Dear Valued Clients and Friends –
Well this was one of the crazier 24 hours in quite some time, more so for what happened last night than today. Futures opened up about 100 points last night, and slowly inched higher for the first couple hours into the evening. Around 6:30pm pacific/9:30pm eastern, my devices starting blowing up that futures had collapsed 400 points (so a net swing of over 500 points) after “White House advisor, Pete Navarro, announced that the phase one China trade deal was over.”
Well, it turns out, not for the first time, Navarro was speaking hyperbolically. Within 30 minutes futures came roaring back to even. President Trump took to the airwaves to say that the trade deal is “fully intact.” I decided to watch the replay of Navarro’s Fox interview, and it was rather obvious that it was a long-winded question and the answer was disconnected from that portion of the question. Regardless, by 3:30am this morning futures were up 300 points.
I suppose it would be fair to conclude from it all that, if anything, the market remains quite susceptible to volatility around U.S.-China trade realities, currency exchange, and overall relationship ramifications. I expect this will remain a market vulnerability for months to come. But this overnight incident was actually silly, and frankly pretty embarrassing for both the press, and futures traders.
The market opened up 200, bounced around in the morning, stayed level mid-day, then slowly lost some momentum late day, still closing up +131 on the day.
* FactSet, DJIA, June 23, 2020
And now, around the daily horn …
As for health data, we have the data update to walk through, and some pretty exciting vaccine news.. Market action has stayed impressively resilient throughout the case growth of the last week, and that would suggest to me that Jim Paulsen, Chief Investment Strategist at the Leuthold Group, is perhaps on to something …
“The message today may be that the virus and the bull market can coexist (emphasis mine). Despite back to back days of Covid19 cases above 30,000 over the weekend and ongoing reports of hot spots, the stock market managed to post a strong gain. Market action seems to suggests that investors expect the economy to continue improving in the months ahead even though the country is likely to experience spotty or temporary spikes in the virus.”
Is the market simply doing a better job of ignoring media headlines, and looking beneath the surface of the data? Is the market stupid, and just flat out missing something in the health data? Or, is it possible, that (a) The market doesn’t see the data of the last week as particularly problematic, but (b) Even where there is bad virus news (FL, AZ), there is a broader acceptance of the reality now that there will be infections, there will be something between 98% and 99.6% recoveries, and there will be an economy that has to plug along regardless. I suspect the market is signaling the latter, but am very open to allowing more time for there to be greater clarity still.
I really disagree fervently with the idea that the states seeing an increase right now are a “Memorial Day wave.” The facts simply don’t bear it out. First of all, Memorial Day was four weeks ago. No increases in any state besides Arizona were detectable until two weeks after Memorial Day, and adjusted for testing, there are still only a handful with case growth, and that is all in the last week (COVID is something that spreads quickly, not hides and metastasizes for 3-4 weeks).
* Pantheon Macroeconomics, June 23, 2020
- Today’s testing data shows over 511,000 tests done today, with a positivity rate of 6.4%
* The COVID Tracking Project, June 22, 2020
- I think the significantly improving data in North Carolina, Alabama, Arkansas, Louisiana, and Tennessee should further bolster the case that Arizona and Florida are outlier states for case growth, exceptions to the rule and not the rule.
- Major League Baseball owners have voted unanimously to proceed with the 2020 season after the players union rejected their latest offer. The players could elect to go on strike (unlikely), but other than that this does mean a season will happen. I assume those who care enough have already gotten the details elsewhere (ESPN, for example), so I won’t get into the details here of how the season will work, but I do believe baseball happening in some format this summer is good for the country, good for the economy, and good for our post-COVID era mental health.
- Markets responded favorably to comments from Dr. Fauci today about a “promising” vaccine entering stage 3 trials next month. His upbeat rhetoric about a vaccine (“when, not if”) was coupled with the news that Inovio (who as a reminder, developed the successful Zika vaccine) announced $71 million in funding from the Department of Defense related to its vaccine development.
- Those arguing that re-opening itself is the problem not only have a broad social, economic, and cultural argument to overcome, but inconvenient realities in the data, both in many of the United States, but also in the rest of the free world:
- And don’t look now, but the much-maligned Sweden has peaked, and seen death rates collapse …
FACT (Florida, Arizona, California, Texas):
The average age of those testing positive for COVID in Florida is directly relevant to the strain it puts on medical resources as younger people are less likely to be hospitalized, less likely to require intubation, and less likely to suffer from co-morbidities (versus the older population most infected with COVID in March and April).
*Florida COVID-19 Response, June 20, 2020
* Worldometers.Info, June 23, 2020
In market technicals, a fascinating chart this morning from my friends at Strategas … Of course, our concern at TBG is not with the index of biotech stocks this chart references but only the particular biotech companies we own, but I do believe this general progression of a significant escalation, followed by a significant sideways movement, has now led to an escalation phase with a strong fundamental support for it.
* Strategas Research, Daily Technical Strategy Report, June 23, 2020, p. 2
In a broader market sense, the reversal back to a relative out-performance of growth over value in the last week, along with a pretty insane level of flows into the Nasdaq, ought to give any contrarian pause … (at least in a short-term technical sense; in a long-term fundamental sense, the pause should be a way of life by now).
As for Public Policy, there is really very little doubt that a substantial “stimulus 4.0” bill is coming, with POTUS yesterday joining the fray promising “a very good, very generous” stimulus check, and further predicting it would get done over the next couple of weeks, and would be “bipartisan.” I know what that word means in this context, and my forecast is this will be closer to the Democrats initial proposal than previously thought. It sounds as if another broadly distributed stimulus check is being proposed. I also am highly skeptical that there will not be direct support to states (New York’s 40% decrease in collected tax revenues is reason #1).
I shared my take on this with Charles Payne on Fox Business today (before being interrupted by President Trump) …
In the Oil and Energy world, WTI crude reached $41.50 this morning, closing at $40/barrel.
I also was heartened by reports yesterday that cancellations of LNG cargo orders have substantially decreased, and are anticipated to be decreasing even more going into August. This would indicate a pick-up in demand, and increased demand for liquefied natural gas not only speaks to more economic activity, and creates economic activity as the energy infrastructure of LNG is itself a growth engine in the economy.
As for Housing, sales volume and price levels appear headed in the right direction, which also has a huge impact on residential structured credit …
*Pantheon Macroeconomics, U.S. Economic Monitor, June 24, 2020
And in Fed news, the composition and size of the Fed balance sheet fascinates me right now. Not only do we see here the significant spike up (from ~$4 trillion to ~$7 trillion) in just a couple months, but we also see a growing amount of “other” securities on their balance sheet, relative to the mortgage agency bonds and Treasuries they have bought. Note how Fannie/Freddie became a part of theoir balance sheet out of the financial crisis, and really exploded throughout QE3 (2013-14). Will “other” become the new mortgage backed securities? (“Other” is corporate bonds, ETF’s, muni bonds, ABS, and who knows what else is coming!)
I thought I would share the predictions of Byron Wien with you, a Wall Street legend now 87-years old who is an economic advisor emeritus at Blackstone. This “View of the Recovery” is neither Blackstone’s official view, or necessarily aligned with TBG’s official views (though I do agree with much here – not all). I share it, though, because Byron is always an enjoyable read, and also because I sort of hope someone will share my market viewpoints when I am 87-years old. =)
- We believe a recovery is underway and we have seen the cycle low for the economy and the financial markets. We expect to see continued volatility.
- We believe the recovery will be square root–shaped. The early phase, probably lasting through the summer, will be “V” shaped, followed by a gradual rise in the fall and beyond.
- We believe the economy will not reach the level of 2019 GDP until 2022. It usually takes several years for a post-recession recovery to get back to the pre-recession pace.
- We expect Covid-19 cases to increase during the recovery but not to the level that would be considered a “second wave,” requiring another lockdown.
- We expect the unemployment rate to come down to 10%. It will remain that high because of the number of businesses that have permanently closed or gone bankrupt during the recession. More than thirty million were unemployed at the bottom and only twenty million will come back to work in the near term. Companies have also learned during the lockdown that they can operate effectively with fewer workers.
- The lockdown has made consumers somewhat cautious. The savings rate will continue to be elevated; travel will be restrained; and older, vulnerable people will spend more time at home until a cure or vaccine is available.
- While remote working and remote learning proved reasonably effective, we believe people want to interact and cross-fertilize ideas with each other. As a result, we expect offices and schools will resume face-to-face exchanges over the next year.
- We believe we will make important progress in managing the symptoms of the disease before year-end, but a vaccine will take time before it is developed, tested, manufactured in large quantities and available widely. Signs are encouraging that significant progress will take place before the end of 2021.
* Thoughts on Recovery, Blackstone, Byron Wien, June 22, 2020
Futures are “flat to down a tad” (just opened).
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.