Dear Valued Clients and Friends –
The market pointed to a modest up opening this morning in the overnight futures, and it did just that. And the market stayed up ~100-200 points throughout the day, until the final hour of trading where it went from +150 to -150. The media has reported it as a combination of news that POTUS was signing an executive order trying to reign in social media companies as well as news that the White House would hold a press conference Friday to discuss some aspect of the China relationship. I believe it was entirely the latter and not at all the former (the social media flexing was known to be coming all day, and surely the market does not see it as having a lot of teeth). The uncertainty around the China announcement was surely worth a couple of hundred points …
The weekly jobless claims came in at 2.1 million, down from the 2.5 million levels of last week, and way down from the 6.9 million high level in late March, but still extremely high, and extremely sad. The number had been just 212,000 per week on average in January and February before the economic shutdown. Continuing claims, though, tallying the unemployment benefits of state programs, fell last week for the first time since the COVID moment began.
As for health data, I read in three different sources this morning frustration over lumpiness in the data of the last couple days that caused some data reads to be under-stated and some over-stated, and I take all these analysts at face value that they are calling balls and strikes at not attempting to talk up or talk down certain data points. The three I am referring to are honest brokers through and through. Case growth was brutally low yesterday, but testing data was really skewed as some states had been combining antibody tests with their PCR tests, and so the removal of the antibody tests is throwing off the comparative data. All that to say, no matter what interpretive lens one uses and how they process the current data complexities, the relevant data points are moving in the right direction, and the contrasting data for the phased re-openings of Western Europe are providing reaffirmation.
* Pantheon Macroeconomics, May 28, 2020
- Today’s testing data shows over 453,000 tests done today, with a positivity rate of less than 5.1%.
* The COVID Tracking Project, May 28, 2020
- Chicago has released plans for opening their restaurants beginning as early as June 10. New York City has said they are targeting a re-opening in the first two weeks of June, but has not identified what will be open and what will not at that time.
- We have talked a lot about Remdevisir, the intravenous therapeutic from Gilead Sciences used in severe cases. I found out this morning that Roche Holdings and Gilead Sciences are initiating a late-stage trial of a two-drug combination combining Roche’s immune suppressor, Actemra, with the Remdevisir therapeutic. We will monitor this closely.
- The discussion levels as to whether or not we will have a “second wave” of COVID cases largely involve vocabulary – meaning, what counts as a “second wave”? Based on this use of vernacular, I am quite sure we will have a second wave, since the liberal use of the English language here apparently allowed for a “third wave” labeling even as cases were 90% reduced from the initial outbreak. The point I am making, evidenced in the sensationalism of this chart’s twice-used vocabulary, is to be wary of semantics divorced from context, data, and proportionality.
* TS Lombard, COVID-19 Chartbook, May 28, 2020, p. 9
- And finally, I get very encouraged when any of the reports I read each day indicate improvements in the mortality data … But a negative death count is something to behold! =) (In all seriousness, it probably means correction of a prior day reporting error)
In market technicals, as I suspected the breadth of yesterday’s market rally was quite extensive, with 95% of S&P 500 companies now above their 50-day moving average. And that the same is true of 92% of the Russell 2000 (small-cap stock index) speaks to how far and wide this market recovery is. The key theme in the more recent chapter of this recovery is that it is not mere rotation, but overall breadth. Put simply, the market momentum and trend is very positive when accompanied by such broad participation. To put in perspective what the market historically looks like when its breadth gets this high, note performance after 20 days, two months, four months, and eight months:
* Strategas Research, Daily Technical Strategy Report, May 28, 2020, p. 1
- The high beta names are leading this market rally, which is important to technicians in that low beta driving the whole market higher still speaks to an underlying defensiveness. This rally has seen March under-performers lead, cyclical sectors pass non-cyclicals, and high beta outperform.
- If I were to be concerned about something in the technicals or flows, it would be this extraordinary level of flows into the Nasdaq retail products (and I should be clear, it wouldn’t concern me since we are not invested here, but I mean it points to something that as a contrarian I would not feel good about if I were):
- Across the whole market, while not as euphoric and frothy as the popular Nasdaq/tech names, even the S&P 500 has seen a real bounce in bullish sentiment compared to bearish sentiment back in March. This is, of course, totally expected given market movement, and it is only in the middle of the two ranges of “very bearish” vs. “very bullish” sentiment (speaking to the historical bands). That said, as far as contrarianism goes, things are concerning at the “very bullish” levels – not middle of the pack – but they also are usually highly opportunistic at the “very bearish” levels – not middle of the pack.
* Strategas Research, Daily Technical Strategy Report, May 28, 2020, p. 14
On the public policy front, the House did indeed pass the flexibility supplements to the PPP legislation. The threshold of what PPP money needs to be spent on payroll vs. rent/mortgage/etc. will be lowered from 75% to 60%, and the time threshold will be expanded from eight weeks (which is about to expire) all the way to 24 weeks. Companies will have until December 31 to hire back employees now. It was a 417-1 passage, so you can bet this will fly through the Senate and the President’s desk.
In the Oil and Energy world, WTI crude was up over 4% from yesterday’s afternoon level … Note tomorrow’s Dividend Cafe will have extensive section on Oil, Gas, and Energy.
As for Housing, if you are shocked by the market’s resilience in the last ten weeks or so, consider the home-builders, generally, one of the most cyclical groups in the entire stock market, that are now up on the year …
And in Fed news, the Federal Reserve of New York president, John Williams, explicitly said that the Fed is “thinking very hard” about targeting specific yields on Treasuries at different maturities (i.e. “Yield Curve Control”) to complement forward guidance and other policies. I reported a few days ago that vice-chair Richard Clarida has stated the same thing. Both have interestingly contextualized their comments around wanting to see how it has worked in other countries that have tried it (one assumes they know we have tried it here in the U.S. – during WW2). Fed governor, James Bullard, often an odd man out on the FOMC, questioned how effective YCC would be at this point with rate expectations so low as it is.
The levered loan market received good (but expected) news yesterday when a judge threw out a suit seeking to classify syndicated loans as “securities” (on par with stocks and bonds). Had something like that gone through, it could potentially have ended loan syndication in the United States, where a huge percentage of companies would have been cut off from collateralized loan funding. Disclosure requirements, regulatory costs, and other burdens would have had a huge impact on this aspect on credit funding in our capital markets.
I continue to find this stuff astounding … I presented a chart a month or so ago that showed the entire downside of the market throughout the COVID sell-off had essentially taken place in off-market hours – that even with the S&P down over 25% on the year at that point, if you only looked at market open to market close levels, the market was flat (the issue was that in factoring in all the market opens that were much lower than the prior market closes, that was where the losses were coming from). The reverse dynamic is now in effect.
The market trading hours have basically been, net-net, flat throughout the recovery rally – with 17% of positive gains coming in aggregate during the overnight hours (now you know why I quote my bed time futures and 3:15 am wake-up futures so much). This is actually fascinating and totally a-historical, but it also has a practical lesson against those who believe they can trade their way in and out of market action. You can’t trade market action, if the action is not when you can trade.
Tomorrow will be our Weekly Dividend Cafe commentary. Monday we will host our bi-weekly national video call.
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