq in the last three trading days does not change that the Nasdaq is up 21% YTD and 55% since the March bottom. So that can be taken in a number of ways. Time will tell.
There has been a certain trend-line to the out-performance of so-called “growth” over “value” for well over a decade (see the red line I drew below). Obviously there were periods of the trend reversing (2012, 2016), but the overall trend was real in the environment of declining rates and abundant QE from the Fed. However, the hockey stick spike up of this out-performance in 2020 is what I might be concerned about if I were a believer in this new abnormal (which I am not). Note, last week’s adjustment where value out-performed growth (the largest two day move of such since 2008) is represented by the blue circle I added. Forgive me if you can barely see it. Early innings.
*OCIO Market Sketch, Sept. 8, 2020
While we wait to see if the U.S. Senate GOP majority can piece together 51 votes for a “skinny” stimulus deal, White House Chief-of-Staff, Mark Meadows, has said he is “more confident than ever” a deal can/will get done.
I suspect the stimulus policy talks and questions may distract investors from the bigger policy-related issue of the next month, or the next year – China. The market has learned to do a good job not responding to the words of President Trump, but from an action standpoint it does appear to me little is priced in for volatility around real substantive changes in the relationship between the two countries, regardless of who is President.
Oil and Energy
There is a full-on sprint for oil producers pursuing drilling permits on federal land in advance of the U.S. election (federal permitting up 80% in the last three months alone). The outlook on production remains weak given price levels and market conditions, but time is of the essence for producers who want to secure drilling permits in advance of the U.S. election.
WTI Crude Oil prices have finally seen some adjustment, dropping to $37/barrel today …
I am one who believes the declining rate environment hits a point of diminishing return for home buyers (price and volume). The issue now is inventory. More supply is needed to balance the market, period.
*Pantheon Macroeconomics, U.S. Economic Monitor, Sept. 8, 2020
An interesting consequence to the zero-interest-rate-policy I would not have anticipated (mostly because it would not have been on my radar) – money market funds are shutting down. Vanguard just announced plans to convert their $125 billion fund into pure govies (they’ve been buying short term corporate paper for decades). Fidelity and Northern trust are doing the same with various money market options they had. There simply is not enough yield pick-up to justify a money market fund when corporates are brought down to the same zero-bound as T’s and repos. What do investors care? if they are going to get paid close to zero, why do they care if it is a Treasury fund or a money market fund paying them close to nothing?
They don’t! The companies that are losing buyers of their commercial paper do! If this trend continues, it will impact capital formation and hinder the smooth operating of money functions. I am now watching closely.
Some gradual improving movement in other economic data points … Air travel levels at new high since spring lockdowns …
*Strategas Research, Daily Macro Brief, Sept. 8, 2020
Futures were down 250 points but now are down 25 points. It will bounce around throughout the night and morning. Lots of technical factors will skew things for a few days (index funds, etc.). Dividends are real. This other stuff isn’t.
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.