Dear Valued Clients and Friends –
After a couple days of a bit more focus on COVID and even public policy, today’s DC Today is heavier in Market Action, and for good reason. They are only quick tidbits, but they are worth your attention. This was actually a market-heavy DC Today from 4 am-7 am ET this morning, hours before the market even opened. But with the drop in market indices today and elevated volatility taking place in a variety of market pockets, some extra attention here seemed appropriate.
- Futures were pointing down a bit last night and then down a hundred points or so very early this morning. Futures slowly slid lower throughout the morning and the market opened down over 300 points. We immediately got down nearly 600 points, then immediately made half of that back, and throughout the day stayed down around 300 points, until the last two hours of trading where we dropped another 300-400 points. We closed about 80 points off the lows of the day, down 633 (-2%). But the S&P 500 was down -2.57% and the Nasdaq down -2.61%.
*FactSet, DJIA, Jan. 27, 2021
- I think there is fatigue in the markets around the momentum that has been driving the ship. A tad less than 70% of S&P companies were trading above their 50-day moving averages coming into today (that number had been ~90%).
- The similarities in post-crash rebound shape between 2009’s post-GFC rally and 2020’s post-COVID rally are quite remarkable. And certainly, corrections and up/down volatility within the trajectory higher post-GFC were part of the story. Investors expecting this to be different are setting themselves up for disappointment. Our simple corrective: There will be downside volatility in this period of time, and it should be embraced, not shunned.
*Strategas Research, Technical Strategy Report, Jan. 26, 2021, p. 4
- Emerging markets were particularly hit today as the dollar moved higher, and pressures in China took center stage.
- More SPAC’s were listed in January of this year than all of 2020. And more SPAC’s had been listed in all of 2020 than every other year combined.
- Margin debt is up $200 billion year-over-year, and this does not include whatever additions have taken this month. I will be talking more about this in Friday’s Dividend Cafe.
- Consumer Staples and Energy were the strongest performing sectors today, but each were still down roughly 1% (I believe this is the first day of the year where the best-performing sector was still in negative territory). Consumer Discretionary and Health Care were each down ~3% today as the worst performers.
- A couple of the largest companies in the world reported results after market today, with numbers huge and results solid, but stock prices modestly down as of press time (barely, not much).
- The VIX blew out today +60% to > $37.
Top New Stories
- You may or may not be following the stories that are all abuzz around the massive, and I mean massive, moves up in the stock prices of select companies (an almost defunct brick & mortar video game retailer, an almost defunct 2005 handheld enterprise device company, etc.) that had been heavily, heavily shorted. The details of the stories are complicated and are being used to pitch some of the silliest narratives I have ever heard in an entire adult life working in financial markets. Is this a case of “decentralization and social media taking down the big guys”? Is it collusion and market manipulation? Is there a protagonist and antagonist in the story? Here is the real lay of the land:
Nothing is ever going to trump the market reality that any attempt to prop up a stock artificially cannot last, and any attempt to talk down a stock artificially, cannot last if fundamental truth and reality speaks differently. Anomalies, inefficiencies, manipulations, pokes, and prods are all part of markets. Short sellers have been trying to talk down since Roosevelt was President, and the inverse is equally true from the pumpers. Short squeezes happen, and yes, these have been short squeezes for a generation. But internet chat rooms are not about to take over for Warren Buffett and Benjamin Graham in the oracles of sage financial wisdom.
There are questions as to how regulators let 140% of the shares of a stock (no typo) be made available for borrowing. And there are plenty of scintillating anecdotes to this story. But no, it is not paradigmatic, it is not a game-changer, and for the love of humanity, it most certainly does not reflect “good guys versus bad guys.” It’s a side story to a market inefficiency that accidentally made some people money and accidentally lost some people money. And all will be “re-priced” to reality in … 3 – 2 – 1 …
- News that the largest financial-technology company in China, founded by the same man (Jack Ma) who brought us Alibaba, has agreed to become a holding company overseen by the Chinese central bank, is absolutely the most under-rated news story of the day. The news is not significant because of what it means to investors of any particular Chinese companies, but rather because of what it means for the lay of the land in public equity in various Communist regimes, and how influential nation-states can still be in a market economy when they so desire to be.
- U.S. durable goods orders were up 0.6% in December, higher than expected. Machinery orders, in particular, were strong.
- We are estimating that CAPEX will contribute 2% to real GDP growth in Q4, a sizable figure which if accurate will likely mean higher total real GDP growth than many are expecting.
- Just 400,000 loans totaling $35 billion have been distributed in new PPP2 loans, a fraction of the total capacity. This speaks to both decreased demand for the loans due to the number of businesses that failed between PPP1 and the passage of PPP2, as well as technical and logistical challenges in getting these new loans approved and distributed.
- Sen. Bernie Sanders, who chairs the budget committee, has repeated his desire that Democrats “fudge the rule” of budget reconciliation and “push through” a $15/hour federal minimum wage through that process. It is receiving a lot of push back even from other Democrats. The challenge here is not whether or not a majority of Democrats want this minimum wage policy – a majority surely do. The challenge is that if the reconciliation process is perverted to allow for this, it then permanently alters the rules of the road for budget reconciliation, a two-edged sword if there ever was one. On one hand, there are not going to be sixty votes for a federally mandated $15/hour minimum wage (the pushback from small business groups and restaurants hurting from the pandemic, etc. is huge). But on the other hand, if this were to happen through budget reconciliation, the procedural risk this unleashes is substantial.
- As for the whole stimulus bill headed to budget reconciliation, I now suspect the total size will be cut in half to ~$1 trillion from the $1.9 trillion that President Biden has proposed.
- As expected, President Biden signed an order prohibiting the DOJ from renewing contracts with privately owned prisons.
- The U.S. has vaccinated 23.54 million people entering today. That leaves 21 million more vaccines already distributed but not yet administered.
- National hospitalizations (“with”) COVID are down to 108,000 (the number was 124,000 a week ago and 140,000 the week before that).
- It has become nearly unanimous and consensus view that schools re-opening is not a public health risk, and in fact, schools not being open, is. A tremendous new academic paper from the Center for Disease Control (CDC) is profoundly important. I mention this because the re-opening of schools is a pivotal economic domino in the big picture of economic normalization.
- The largest company in the world also said today they anticipated they will have employees back in the office by June.
Housing & Mortgage
- New purchase applications were down 4% week-over-week, and re-financings were down 5% (yet obviously still way up from a year ago).
- I love when people hype up a Fed meeting where we know every single thing they will do (and not do) weeks in advance as a market event. There was no “monetary policy decision” coming from this meeting; the outcome has been known forever.
- Apart from policy decisions, markets do sometimes love (for 20 minute intervals) to hang on various words or expressions that come from Fed governor’s mouth (usually the chairman) out of these meetings, non-announcements, and more recently, press conferences. All that we heard today was that the Fed plans to keep asset purchases (QE) going as long as it takes to help the economy (note: they do not help the economy), and that they do not believe monetary policy is impacting asset prices as much as the vaccine will.
Oil and Energy
- WTI Crude closed at $52.54 – just totally flat on the day.
- I am sure lots of eyes will be on market action tomorrow to see if there is follow-up to today’s sell-off, how the market responds to headline earnings results, and more.
Markets never sleep.
David L. Bahnsen
Chief Investment Officer, Managing Partner
The Bahnsen Group
The DC Today features research from S&P, Baird, Barclays, Goldman Sachs, and the IRN research platform of FactSet.