Primary drivers in the market last week included the signing of the American Recovery Act, exception­al progress on vaccine distribution, and a supportive calendar of economic reports. All three large cap U.S. indices (S&P, DJIA, NASDAQ) set new record highs while small caps surged over 7%. Gains were broad based with value/cyclicals continuing to lead the way, but we did see a strong bounce back in technology names as well. Developed and emerging international markets were up comparable to large cap U.S. markets. Both the USD and oil traded down slightly on the week. Rates moved higher in a similar fashion to recent weeks with the longer maturities rising 8 – 13 basis points and the short end remaining anchored by policy.

Market Anecdotes
•The $1.9t American Recovery Act became law last week, delivering a historic fiscal stimulus surge to many parts of the economy through stimulus checks, extended unemployment benefits, state & local government payments, Covid research/testing/vaccine distribution, and more.
•BCA Bank Credit Analyst noted con­sumers will have an estimated $2t in ex­cess savings at their disposal by April and should begin seeping into the economy as activity normalizes.
•The economic impact of fiscal stimulus (particularly this size/scope) should be to increase aggregate demand. The unknown is how much the curve will shift and how much real slack there is to soak up in the overall economy.
•Strategas made the important point that the actual re-opening and recovery in mobility/activity is the real economic stimulus, far outweighing the American Recovery Act.
•The outperformance of financials over technology since September has been pronounced but somewhat muted due to the surge in ‘non-profitable’ tech company shares.
•The NASDAQ entered correction territory on Monday but bounced off what were likely some short-term oversold conditions the remainder of the week.
•The selling of Treasuries continued last week and, like last week, the focus was not inflation fears. The slope of the 10 year and 30 year was again pretty static but the 2 year 5 year steepened again.
•Currently markets expect the Fed to begin hiking rates in November 2022, an­other in May 2023, and again in Novem­ber 2023 – notably more hawkish than the Fed’s current guidance.
•Arbor Data noted a significant part of the recent USD rally may be some short squeezes in addition to U.S. economic growth leading most non-U.S. markets.
•China’s annual National People’s Congress kicked off on Friday with the unveiling of economic targets and budgets for the year. Beijing noted GDP growth over 6%, 3% GDP, and unemployment similar to 2019 levels with a fiscal deficit target of 3.2% of GDP.
• The European Central Bank announced an increase to its Quantitative Easing scheme and left Pandemic Emergency Purchase Program (PEPP) unchanged at $2.21t until March 2022. European Union stocks rallied, and sovereign yields fell.

Economic Release Highlights
•February headline and core Consumer Price Index registered a benign 1.7% and 1.3% respectively.
•February NFIB Small Business Op­timism registered 95.8, slightly below consensus but a small improvement over January.
•The flash University of Michigan con­sumer sentiment report for March came in significantly higher than expected, rising to 83.0 (78.5 expected) and up nicely from 76.8 in February.
• January Job Openings and Labor Turnover Survey (JOLTS) report has job openings at the highest levels since Febru­ary 2020.

 

 

 

 

 

 

 

 

Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Adviser. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. Indices do not reflect the deduction of any fees or expenses. They are not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was designed to serve as a proxy for the broader U.S. economy. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. It is used as a broad-based market index. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Total Return assumes dividends are reinvested. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. All enclosed material including market analysis data provided Taiber Kosmala & Associates, LLC. There is no duty to update this information. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of 30 semiconductor companies. The companies in the Index have primary business operations that involve the design, distribution, manufacture and sale of semiconductors. The index is designed to track the performance of listed semiconductors. The Case-Shiller Index, formally known as the S&P/Case-Shiller Home Price Index is made up of several indexes that track the value of single-family detached residences using the arms-length and repeat-sales methods. It is used as a barometer not just of the housing market, but also of the health of the broader economy. For more information on the index, please visit https://www.spglobal.com/. All information obtained from Taiber Kosmala & Associates (2020. The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.

Rates moved both higher and steeper again last week. Curve steepening has been pronounced with the 2-10 at 1.30% and the
3m-10 at 1.40%. While bonds are oversold in the short term, the long-term trend line should eventually take yields up to the 2.0%-2.5% area.
• We saw some very bizarre US Treasury rate action last week. Tuesday saw 2 year and 30 year fractionally higher while 5 year and 10year were lower. The shortest (1bps) and longest (3bps) maturities did not move too much while 5 year were up 16bps and 10 year & 20 year were up only 10bps. A clear kink in the curve.
• Momentum and technology stocks are bearing the weight of the rise in yields. MTUM, a proxy for the broad momentum factor across the US equity market, was down over 5% across 5 days which is only the second time it has reached that degree of a selloff since March.
• Central bankers on both sides of the Atlantic did their best to assure markets last week. Powell reiterated the Fed’s commit- ment to explicit forward guidance to the Senate Banking Committee and offered reassuring views on inflation and the rise
in yields. Lagarde and Schnabel also made clear the ECB will ensure there will be no unwarranted tightening of financing condi- tions.
• In the past, dovish braying and big QE helped stocks AND bonds but recently markets have been behaving as if there has been a shift in market psychology translat- ing to a change in bond yield to stock price correlation.
• Inflation remained a key focus of market participants last week. BCA noted West Texas Intermediate prices rising 70% since October alongside correlation data between gasoline prices and headline inflation.
• In a separate research note, BCA ad-dressed several myths surrounding 1970’s style inflation relative to today.
• Strategas reiterated confidence in the overall market due to continued internal market dynamics such as reopening pairs, BB/BBB spreads, CD vs CS, high beta vs low beta, advance/decline ratios, and cycli-cal sector performance.
• The $1.9t stimulus package passed the HOR and is heading to the Senate. Strategas estimates approximately $700b of consumer related stimulus will hit within the next six months.

Economic Release Highlights

• January Personal Income and Outlays report showed MoM personal income (10% vs 9.4%) and personal consumption (2.4% vs 2.2%) both higher than expected while core PCE was in generally in line with expectations at MoM (0.3% vs 0.1%) and YoY (1.5% vs 1.4%).
• December’s Case-Shiller Home Price Index rose more than expected for a second consecutive month at MoM (1.3%a vs 1.0%e) and YoY (10.1%a vs 9.6%e).
• New (923k vs 855k) and Pending
(-2.8%a vs 0%e) Home Sales were mixed with new exceeding pending continuing to lag.
• Conference Board Consumer Confi-dence for February came in higher than expected (91.3 vs 90.0) but remained somewhat subdued.
• The final UofM Consumer Sentiment for February remained at the relatively subdued level of 76.8a vs 76.4e.
• January Durable Goods Orders acceler-ated faster than expected (3.4% vs 1.1%), well over December’s 0.5%, providing further evidence of an upward trending manufacturing cycle.

 

 

 

 

 

Investment Advisory Services are offered through Virtue Capital Management, LLC, an SEC Registered Investment Adviser. This newsletter is not to give investment advice. Before investing in any advisory product please carefully read any disclosure documents, including without limitation, the firm’s Form ADVs. Indices do not reflect the deduction of any fees or expenses. They are not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA was designed to serve as a proxy for the broader U.S. economy. The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. It is used as a broad-based market index. The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. The Russell 3000® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. Total Return assumes dividends are reinvested. The Russell 1000 is a subset of the Russell 3000 Index. It represents the top companies by market capitalization. The Russell 1000 measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 2000 index is an index measuring the performance of approximately 2,000 small-cap companies in the Russell 3000 Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000 serves as a benchmark for small-cap stocks in the United States. Visit www.russell.com/indexes/ for more information regarding Russell indices. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. The information published herein is provided for informational purposes only, and does not constitute an offer, solicitation or recommendation to sell or an offer to buy securities, investment products or investment advisory services. Nothing contained herein constitutes financial, legal, tax, or other advice. These opinions may not fit your financial status, risk and return profile or preferences. Investment recommendations may change, and readers are urged to check with their investment adviser before making any investment decisions. Estimates of future performance are based on assumptions that may not be realized. Past performance is not necessarily indicative of future returns or results. No representation is made as to the accuracy, completeness or timeliness of the information in this material since certain information herein is based on or derived from information provided by independent third-party sources. All enclosed material including market analysis data provided Taiber Kosmala & Associates, LLC. There is no duty to update this information. The Wilshire 5000 Total Market Index represents the broadest index for the U.S. equity market, measuring the performance of all U.S. headquartered equity securities with readily available price data. The PHLX Semiconductor Sector Index (SOX) is a capitalization-weighted index composed of 30 semiconductor companies. The companies in the Index have primary business operations that involve the design, distribution, manufacture and sale of semiconductors. The index is designed to track the performance of listed semiconductors. The Case-Shiller Index, formally known as the S&P/Case-Shiller Home Price Index is made up of several indexes that track the value of single-family detached residences using the arms-length and repeat-sales methods. It is used as a barometer not just of the housing market, but also of the health of the broader economy. For more information on the index, please visit https://www.spglobal.com/. All information obtained from Taiber Kosmala & Associates (2020. The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that is replacing the London interbank offered rate (LIBOR). Interest rate swaps on more than $80 trillion in notional debt switched to the SOFR in October 2020.

The holiday shortened Thanksgiving week began with a third consecutive Monday morning booster shot (AstraZeneca) which sustained throughout the week leaving the S&P 500 with a healthy 2.3% gain.

U.S. small cap, developed, and emerging market equities again outperformed U.S. large caps. The ‘risk-on’ trade took cyclical parts of the market higher with banks, energy, and materials leading the way while REITs, healthcare, and consumer staples lagged. The S&P 500 is now up 7.99% since Election Day and up 12.6% for the year. Commodity markets were up sharply with industrial metals and oil (+8%) rallying while gold lost more ground, now back below its 200dma. Longer duration treasury rates edged slightly higher with the 10 year U.S. Treasuary now at 0.84% but shorter rates remained anchored.

Market Anecdotes
• Alpine Macro addressed ‘bubble’ and mania valuation sentiments in a recent equity strategy piece highlighting the differences between Nifty Fifty ‘72, Tech Bubble (‘00), and FANMAG (‘20).
• Ned Davis made note of near-term excessive optimism they see in the market, likely stemming from recent vaccine and political developments.
• Leuthold Group highlighted the relatively attractive valuation for small caps, making the case that both SCV (17x) and SCG (24x) are historically cheap relative to historical averages. Small growth is trading at approximately 50% of valuation measures it reached in ‘00.
• Commodities, particularly copper, continued to benefit from the strong bid for cyclical assets, up 3.22% last week. For the first time since 2011, all 18 major commodity indices are above their 200 DMA.
• The Fed is expected to ramp up longer duration UST purchases in light of the Treasury announcement of sunsetting Fed bond facilities and may now be considering supplemental monetary action at their upcoming December meeting.
• The weekly Fed balance sheet report showed the consolidated balance sheet surging $67b to a new record $7.24t. The ECB balance sheet marked a new high last week as well.
• Biden has stepped up pressure on the Democratic caucus to move more meaningfully toward the Republican offer, putting his weight behind a compromise smaller lame duck package.
• Barings highlighted capital inefficiencies currently prevailing in private equity where 70% ($366b) of capital raised from ‘15-’19 is targeting large cap businesses which account for less than 1% of firms (2,000). Only 7% ($37b) of raised capital is targeting lower middle market businesses which account for nearly 96% of firms (440k).

Economic Release Highlights
• November flash U.S. PMIs (C, S, M) all came in handily above consensus and now are now deeply in expansionary territory at 57.9, 56.7, and 57.7 respectively.
• EZ PMIs (45.1, 53.6, 41.3) missed expec-tations while the U.K. (47.4, 55.2, 45.8) beat handily across the board.
• October’s Personal Income and Outlays report revealed disappointing personal income (-0.7% v 0.1%) but in line PCE growth of 0.5%. Core PCE price index was in line as well at 1.4% YoY.
• October durable goods report came in higher than expected across headline (1.3% v 0.9%), Ex-transports (1.3% v 0.3%), and core goods (0.7% v 0.6%) components.
• Conference Board consumer confidence for November came in short of consensus (96.1 v 98.0) likely reflecting the CoVid surge and policy uncertainty in the coming months.
• November’s final University of Michigan consumer sentiment reading fell to 76.9, short of con-sensus estimate of 77.2, likely a reflection of Republican initial sentiment after the election.
• Case-Shiller House Price Index continued its torrid pace in September, coming in well above expectations (1.3% v 0.5% MoM) (6.6% v 5.4% YoY) across the 20 metro region samples.

W E E K E N D I N G  11 / 27 / 2 0

INSIGHT
MARKET ANALYSIS

 

Equity markets surged (6%-7%) to their best showing since April last week as election outcomes began to materialize.

With Senate outcomes still in limbo, markets cheered what looks like a gridlock scenario with Vice President Joe Biden taking the White House and market friendly policy compromises thanks to mixed Congressional power. Healthcare and technology led the way while energy and real estate lagged. Commodities benefited from a risk on rally in oil and long treasury bonds surged initially on contested election news bits but stayed suppressed due to a reduced likelihood of a sizable CoVid relief package.

Market Anecdotes
• After the worst pre-election stock market week on record, the S&P 500 delivered its best week since April as the election outcome and policy handicapping began to clear up.
• Tax hikes, infrastructure spending, green new deal, healthcare reform, regulation, and tech sector vilification have taken a back seat under a divided government scenario. The end of the trade wars, more modest CoVid fiscal relief, and eliminated tariffs are also likely.
• Emerging markets have benefited materially from the GOP Senate / Biden White House driven by currency implications of a weak USD due to lower interest rates (growth), lower Treasury issuance (deficit spending), and more stable foreign and trade policies.
• With 89% reported, FactSet noted record beat rates of 86% and margins of 19.5% for a blended Year over Year earnings decline of -7.5%. Revenue is coming in at -2.1% with record beats (79%) and margin (2.6%) of beats.
• The October FOMC meeting happened last week. As expected, no change in policy and they stand ready to enact fresh QE along with other measures if deemed necessary.
• The Bank of England surprised the markets by announcing £150 billion of quantitative easing. This was £50 billion more than expected.
• BCA pointed out an important sub-component of last week’s GDP report is that the contribution from state & local government spending turned negative as it did in 2009/2010 where it remained a drag until 2014 – a significant contributor to subpar GFC recovery growth.
• CoVid is becoming more prevalent in the U.S. as the “third surge” does not seem yet to be slowing down.
• European and Canadian approaches to health policy/lockdowns are being closely watched as proxies for full spring 2020 style versus partial targeted approach.
• The September Black Knight Mortgage Monitor showed a slight improvement in delinquencies and record originations.

Economic Release Highlights
• The October jobs report was strong with 638,000 new jobs taking the unemployment rate down to 6.9% (7.6% expected) and non-farm, private, and manufacturing payrolls all topping expectations.
• October’s U.S. manufacturing PMI improved slightly to 53.4 while the ISM manufacturing surged and crushed expectations (59.3 v 55.7). The Composite improved from 54.3 to 56.9 in October.
• The global manufacturing PMI was 53.3, an improvement from 52.1 prior reading. The European Union registered a healthy 54.8, China 53.6, India 58.6 and Germany 58.2.
• October’s ISM services index softened slightly to 56.6 from last month’s 57.8 reading.

W E E K E N D I N G  11 / 06 / 2 0

INSIGHT
MARKET ANALYSIS

 

Last week, equity markets bolted on to some already pretty gaudy results of the past several weeks, coming within 1% of February’s record high on an intraday basis. The first full week of August felt pretty bullish with all U.S. equity classes and sectors posting healthy gains and only Brazil was left out of the non-U.S. equity market rally. Market internals last week favored cyclicals (industrials, financials, energy) over defensives (health care, utilities, consumer staples).

Market Anecdotes

• DC negotiators failed to reach a stimulus deal and remained pretty far apart (trillions of dollars and different sets of facts). POTUS executive orders were expected to bridge the gap over the weekend which is why markets are remaining calm for now.
• COVID data seems to be taking a modestly positive turn over the past two weeks. Confirmed cases have fallen 18% since July 23 while positivity rates, deaths, and hospitalization rates are falling as well.
• Despite a significant mega cap tech rally late last week, this week saw value and smaller caps lead the way.
• Earnings season is maintaining a clear positive skew with earnings and sales beat rates of 68% and 62%. A net guidance spread of +18.6% is also extraordinarily positive.
• Ned Davis pointed out, on average, the stock market bottoms four months prior to the end of recession and earnings/revenue bottom six and nine months after the end of recession.
• Bloomberg highlighted at least 25 major retailers have gone BK this year. Chapter 11 allows them to walk away from leases translating to CMBS delinquencies, now 16% from 3.8% in Jan.
• A 2Q NY Fed report shows total household debt declining for the first time since 2014. Credit card balances fell $76b, the steepest margin on record while mortgage balances fell by $63b.
• The big story on Tuesday was the 2% rally in gold that pushed the December futures contract to a new record high of $2,027.30. Negative real rates, particularly with the U.S. joining that club have factored materially into the picture for gold.
• The USD is down 10% from its March highs, now below 93 for the first time since May 2018.
• The BCA Pipeline Inflation Indicator has troughed suggesting bond yields have limited downside risk looking forward.

Economic Release Highlights

• The July jobs report was solid at 1.76mm (1.675mm expected) and the unemployment rate falling to 10.2%. U-6 under-employment rate fell to 16.5% and participation stalled out at 61.4%.
• All but three of eleven major global services and manufacturing PMIs moved back into expansionary territory.
• July PMI (50.9a vs 51.3e) and ISM (58.1a vs 55e) manufacturing indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• July PMI (50.0a vs 49.6e) and ISM (54.2a vs 53.5e) services indices both marked improvement over the prior months, now both officially residing in expansionary territory.
• The ISM commodities survey pointed to upside price risk across the commodity markets with a +20 net reading, the highest since October 2018 and the fourth highest ‘short supply’ response (24) on record.
• Initial jobless claims (weekly) declined to 1.186mm from last week’s 1.435mm but still sit two-times higher than what we saw during the GFC.
• July motor vehicle sales of 14.5mm (11.2 domestic) grew handily over June’s 13.1mm and came in well over expectations of 14.0mm.

 

W E E K E N D I N G  8 / 07 / 2 0

INSIGHT
MARKET ANALYSIS