Buy in November and HODL
Popular meme seems perfect for this market.
Back out on the road this week, with large group meetings in Ft. Mitchell, Ky., and Birmingham, Ala. Country club ballrooms in each location, and the rooms were filled. I saw but one mask. The audiences were in fine spirits, but had issues to share at Q&A. The group of frustrated small business leaders in Ft. Mitchell, a Cincinnati suburb, think D.C. policies encourage workers to stay at home. “When will the workers come back? Why is the government doing [extra benefits]??!” I refused to get into a political discussion; why Thanksgiving is just a few weeks away! In Birmingham, where most everyone I met was over-the-top warm and friendly, a banker wanted my opinion on crypto currencies. “Because I think Bitcoin is the Ponzi scheme of all Ponzi schemes.” My response—and strong opinion—after extensive study in these past few months: it is here to stay. Gosh, it’s great to be back on the road! HODL, BTW, is a popular crypto meme that’s code for, “Hold On for Dear Life.” This market is making some nervous—JP Morgan says the biggest question it’s hearing from investors is no longer if a correction will occur, but rather when? Corrections are healthy, impossible to time and there are a lot of drivers behind the melt-up: a sixth straight surprisingly strong earnings season, fading delta cases, rising spending (more below), rebounding jobs (more below), a continuing patient Fed (more below), strengthening services (more below) and seasonality. Fundstrat notes 20 of the 20 times (decent odds!) since 1950 that the S&P 500 increased 5% or more from May 5 to Oct. 27, it rose in the subsequent six months, by an average 12%.
Rising inflation and stock prices have dropped the real S&P earnings yield 2 standard deviations to levels last seen in the early 1980s. The last two times it was so low saw significant snapbacks, Strategas Research says, a positive for lagging value stocks that are trading at a 1-year low relative to growth stocks as measured by the Russell 1000 Growth and Value indexes. This week, global bond markets were surprised. After weeks of hawkish warnings, the Bank of England made a surprise decision to hold rates steady. And though the Fed announced tapering as expected, Chair Powell made clear the criteria for “maximum employment” and lift-off extend beyond the jobless rate to include the inclusiveness of employment and labor force participation, factors that could take until summer to gauge. Given a high quits rate and near record job market openings, the labor market is behaving as if the Fed already should be raising rates. Private sector wages and salaries are rising at their fastest pace since the mid-1980s. But Powell said he’s not seeing signs of a wage-price spiral and blamed the pandemic for distortions that can’t be cleared up until the pandemic passes. A reprieve until next summer.
Supply-side pressures could abate over the coming months as semiconductor availability improves, transportation bottlenecks ease, energy prices recede and more workers enter the labor force. Some commodities already are showing clear signs of lower demand or at least, less demand at high prices. Lumber prices have collapsed by two-thirds (though they’re still more than double where they were a year ago), iron ore prices have collapsed, oil is off is recent peak and the Baltic Freight Index has fallen sharply. These represent key components of the global supply chain. Meanwhile, GDPNow—the Atlanta Fed’s constantly updating estimate of GDP for the current quarter—stood at a stunning 8.5% for Q4 as of yesterday. Evercore ISI’s proprietary pricing power surveys are at record levels and the National Association for Business Economics’ survey of 91 companies for Q4 revenues was near a record high. The message from small caps is compelling, Strategas says. As measured by the Russell 2000, they broke out this week to multi-month highs relative to large caps, a strong sign of cyclical and market momentum. Sell in May if you must. This November, it may be best to buy and HODL.
- Just in time for the holidays Nonfarm payrolls surprised, rising 531K in October (and 604K in the private sector after excluding government losses), and gains the prior two months were revised up another 235K. Elsewhere, ADP private-sector employment came in well above consensus on broad-based gains, the American Staffing Association Staffing Index hit a record high and initial jobless claims fell a fifth straight week to a new pandemic low.
- Santa’s likely to be busy well into the new year Total card spending as measured by Bank of America jumped nearly 19% for the week ended Oct. 30, with airlines and lodging outlays growing at their fastest pace this year. JP Morgan cardholder spending is up 20% over 2019, with the acceleration after September’s fade in delta cases. Elsewhere, Redbook’s gauge of retail sales rose 17% in the past week, and the National Retail Federation is projecting record November-December holiday sales. Strategas estimates spendable household savings at $3.6 trillion, triple the annual average from 2015 and 2019.
- Services surge ISM’s nonmanufacturing index rose the most on record in October to a new high, defying expectations for a flat reading. Markit’s separate gauge for the month also spiked. Of note, ISM business activity and new orders components set records as delta’s impact continued to fade.
- It’s costly to fill Santa’s bag Seeking to fulfill rampant demand and build inventories amid snarled supply chains, companies imported higher-priced goods and industrial supplies at a frenzied pace in September, driving the trade deficit up 11% to a record $80.9 billion. Exports tailed off as demand weakened in countries dealing with delta wave and fallout from a slowing China.
- My fabulous new decorative pillow is in one of those containers! A record number of cargo ships—five times the previous high—with 200,000 containers are afloat in Southern California harbors, awaiting unloading, while 80,000 more containers are stuck on docks, awaiting trucking companies to find drivers. Naysayers are worried Christmas will be canceled. However, as noted above, we’re seeing anecdotal evidence of loosening supply chains. Imagine how stocked the shelves will be next year…more sales!
- I’m still betting heavy on productivity Nonfarm productivity plunged at a 5% annualized rate in Q3, the most since 1981 and much worse than market expectations for a pullback on summer’s sharp slowdown in economic growth. Falling productivity often is viewed as harbinger of inflation. The market appeared to ignore the report as a temporary issue, as the 10-year yield fell, Fed futures lowered odds of a rate hike and cyclical stocks rallied.
Nancy’s in a mood Pelosi’s response to the Dem’s disappointing election results suggests she recognizes the GOP likely will win the House in 2022 and potentially the Senate, so her party must act while it can. She almost certainly would like to get reconciliation done before her trip to Glasgow next week and the weeklong congressional recess—and before the Congressional Budget Office’s likely disappointing scores on its provisions.
Unintended consequences With policymakers applying deeply negative real interest-rate policies to supply-inelastic economies, the consequences of higher and stickier inflation, such as hoarding and speculation, are growing. “It is very difficult to get people to focus on the most important things when you're in boom times,” observes Jeff Bezos.
I think I’ll be a tall blonde in the metaverse By the 2030s, Bank of America says people the world over may be spending more time in the virtual world than the real world. It notes Ariana Grande drew a record 78 million video game players to her virtual concert in Fortnite—more than the entire population of the U.K.!—and thinks the metaverse market could be worth $800 billion by 2024 and $2.5 trillion by 2030.