What might the markets do as we all hunker down?
Are you getting Covid Fatigue, just as we are about to enter the “Dark Winter?” Here in Pennsylvania, our governor just shut down restaurants, etc., until the New Year (more below). My family has enjoyed Movie Night for months now, where each of the six of us get a turn to choose the evening’s showing, then we text each other throughout. Good times, though one of us has dominated the movie choices! My turn, I pick “Sideways,” the 2004 Oscar-nominated comedy and one of my favorite all-time movies. But they refuse to watch it! So far…. Sideways may describe the market in the year ahead. Many Wall Street observers insist it’s dangerously expensive. But the market reasonably reflects what looks like a global V-shaped recovery in 2021. Currently, consensus earnings-per-share estimates for next year are around $180 for the S&P 500, with year-end price target around 4,000. That’s a 22x P/E, historically high but not too expensive with inflation still tame (more below) and the 10-year Treasury trading under 1%! The market had a great November, broadening beyond the big FAANG stocks, and that bodes well for next year. Indeed, it seems everything has been picked over except defensive stocks—those large, mature, sleepy, income-rich turtles (who, incidentally, walk so slowly because of the dividends weighing so heavy in the wallets on their backs). A perfect setup for a sideways market.
It looks like we are in the thick of the slowdown. According to the TSA, 501,513 people were screened at airport security checkpoints on Dec. 8, the fewest since July 4 and a fourth of last year’s demand. Screenings had been running closer to 40%. OpenTable seated diners are off 73% against year-ago levels, the worst since the pandemic recovery started. Lockdowns and stay-at-home orders are rising again, causing jobless claims to worsen (more below), as people all over are holing up again. November spending soared the most since March at food & beverage stores and health & personal care stores (pantry hoarding). The European Central Bank, which this week added to its asset purchases, pushing its stimulus well above $3 trillion, expects the economic drag of Covid-19 to last well beyond the point when the virus is under control. Back in the U.S., hopes for more stimulus faded as Republicans and Democrats bickered over liability protections and state & local assistance. Left in the cold are restaurants, mom & pop shops and other smaller establishments struggling to survive. Services’ recovery is likely to remain sluggish, posing a significant challenge to reflation efforts as pricing power among this major sector of the economy remains persistently weak.
Equities struggled this week. Technicals were hurt when the S&P posted a new high Wednesday but closed lower and the Nasdaq shed 2%. Sentiment is at bullish extremes. And the percentage of NYSE stocks trading above 200-day moving averages is at an 11-year high. Of course, the first few weeks of December have a reputation for volatility. The outperformance from the equally weighted S&P index and value stocks shouldn’t be discounted. They reflect continued improvement from the “average stock.” Strategas Research likens the current environment to 2009/2010, when the S&P rallied 65% off its March 2009 lows by December of that year, only to suffer a quick 9% mid-January pullback, recover to new cycle highs by mid-March 2010, stumble 17% from May to September, before a strong fourth quarter left the market up 13% for all of 2010. How about movie night and a Santa Clause rally? I love “Sideways”! A movie about wine! Now, my BFF and beloved sister particularly enjoy Cabernet Sauvignon when we visit. Paul Giamatti, its star, was partial to pinot in the movie. (Actually, if we’re being honest, red or white, I like them both.) This powerful bull market could easily reach 4,000, sooner than later. Then, quite possibly, sideways. Hey, after the roller-coaster year we’ve been on, sideways might be just fine.
- Is that Santa I see? If it is, it’s through showroom plexiglass or on my computer. Bank of America says year-over-year (y/y) holiday sales jumped 19% from Nov. 1 through Dec. 5. Online activity dominated and there was very strong momentum in goods spending—used car sales are running at their fastest pace in 11 years. The S&P is now 10% above its September average, suggesting quarter-over-quarter holiday sales may rise 9% annualized based on historical correlations. Evercore ISI’s Christmas tree gauge showed sales soaring 30% y/y this week, with some areas selling out, and Michigan sentiment jumped this month to near pandemic highs, indicating consumers are ready to shop.
- Another a catalyst for manufacturing Wholesale inventories jumped 1.1%, a third straight monthly increase and the most since January 2019. Wholesale sales rose even more, dropping the inventory-to-sales ratio to pre-recession levels—more impetus for a budding inventory-rebuilding cycle.
- Way too early to worry about troublesome inflation Y/y core CPI and PPI remained mired well below Fed targets, with no signs of an imminent breakout. While accommodative monetary policies and strong global growth should push inflation higher next year, JP Morgan thinks the core rate will end the year a half percentage point below its pre-crisis level, mainly due to a services-led global output gap that it expects will be roughly 2.5% at the end of 2021 as smaller businesses struggle to recover from the crisis.
- Sideways This week’s surprising deterioration in initial and continuing jobless claims reinforces the message of November’s jobs report: spreading labor-market weakness isn’t solely due to Covid restrictions. UBS only sees a 21% correlation between case growth and rising claims. All year, I’ve been saying ours is a very big economy with varied state responses to the virus. Surely, many jobs have come back. But 2021 could be a year of fits and starts, with many remaining unemployed permanently.
- Sideways Lockdowns and Covid’s spread are weighing on small businesses. The NFIB optimism gauge fell to a 3-month low this month, with just 8% of respondents expecting the economy to improve, the lowest number since March. On a positive note, a growing percentage said they plan to increase employment in coming months, indicating the weakness could prove temporary.
- Sideways Decelerating credit growth and fiscal support may already be underway in China, the world’s second-largest economy, where the Peoples Bank of China is moving to pare stimulus. This could slow the recovery not only in China but neighboring economies and the rest of the world going into 2021.
‘Punch in the gut’ This week, I spoke virtually to what historically is my largest group of the year—600 or so at the Lancaster Area Chamber of Commerce. The chamber is all about “buy local,’’ and at the end of my presentation, its president typically gets up and says, “Ho! Ho! Ho! Buy local.’’ Not this year. “We just got a punch in the gut from the governor,’’ he said, referring to Gov. Tom Wolf’s order shutting down restaurants etc. This came with no warning, leaving many with stocked inventories for their busiest time of the year. Restaurants can’t survive on just takeout, and it doesn’t help that Congress has failed so far to push through new Paycheck Protection Program aid.
Vaccines can’t get here quick enough The percentage of adults who know someone who has been hospitalized or died as a result of Covid-19 reached 54% in November, before the latest spike in cases due in part to Thanksgiving travel.
‘Sideways’ In the movie, “sideways” was as a synonym for “intoxicated” (lots of wine was poured), and referred to the life of its hero, Miles Raymond (Giamatti). The film was credited for depressing the market for merlot, when Miles proclaimed, “… if anyone orders merlot, I’m leaving.”