'With food, we can get a lot more' 'With food, we can get a lot more' http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\eggs-cook-book-small.jpg November 20 2020 November 20 2020

'With food, we can get a lot more'

With more fiscal stimulus, the market can too.

Published November 20 2020
My Content

I didn’t say that, an advisor for whom I was presenting virtually to his clients this week did. Expecting over 100, we got half that number. Hey, I long ago accepted the fact that a meal helps fill meeting rooms. No hard feelings, food could make up for a boring/downbeat meeting. But mine is neither! Ever! With the election (mostly) behind us and really positive vaccine headlines, some wonder if sentiment risks running too hot. AAII bulls have jumped to their highest reading since late 2017 and above early 2020 extremes when 99% of Americans wouldn’t have been able to locate Wuhan on a map. Investor Intelligence’s bull-bear ratio is at the 92nd percentile of all historical observations. The problem is these contrarian negatives are running smack into broadening market momentum and potent seasonality. The NYSE advance/decline is making new highs, 92% of ACWI markets are above their 200-day moving averages (a percentage last seen in early 2018) and the percentage of ACWI companies with positive earnings revisions is at a record high. Also, for the first time since 2011, all 18 major commodities are above their 200-day moving averages. And among 29 equal-weighted currencies, 72% have rising 50-day moving averages, consistent with a weakening U.S. dollar, with emerging-market currencies breaking out to March highs. The lack of new lows has been consistent with double-digit gains on the S&P 500 historically since 1940. Santa is right around the corner!

Within the market, the small-cap and value rotation is picking up steam. More than 90% of the S&P SmallCap 600 Index is trading above its 50-day moving average, with this many names exceeding that threshold for only the 48th time ever. The Russell 2000 has made a fresh 1-year high and the relative performance of small versus large has now turned in favor of the former. A breath of fresh air! From a historical perspective, market technicals are indicative of equity outperformance 12 months out in cyclical and small-cap stocks. It helps that the recovery is just getting started. Even before the Pfizer and Moderna news, the consensus GDP forecast for 2021 had climbed from 4.5% in late October to above 5%, and it’s trending higher (more below). Accompanied by unprecedented monetary and fiscal stimulus and a resilient consumer, we’re still in the early innings of a profit recovery. The Q3 beat rate was its highest since 2004, and S&P earnings are on track to increase roughly 50% year-over-year (y/y) in Q2 2021. October retail sales disappointed slightly (more below), but upward revisions for the prior two months made for a strong cumulative increase, pushing sales well above their prior peak. Based on the historical relationship between stock prices and spending, the S&P’s 8% annualized increase off September equates to 6-7% increase in holiday sales. (I’m doing my part!) Consumers are entering the season on a strong footing, the surge in Covid cases aside. Their net worth has jumped $19 trillion since the pandemic low, lifted by rising stock and home prices and a 21% y/y increase in bank deposits. Evercore ISI estimates households have saved roughly $1.3 trillion above trend since March. Even though jobless claims unexpectedly rose (more below), the Bloomberg Consumer Comfort Index increased the most in nearly two months and the third time in as many weeks to its best level since April. Eggnog all around!

The most important intermediate question may be how much permanent economic damage is done before a vaccine is widely deployed. The answer, Wolfe Research says, will depend on whether a new fiscal stimulus package gets done in January at the latest and includes extended unemployment benefits and another round of paycheck protection loans for businesses. There could be a few rough months before the economy strengthens into spring and the back half of next year. With cyclical positioning relative to defensive stocks at the long-term median for hedge funds and well below levels that would exist in recovery, there’s a lot of potential upside here. If yields remain low, it’s hard to get negative on stocks. Indeed, Renaissance Macro sees the correlation between yields and equities staying positive until the 10-year Treasury reaches 3.50%, a level on few if any radars. My advisor friend who lamented the downside of virtual meetings (no food, no face-to-face) did mission work in India. Asking children whether they would like to play games or hear a lecture, he often heard “both,” as the group thought it might be a trick question. Lectures can be legitimately positive, even in the face of fresh lockdowns. Happy Thanksgiving! And as my advisor client eloquently closed our virtual meeting, “we’ll make lemonade out of this.”

Positives

  • A lot of people want houses Amid shortages, homebuyers increasingly are buying homes under construction or not yet started as the rush for suburban single-family homes gains steam. Existing sales in October jumped to a 14-year high, and homebuilder confidence climbed a seventh straight month to another record high. Y/y single-family starts and permits have soared a respective 29% and 21%.
  • Q4 outlook improves The Atlanta Fed tracker of current growth rose again to 5.4% for the October-December period, and may climb yet higher on the housing news. Led by manufacturing, industrial production expanded again last month and Conference Board leading indicators rose a seventh straight month.
  • Capex on the rise Companies continue to invest despite the risk of short-term Covid shutdowns in order to avoid costly supply constraints when the economy reopens fully in next year’s second half. Tech capital expenditures (capex) for 2021 are leading the way as companies accelerate IT spending due to the pandemic and work-from-home policies.

Negatives

  • Manufacturing moderates The Philly Fed gauge slipped in November, though it remained strongly expansionary and came in above forecasts. New York’s Empire survey also dropped but still reflected growth, with new orders and shipments pulling back from October.
  • Sales moderate October retail sales rose less than expected, with core sales up just 0.1%. The data indicate consumers may be turning a little skittish amid rising Covid cases or could just be taking a break after a strong summer that pushed overall sales to a record high.
  • It’s all about jobs New jobless claims unexpectedly rose for the first time in five weeks, suggesting the pandemic's surge may be starting to weigh on service establishments. Still, continuing claims declined again, lowering implied unemployment to a recovery low 4.8%.

What else

The hurt has been uneven A Leuthold study finds the short-but-steep recession ravished low-earning industries while leaving high-earning industries far less scathed. The unemployment rate for low-earning industries spiked from about 3.5% to almost 23% in just a few months and has only recovered to slightly below 10%. By comparison, the jobless rate among high-earning industries spiked from 3% to 12% and already is back to 5.5%. The divergence helps explain the historically odd 2020 recession as low-earning industries constitute about 56% of unemployment but only 24% of total employment.

Gen Z is the most disruptive generation ever The “youthquake” revolution is starting as the first generation born into an online world is now entering the workforce and compelling other generations to adapt to them, not vice versa. Gen Z are set to grow incomes 5 times to $33 trillion by 2030. Bank of America calls them the “clicktivist” generation: socially involved, citizens of the world, living online, financially conservative. Beneficiaries include ecommerce, payments, luxury, media and ESG. On the flipside, they'll likely be the "peak" generation for alcohol (fingers crossed), meat, cars, shopping malls and old media.

I’d rather you not mention this to my boss Loose labor markets and the fallout from the Covid pandemic are expected to cause the fewest number of raises next year since ISI began its survey in 2014. On a positive note, companies expect modest employment growth—up a net 8%.

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Tags Equity . Markets/Economy .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

International investing involves special risks including currency risk, increased volatility, political risks, and differences in auditing and other financial standards. Prices of emerging-market and frontier-market securities can be significantly more volatile than the prices of securities in developed countries, and currency risk and political risks are accentuated in emerging markets.

MSCI All Country World Index (MSCI ACWI): A free float-adjusted, market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of November 2011, the MSCI ACWI consisted of 45 country indices comprising 24 developed and 21 emerging market country indices. The developed market country indices included are: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom and United States. The emerging market country indices included are: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey. The index is unmanaged, and it is not possible to invest directly in an index.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

S&P SmallCap 600 Index: An unmanaged capitalization-weighted index representing all major industries in the small-cap of the U.S. stock market. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The American Association of Individual Investors (AAII) Bulls Minus Bears Index is a measure of market sentiment derived from a survey asking individual investors to rank themselves as bullish or bearish.

The Bloomberg Consumer Comfort Index is based on weekly telephone survey of consumers seeking their views on the economy, personal finances and buying climate.

The Conference Board's Composite Index of Leading Economic Indicators is published monthly and is used to predict the direction of the economy's movements in the months to come.

The Empire State Manufacturing Index gauges the level of activity and expectations for the future among manufacturers in New York.

The Federal Reserve Bank of Philadelphia gauges the level of activity and expectations for the future among manufacturers in the Greater Philadelphia region every month.

The Investors Intelligence bull–bear ratio is a measure of market sentiment derived from a weekly survey of individual investors who are asked to rank themselves as bullish or bearish.

The New York Stock Exchange (NYSE) advance/decline line measures the ratio of advancing stocks to declining stocks.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

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