Dear Valued Clients and Friends –
The market rallied +370 points today, making back the points it was down yesterday, leaving the Dow through Wednesday with the nearly +1,000 point gain from Monday. Oil is approaching $34 after a +5% move today. It was a healthy day for risk assets across the board. And speaking of health, there is some truly good news to report on that front as well …
I appeared on Charles Payne’s Fox Business show for a brief hit on out-of-favor stock sectors and consumer expectations post-COVID. I always hope you’ll benefit from these segments, but more importantly, I share this one because I was back in my own studio for the first time in ten weeks.
As for health data, the trend of a declining case growth percentage week-over-week resumed yesterday, with just +1.3% case growth yesterday vs. +1.6% same day a week ago. Absolute cases yesterday were ~20.3k, so down from the 21.5k of a week ago. We are looking to see the number get below 20k and hold there very soon, and then get below 10k and hold there in a month. This is in a country with 330 million people, and with a critical/severe average ratio of ~1.5%. This is encouraging data. But nothing is more encouraging than the fact that even as the testing is dramatically increasing (+56% week-over-week), the positive cases are collapsing (see the top right quadrant image).
* Pantheon Macroeconomics, May 20. 2020
- Today’s testing data shows 414,000 tests done today (a new record high), with a positivity rate of just 5.2%. It occurs to me some readers may not know – this daily testing figure is the combination of state reporting tests – it does not include the serology tests done by individual approved labs, which obviously would increase total testing numbers.
* The COVID Tracking Project, May 20, 2020
- We have confirmed that much of Florida’s “spike” in new cases yesterday was from a reporting lag accumulation. Their positivity rate yesterday was 0.64%, which is the lowest in the country I have seen from any state on any day.
- And, “Sweden watch” is going reasonably well …
* Pantheon Macroeconomics, May 20. 2020, p. 2
- The Center for Disease Control (CDC) released their comprehensive guidance for re-opening today. Reach out to us if you would like a copy of the 60-page report.
In market technicals, the +31% rally in stocks since the March 23 low is now the second best 40-day period (on a percentage basis) in market history. If you are having a hard time getting too excited about that, the prior 30-days was the fastest decline into bear market territory in market history. But as the world is awash with predictions about what is “supposed” to happen from here, I just want to keep you apprised of the historical record as to what markets have often done after various past occurrences. Past is never assured of being prologue, but take a look at the one month, two month, four month, and nine month performance in markets, after the top ten “40-day rallies” in history.
* Strategas Research, Daily Technical Strategy Report, May 20, 2020, p. 1
I think there is plenty of room for disagreement around what markets will do from here. But there ought not be disagreements about what they have historically done.
- We are not “sector” investors at TBG, but rather bottom-up fundamentalists in pursuit of sustainable dividend growth. That said, the Utility sector strikes us as an anomaly right now (and we only own one name in the space, but believe in it as an individual dividend grower a great deal). The technicals point to incredible weakness in the sector, 18-month relative lows to the S&P, and a stubborn struggle against its own 50-day and 200-day moving averages. And yet, the relative yield premium to stock and bond comparables, combined with reasonably defensive characteristics of the space, do point to a fundamental argument for the sector even as the technicals argue the other way. The issue, of course, is timing the rotation, which can’t be done. The higher beta names have led this rally so far. When more non-cyclical, low beta names get their turn at the front of the line, I suspect many Utility names are setting up for a very nice rally.
On the public policy front, I got sucked into a brilliant research paper from the National Bureau of Economic Research this morning about the labor market impacts from COVID-19. These economists (tops in their field) are estimating that 58% of the current layoffs will come back (inversely implying that 42% will result in permanent job loss). I would particularly point out this summary line: “Unemployment benefit levels that exceed worker earnings, policies that subsidize employee retention, occupational licensing restrictions, and regulatory barriers to business formation will impede reallocation responses to the COVID-19 shock.” If you are interested in a copy of the full paper email here.
- I think monitoring the U.S./China relationship deterioration will be prudent as a leading indicator to short term market volatility. While I expect the “real bazooka” of changes to take place post-COVID, and perhaps even post-election (depending on who wins), short term “small ball” catalysts persist (and “small ball” is a relative term). Recent ramp-ups on regulations around chips made by Hauwei are meant to be a forceful step by U.S. policymakers to hamper Chinese dominance in the semiconductor space. The recent order for the U.S. federal employee pension fund to lay low on Chinese equities is another escalation (it is not yet binding). It is unclear to me if these light policy maneuverings are intended to leverage greater access to Chinese investment markets, or are just political flexes in the aftermath of COVID. Markets have not yet responded directionally, but volatility remains heightened (for any number of reasons).
In the Oil and Energy world, though so many metrics have been on a continually positive trajectory from lows of 3-4 weeks ago, we do need to address collateral damage from the malaise the crude oil dynamic has created in this COVID era. We have addressed economic collateral damage (i.e. banks that have lent to the shale industry facing credit impairment), but there is other commodity collateral damage as well – namely, the high percentage of natural gas (32%) that comes from oil well production. As rig counts decline and this source of gas production is lost, we expect natural gas prices to increase.
* Mauldin Economics, Over My Shoulder, May 20, 2020
As for Housing, weekly mortgage applications (for new purchase) were only down 1.5% versus a year ago (you know, a year ago, when the whole country was NOT shut down). Purchase volume was down 35% a month ago (vs. the prior year), but only 1.5% now – a simply stunning recovery in the last month. New purchase applications were up 6% this week vs. the prior week. Virtually all of the pick-up is in mortgage apps for a conforming loan product. Straight government loan apps (FHA, VA, etc.) are actually UP vs. a year ago.
Pantheon Macroeconomics, U.S. Economic Monitor, May 20, 2020
States are beginning to open up which is allowing for more on-site visits, and of course in the conforming area rates are at record lows. Re-finance activity is 160% higher than a year ago, primarily because rates are literally 92 basis points lower now than a year ago (again, in the conforming categoery – that is, loans of $510,400 or less that are Fannie/Freddie backed).
- The percentage of mortgages in forbearance rose from 7.91% to 8.16% this week, a higher percentage than I was wanting to see. This is the smallest percentage increase since the CARES ACT passed, giving ~70% of borrowers the right to not pay their mortgage for up to 12 months. While I did fear the increase would be even worse, I have hoped the number would stay below 8%, and I now suspect it will be very difficult to keep it below 10% when all is said and done (again, when CARES ACT passed in late March I am not sure policymakers knew we would still be talking lock-downs into June in many parts of the country). The major question here will be what lenders and policymakers end up doing as an exit plan to these forbearance situations. No one is going to be able to extract a balloon payment of 3-6 months (or longer?) worth of mortgages all at once from distressed borrowers. It simply is not going to happen. And yet forgiveness of these payments is also not an option, not without injecting a massive capital hole into the heart of our nation’s financial system. So my concern is that the “benefit” of forbearance is actually creating a “risk” and a “problem” that is going to have to be dealt with, and the way in which it is dealt with (again, for 4.1 million people and counting), remains unclear.
And in Fed news, the FOMC minutes from the April 19 meeting were released today. Clearly, the Fed is pondering what to do with the yield curve in future months. Forward guidance is likely to be their next policy tool to use, and again I believe Yield Curve Control will follow that. They were quite explicit that inflation concerns are non-existent for them, so they are feeling ample flexibility with their balance sheet at this time.
Praying for less jobless claims tomorrow morning.
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