We have a light, holiday-shortened week ahead. There are several reports on housing, but everyone will be focused on the Inauguration and hopes for a peaceful transition of power. Anyone with skin in the game will be asking: What does a Biden Administration mean for my investments? In my last installment of WTWA, I suggested the need for substantial earnings growth to justify stock valuations. I also introduced Springtime Blossom Indicators – what we really need to monitor in our search for progress. It is a good reference, particularly the “What to Watch” column. I will update it when there is an interesting change. 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.
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James Picerno writes Macro Briefing: 25 February 2021
We have a light, holiday-shortened week ahead. There are several reports on housing, but everyone will be focused on the Inauguration and hopes for a peaceful transition of power. Anyone with skin in the game will be asking:
What does a Biden Administration mean for my investments?
In my last installment of WTWA, I suggested the need for substantial earnings growth to justify stock valuations. I also introduced Springtime Blossom Indicators – what we really need to monitor in our search for progress. It is a good reference, particularly the “What to Watch” column. I will update it when there is an interesting change.
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:
In a week to that will go in the history books, a U.S. President was impeached twice. The S&P 500 was down almost 1.5%. Investors received with optimism President-elect Joe Biden’s stimulus plan but realize its approval still has ways to go. With recent weak jobs data, there is increased urgency to support the slow economic recovery. Energy once again set the pace, moving into the leading quadrant with a 3.13% weekly gain. Its momentum is significantly stronger than any other sector in the index. The financial sector was mostly flat and maintained its position in the leading quadrant. It is still the only sector in green color. All remaining sectors were down for the week except for Utilities and Real Estate, which remain in the lagging quadrant shown in reddish font.
The market lost 1.5% on the week with a trading range of only 2.0%. You can monitor the continuation of lower volatility in my Indicator Snapshot, featured in the Quant Corner below.
Do we care about what the experts see coming in the year ahead? The Visual Capitalist has the right attitude with this 2021 Bingo Card. Which line would you choose? Without knowing the course of the pandemic these guesses are even tougher than usual.
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.
- Early reports have been strong. John Butters (FactSet) summarizes as follows:
Of the 26 S&P 500 companies that have reported actual earnings for Q4 2020 to date, 96% have reported actual EPS above the mean EPS estimate. In aggregate, actual earnings reported by these 26 companies have exceeded estimated earnings by 26.2%. Thus, at this very early stage of the Q4 earnings season, the performance of earnings relative to estimates is trending closer to the numbers of the previous two quarters rather than the five-year average. Since December 31, the earnings decline for the S&P 500 has improved by 2.4 percentage points (to -6.8% from -9.2%).
- Guidance is also strong going into the quarterly reports. This is worth close monitoring. (Brian Gilmartin).
Last week I cited the increase in inflation expectations. This week, at least as measured by the CPI and PPI we see some significant price increases. One month does not a trend make, but this is attracting some attention. The increase in the core rate remains mild.
- CPI for December increased 0.4%, in line with expectations but higher than November’s 0.2%. The core rate was much better, increasing only 0.1%.
- PPI for December increased 0.3%, a bit better than expectations of 0.4%, but worse than Octobers 0.1%. Once again, the core increase was only 0.1%.
The stall in economic growth is beginning to show outside of employment, but the December economic data provide a mixed picture. The level of activity remains poor, but the pace of the rollover has not accelerated. Here were the two key reports last week.
- Retail sales for December surprised with a 0.7% decline versus expectations of -0.2%. This was better than November’s downwardly revised (from -1.1%) reading of – 1.4%.
- Industrial production for December had a nice 1.6% increase versus expectations of 0.4% and an upwardly revised November gain of 0 .5%.
- MBA new mortgages are off to a good start in 2021.
New vaccine development continues at a pace which seemed impossible a year ago. Given the uncertainty around the candidates now in use (dosage, new strains, transmission potential), it is important to encourage the needed scientific work and regulatory analysis. At least two more candidates may be available in a few months. Here is the big picture.
- Initial jobless claims spiked to 965K versus expectations of 780K and the prior week’s 784K. Continuing claims also moved slightly higher, but the series is becoming less valuable as recipients exhaust benefit limits.
- JOLTs showed a decrease in job openings to 6.527M in November from the upwardly revised 6.632M in in October. This is probably not very important as an additional read on the economy.
- Reasons for unemployment are not encouraging optimism.
- The link to COVID is obvious.
Consumer and business confidence remain a crucial part of the economic recovery. The survey responses usually exhibit a partisan split. It will be a challenge to restore confidence among the skeptics.
- Business confidence as reported by the NFIB declined to 95.9 in December versus expectations of 100.2 and November’s 101.4. Especially troubling is the decline in businesses seeing this as a good time to expand.
- Business confidence is declining more broadly.
- Consumer sentiment is also under pressure according to the Bloomberg US Weekly Indexes.
- Rent payment rates have edged lower.
- The worsening trend includes nearly every state.
- Positive test results remain moved to 13.5% for the entire U.S. I have been tracking this since June, and it is at the highest level in my data series.
- Cases per day and any other indicator you choose are at the worst levels ever.
- Death rates, as measured by the excess death approach, are much higher. The WSJ pegs the total at 2.8 million people.
The process of distributing and administering the vaccine has continuing problems.
- US totals are significantly behind schedule – 13.7 million in the first month. Last week the rate was about 850K doses a day. (Bloomberg).
- Distribution at the state level remains a problem. Only 44% of the shots distributed have been administered.
- State planning has been undermined by Federal misstatements about the size of the “stockpile.” States adjusted distribution plans, but have nothing more to distribute (beyond the existing pipeline). (Washington Post)
- The result is confusion and futility: The Maddening Red Tape Facing Older People Who Want the Vaccine
- Many remain unwilling to take a vaccine.
Market breadth? Six companies made up almost one-fifth of trading last Monday. (Bloomberg). Do you hold any of these?
Well, why not?
We have a very light calendar and a holiday-shortened week. Housing data provide the focus, with four key reports. Investors will wonder whether the spike in jobless claims will reverse.
Corporate earnings should and will attract plenty of attention. And of course, the events around the Inauguration and the reception of the Biden proposals will lead the daily news.
Briefing.com has an excellent weekly calendar and many other useful features for subscribers.
Despite intense partisan divisions, markets reflect continued optimism. There is certainly a new wall of worry facing newly elected political leaders. Everyone with an investment is wondering:
What do Biden proposals mean for investors?
And of course, will they become policy?
Technical experts on TV shows often complain at the misleading aspects of the entertainment. When I watch discussions of the newly minted political experts, I cringe. And yes, they are the same people who were formerly experts on recessions, immigration, Brexit, the Fed, epidemics, and world politics.
I have sympathy. If your job requires you to write an article about what Biden’s election means for immigration, you are forced to speculate.
Investors need not speculate. We can gather facts and make sure that conclusions are sound. I do not know the future, but I can stay a step or two ahead by watching the right things.
First insider tip
Will the Biden stimulus plan pass the Senate via the “regular order” or will it be part of the reconciliation process? Think how much time we could save if we began each TV interview with that question!
The regular order is exposed to a filibuster. It therefore needs 60 votes to pass a cloture motion. With enough GOP votes, the bill could pass quickly.
Lacking these votes, the bill can be made part of the budget resolution process, which requires only a simple majority. That is much slower – perhaps a few weeks or as much as two months.
A third possibility is for the Senate to change the rules to permit simple majorities under the regular order. This so-called “nuclear option” would end the ability to filibuster. Traditionally there has been little support for this idea, but in this sharply partisan era, who knows?
Knowing the rules will help to handicap the result. Whatever votes are required in the Senate there will be policy adjustments to reach a minimal winning coalition. This may include adding or eliminating proposals important to a single Senator.
The stimulus proposal combines items that were controversial before the election. Some in the GOP do not want to help states financially. Will that apply to vaccine distribution assistance?
Some in the GOP object to the overall program size. Has that changed?
Direct payments were popular a month ago, despite the un-targeted nature of the program. Is that still true, despite the cost?
The proposal is something of a pre-built compromise which passes muster with Democrats including the Sanders faction. We will now learn the degree of GOP support. How this plays out will be an early indicator of policy direction.
Taxing, spending, and most other bills will take a back seat to stimulus and the pandemic. Investors are already making decisions about the impact of Biden taxes. This is crazy. We do not have a proposal or a sense of what might get support.
Here is the outlook from one of the big names in Barron’s Roundtable:
When I look to the first quarter of 2022, the domestic economy looks pretty good. The Biden team will want a good economy for the midterm elections. An infrastructure bill will be announced earlier, but it will kick in around that time. Europe’s economy looks uninspiring.
Consumer wealth in the U.S. is at an all-time high. We have a problem with outstanding student loans, but the government will deal with that. The consumer will spend nicely. That’s good for the auto industry. The industrial sector looks robust. We’ll see what happens with corporate taxes. With wages rising and commodity prices spiking, companies that can pass higher costs on to customers will benefit. I expect U.S. GDP to increase 5% or 6% in real terms, reflecting a vaccine that works, continued monetary policy, and added fiscal stimulus, including a sizeable infrastructure bill that kicks in in the fourth quarter to buttress the economy in first half of 2022 in time for the mid-term election.
So many assumptions and dubious conclusions packed into two paragraphs!
- A forecast of the 2022 economy.
- Assumptions that Biden will immediately be thinking about the midterm elections. He is not even in office. What about the current needs?
- Consumer wealth based on averages without a sense of inequality.
- Timing and size of a possible infrastructure bill.
- Prediction of GDP from a few macro headlines.
I wanted to include some reading about implementing public policy, one of the lesser-known subjects I taught in the day. Most people expect instant action when the government institutes a new legislative or regulatory policy. In fact, the legal passage is only the beginning. You probably do not want to sign up for the Kennedy School course for executive education, but this description helps with the idea.
Are you a public policymaker frustrated with the limited impact of your government’s policies? Do you see many policy ideas starting out with promise but ending up incomplete or ineffectively implemented? Are you trying to improve implementation?
If so, you are not alone.
New public policy ideas that promise to solve many of society’s problems are constantly emerging in governments, nonprofit and corporate organizations across the world. Unfortunately, studies show that more than half of these ideas fail during implementation, thus falling short of achieving their intended—and much needed—results.
I mentioned my difficulty in highlighting this crucial subject – at the heart of the vaccine distribution problem—to Mrs. OldProf. Getting one of her “this is boring” looks, I tried a different example. “You know the goal-line play where Adams went in motion to the left edge and then doubled back all of the way? And how Ramsey had to trail him because of man coverage? And how he did not get back in place to defend the TD pass?” She acknowledged all of that.
That is implementation, I explained. You can draw the play up on the blackboard, but it is nothing without implementation.
She advised that I should use the Packer example and forget about Harvard. So take your pick.
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 neutral 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. This is going to take a lot longer than people expect.
With the addition of important data, it is time for a review of Jill Mislinski’s Big Four Indicators.
Full economic recovery will not happen before the pandemic is tamed. Each week I include a brief update on the coronavirus, the same way that I do for other relevant market information. And each week there are some readers who want to challenge individual charts or data sources. These readers are making a very expensive mistake, and perhaps leading others astray in the comments.
When this situation gets better, or is less relevant to investing, I will let you know!
Last week some complained that I discussed cases rather than deaths. That makes no difference. Whenever I discuss deaths, someone claims that they are not measured correctly, or only occur to old people, or only with other health problems as factors.
Pandemic information is important because even if the skeptics were right (and they are not) the world disagrees with them. Public policy is going to protect life, including lockdowns if necessary, and to accept economic costs.
Successful investors are realists not ideologues.
I continue to maintain higher than normal cash levels as a cushion against the continuing recession, but I have added some new choices. These are selected based on post-recession expectations as well as current prospects.
I am almost finished with a bond substitute program to generate reasonable low volatility returns via an extremely selective REIT program developed along Great Reset principles.
If you have not already done a review of your current portfolio – asset allocation, sector exposure, and risk – you are behind schedule! I will soon have a new White Paper on the bond substitute REIT program. You can get on the list. You can still get my paper on risk. If you act quickly you can also be part of the latest Great Reset Wisdom of Crowds survey (closing this week). Participants get the first access to results and related discussions.
There is no charge and no obligation for either White Papers or the Great Reset Group. Just make your request at my resource page.