We can enjoy two light weeks for economic reports. Both are holiday-shortened, implying lower volume but not necessarily lower volatility. Personal income and spending will be especially interesting, along with updated unemployment claims data. It is also an especially important time to monitor sentiment. The biggest reports are schedule for the first week of 2021. The calendar will prompt many to offer specific and complex forecasts for next year. Good luck with that! It is necessary for investors to think ahead, but dangerous to drive faster than you can see on a foggy road. A good approach to this is for investors to ask: What should we expect before Springtime? It is a general question for a good reason. The relevant answers cover many different fronts, as today’s post illustrates. In
oldprof considers the following as important: Covid-19, economic data, government, Uncategorized, weighing the week ahead
This could be interesting, too:
James Picerno writes All The Major Asset Classes Posted Gains Last Week
James Picerno writes Macro Briefing: 19 April 2021
James Picerno writes The ETF Portfolio Strategist: 18 April 2021
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We can enjoy two light weeks for economic reports. Both are holiday-shortened, implying lower volume but not necessarily lower volatility. Personal income and spending will be especially interesting, along with updated unemployment claims data. It is also an especially important time to monitor sentiment.
The biggest reports are schedule for the first week of 2021.
The calendar will prompt many to offer specific and complex forecasts for next year. Good luck with that! It is necessary for investors to think ahead, but dangerous to drive faster than you can see on a foggy road.
A good approach to this is for investors to ask:
What should we expect before Springtime?
It is a general question for a good reason. The relevant answers cover many different fronts, as today’s post illustrates.
In my last installment of WTWA, I described the challenges of Washington gridlock with special attention to COVID-19 aid and the potential government shutdown. That was a good call, since it dominated news stories all week. As I write this, negotiations continue demonstrating that this is not an ordinary compromise situation.
I always start my personal review of the week by looking at some great charts. This provides a foundation for considering news and events. Whether or not we agree with Mr. Market, it is wise to know his current mood.
I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a simple readable format.
Sector movement is another important clue to market trends.
Once again, Juan Luque provides us with some words of wisdom from the Incline trading desk:
The S&P 500 Index reached new highs this week on Thursday gaining 1.25% for the week. The Covid-19 vaccine and anticipation of possible additional stimulus keeps pushing stocks higher. Most sectors were up except for Communication Services (-0.46%) and Energy (-4.26%). Communication Services remains in the leading quadrant along with Financials. The Consumer Staples and Real Estate sectors have reversed and dropped into the lagging quadrant shown in red font. Information Technology was the leader this week with a 3.2% gain and changed its direction upwards gaining momentum. Energy shows a significant move and has reversed its long-term trend as it moves along the improving quadrant. Finally, the utilities sector has reversed and is moving directly into the lagging quadrant. Investors continue seeing with optimism the outcome of stimulus talks and the efficacy of the vaccine.
The market gained 1.3% on the week with a trading range of 2.8%. The Friday afternoon rebound was a big contributor. You can monitor the continuation of lower volatility in my Indicator Snapshot, featured in the Quant Corner below.
As I wrote last week, there will be no WTWA for the next two weeks. I am looking forward to more family time, and I hope readers are as well. I hope to catch up with a few shorter posts on some different topics. Portfolio managers can never be completely “off,” but there are chances to cut back a little.
The Visual Capitalist has a timely look at vaccine purchases around the world.
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
My continuing assessment is that many of the normal economic indicators are not helpful in the wake of the COVID lockdown decline. Too many sources are focused on a change in direction, even if very modest, which has painted an overly optimistic picture. As the economy stalls, there will be a rapid switch in the diffusion indexes. The early signs are emerging. I expect some dramatic shifts over the next month or so.
- The FDA approved Moderna’s vaccine for emergency use. This is a big help in both the number of available doses and speedier delivery.
- More vaccine progress from many countries. (Cuba’s Soberana 2 moves to Phase 2.) From the NYT Coronavirus Vaccine Tracker.
- Housing starts for November registered 1574K (SAAR) beating expectations of 1530K and October’s 1528K. Calculated Risk points out that the prior two months were revised downward and that year-over-year comparisons are becoming more challenging (emphasis in the original).
Starts, year-to-date, are up 7.0% compared to the same period in 2019. This is close to my forecast for 2020, although I didn’t expect a pandemic!
I expect starts to remain solid, but the growth rate will slow.
- Building permits for November hit a SAAR of 1639K topping expectations of 1550K and October’s 1528K.
- Mortgage applications increased by 1.1% as the year-long strength continues.
- NAHB Housing Index was the one negative spot for the week, declining to 86 for December versus expectations of 88 and November’s 90. (Calculated Risk).
- Home Equity Withdrawals provide more support for the consumer-fueled economy.
- Initial jobless claims continued the post-Thanksgiving surge, rising to 885K versus expectations of 795K and the prior week’s 862K.
- Continuing claims lag by a week and declined to 5.508M versus the prior week’s 5781M (revised up from 5.757M). Some recipients may be hitting the time limits for benefits.
- Job losses are showing up in reduced income, as we would expect.
- Reduced income implies reduced spending.
I sincerely hope that this news section will move to the “good” category when I return. I am tired of citing it, but it is reality. Even if Mr. Market is in denial. I follow many data sources and include only a few each week to illustrate the universal story.
- The number of cases is increasing dramatically, no matter how you calculate the changes. Some say that more testing means that we find more cases. I have been tracking data on US tests and new cases since June. In the last week the positive rate was 12.1%, the worst I have recorded.. In September, it was below 5%.
- The death rate is growing rapidly in recent weeks. (from Stat’s COVID-19 Tracker)
- Hospitals are crowded, especially in the South.
The stall in economic growth is beginning to show outside of employment.
- Retail Sales for November declined 1.1% missing expectations of a more modest 0.2% decline. October’s result was downwardly revised from a gain of 0.3% to a loss of 0.1%. Jill Mislinski has a nice update, including the revisions. The effect on the Big Four economic indicators is shown in the Quant Corner (below).
- Spending is linked to assistance programs which are declining.
Hack attacks have appeared regularly in the “ugly” section of WTWA. The latest news is very serious.
Why Russia’s massive cyberattack is especially insidious explains what is at stake – the extent of the effect and institutions affected.
“When nation states want to attack, they tend to attack through software updaters, because the advantage to this is you’re supposed to be doing things like applying a software update, and if you don’t apply software updates, you’re absolutely, definitely vulnerable. Because old software is vulnerable software,” Cappos, a cybersecurity expert, told Yahoo Finance.
That’s the ingenious nature of this attack. Using old, outdated software is dangerous, because the longer a piece of software has been available, the better chance there is that someone has found a way to hack it, which can lead to any number of unforeseen attacks.
One of the best ways for companies, governments, and consumers to protect themselves from such attacks is keep their software up to date. But this attack went after the very updates Solarwinds’ customers downloaded to keep them safe in the first place.
But what if the updates contain the malware? And have silly passwords? When I mentioned this to Mrs. OldProf, her first reaction was that I was making one of my typical jokes. Her regular extensive reading quickly confirmed my assertion.
You can’t make this stuff up!
I have two concerns about this:
- Budget pressure has forced governments to “go cheap” on both hardware and software.
- Decision-makers are much more interested in making political capital from this danger than on fixing the problems.
We have a relatively light period over the next two holiday-shortened weeks. Personal income and spending, jobless claims, and sentiment indicators are the most important.
The bigger news from the ISM indexes, ADP private payrolls, and the employment situation report are all scheduled for the first week of the new year. Many market participants will be taking some time off.
Briefing.com has an excellent weekly calendar and many other useful features for subscribers.
The successful development of vaccines in record time has provided an optimistic backdrop for the holiday season. Not to be Scrooge-like, we need a realistic look at what might happen next.
Making specific year-long predictions is a fool’s errand, but there seem to be plenty willing to try!
Investors need to prepare for the future, but it is crazy to make forecasts beyond your headlights when driving on a foggy night. We should be more modest. It is still helpful to be less specific, take a shorter time frame, and focus on what we should be watching. How about asking this:
What should we expect before Springtime?
I am willing to consider a general approach like this one from Matthew C. Klein:
On average, American consumers are flush with cash and itching to spend it. Thanks to the potent combination of one-time “economic impact payments,” enhanced unemployment benefits, forgivable loans to small businesses, lower interest rates, and forbearance programs, average personal incomes have been substantially higher than before the pandemic.
As well as those who see good (or bad) news as already “baked in” to market prices. If you look at financial media for a single day you will see both flavors on a topic that no one can really know.
The Key Indicators
It is more helpful to consider the key indicators (not all economic) that we should be watching. For each I will provide my own evaluation of the actual impact of changes, the market perception of the importance, and my own current conclusion.
|Indicator||Actual Impact||Market Perception||Jeff’s Take|
|Vaccine distribution||Very Important||Silver Bullet||This great news will not have what I call a “light switch” effect. Realistic estimates for full distribution are measured in months.|
|Vaccine acceptance||Important||Assumed||We will not know until we have more data. Leadership examples should help.|
|Voluntary actions||Very Important||Little Interest||Social distancing and mask-wearing help to bridge the gap until vaccines are more generally available. Testing and tracing would help a lot, but has not gained a foothold.|
|School re-openings||Very Important||Mild Interest||A very important measure of compromise and cooperation. Vaccine priorities and teacher cooperation crucial. Cost of closures to students might be irreversible.|
|Economic indicators: Direction||Not much||Market is making no distinction. The “stalling growth” story is getting attention.||The weakest aspect of current conclusions from the Street – mistaken assumptions that interpretation is the same despite unprecedented conditions.|
|Economic indicators: Level||Very important|
|Ten-year note||Very Important||Some attention||Important because:
|Fed Policy||Important||Very important. For some, this is the key.||The Fed repeatedly emphasizes the limits on power and the need for fiscal stimulus.|
|Earnings Expectations||Very important||Not worried since estimates are strong||The next round of earnings reports will be extremely important.|
|Government Assistance||Depends upon size||Very Important||Too little and too late, even if current compromise is passed.|
|Sentiment||Somewhat Important||Meh||While this is “soft data,” perceptions drive reality. A significant decline in consumer sentiment would be a warning.|
More Reading Related to the Table
Longish read, but quite informative. And similar to a story that I am hearing from friends around the country.
An overlooked part of the stimulus debate.
Most of what you will read in 2021 forecasts. Always of dubious value, the year ahead is the most challenging in decades for those daring to guess. I generally hazard a few themes to watch without making specific numerical forecasts. Here are some examples of silly comments I have already heard:
“The company has a high-quality franchise. It will eventually get a premium multiple.”
[Jeff’s translation: The stock is over-valued already, but we need it on our recommended list whether or not we were late to the party.]
“The rally has been strong and will continue, but there may be some tactical consolidation.”
[Jeff’s translation: We want to act like we predicted and rode gains in 2020. We need to keep acting bullish but do some fudging. “Tactical consolidation” can mean so many things!]
“Dr. Copper is forecasting a strong economy.”
[Jeff’s translation: After searching a list of indicators we have found one that supports our thesis. No matter that the copper surge is mostly a shift in Chinese consumption. That will surely quickly spill over to US companies.]
Leading Fed watcher Tim Duy has published a must-read analysis of the most recent Fed announcements. Here are a couple of the most crucial points (emphasis in the original):
The description of the economy was unchanged and focuses on the level of the economy not recent growth.
The Fed continues to set policy in accordance to its updated strategy. Even though the Fed see unemployment dropping close to its estimate of the longer run rate, 4.1%, at the end of 2022, this improvement has no bearing on the decision to raise or not raise policy rates. The Fed no longer sees closing the estimate unemployment gap as by itself a reason to hike interest rates. The Fed needs to see actual inflation sustained moderately above 2% to justify a rate hike. And with no such inflation expected, no rate hike is forecast.
Prof. Duy’s conclusion is that the message was dovish, even though the asset program was not changed.
And from Tim’s pre-meeting report:
Today’s news highlights the dilemma facing the Fed at this week’s meeting. This, for instance, from Bloomberg:
“The first Covid-19 vaccine shots were administered by U.S. hospitals Monday, the initial step in a historic drive to immunize millions of people as deaths passed the grim milestone of 300,000.”
And this, also from Bloomberg:
“New York is headed toward a second full shutdown if Covid-19 cases and hospitalizations continue at their current pace, Governor Andrew Cuomo said.”
But we also have this from the New York Federal Reserve:
“The November Survey of Consumer Expectations shows that consumers’ year-ahead spending growth expectations rose to 3.7 percent—the highest level in more than four years—despite flat income and earnings growth expectations.”
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here.
Technical measures have turned bullish in both short and long-term time frames.
My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. As always, I expect good times – but not yet.
US Treasury Yield Curve Steepens To 3-Year High notes James Picerno.
I have confidence that the world will look much better at the end of 2021. Is it important for investors to be “all in” right now? I think not.
At the start of the crisis, the Fed and the Federal government engaged in unexpected programs and historically large amounts of stimulus – helping individuals, the unemployed, and employers and their workers. The last effort included both loans and loans that became grants. The total cost was about $3.5 trillion, not counting payments to drug companies. These efforts bought months of support for some people and the unemployed. It provided fuel to keep spending at near the pre-pandemic levels. There were still big holes at the level of state and local government.
And now? Many are concerned that a one trillion-dollar package is too big. From the early consensus about a need for massive action the issue has morphed into a debate about size and who benefits.
The market reaction is the typical yes-or-no vote. Stimulus (of any size) means “risk on.” As does a vaccine. Investors should ask whether the current proposal is adequate. You do not need a detailed analysis to compare the two programs.
Watch the progress of school reopening. It is the point of greatest public demand contrasted with a valid concern for safety. Achieving an end which is desired by all should be attainable, right? We will see how long it takes.
Widespread availability and acceptance of the vaccine is essential, and worth watching closely. It will all filter into consumer expectations and willingness to spend. And that will drive corporate earnings.
I continue to maintain higher than normal cash levels as a cushion against the continuing recession. It is possible to do this and still meet your goals provided you do not make extreme decisions. I am doing well in all stock portfolios, mostly by selecting less risky stocks. I am finding some new ideas based upon the Great Reset principles. The problem is that Mr. Market has jumped the gun on some of these names, so patience is required.
I continue to add positions to my Enhanced Yield program, but I am being fussy. While income, not capital appreciation, is the goal of the program it remains wise to buy low and sell high!
Most important takeaway
Investors should be wiser than Mr. Market. Watch the indicators and take more gradual action.
If you have not already done a review of your current portfolio – asset allocation, sector exposure, and risk – now is a great time. You can still adjust with tax considerations in mind as well. My recent white paper on this topic provides a method for finding and measuring risk. It provides solid, practical information.
If you are planning to go it alone, it would be wise to consider my “Pitfalls for the Individual Investor.”
I also recommend looking forward! The world will be different when the economy really turns around. That is the foundation concept for my Great Reset research project. I have almost completed my extension of these principles to REITs. I have both a safe version and an aggressive version in mind.
There is no charge and no obligation for either the Portfolio Risk paper or the Great Reset Group. Just make your request at my resource page.