Santa's got an 'everything rally' in his bag
Earnings and solid fundamentals appear ready to spread some holiday cheer.
This week, I spoke in Wheeling, W.Va., Fargo, N.D. (virtually) and Greenville, S.C. Again, the topic of cryptocurrencies came up, though I didn’t mention it. One advisor wanted advice, as his clients keep asking him about it. Another insists it’s pure speculation in an era of easy money. An interesting question from an advisor in Fargo, “How will cryptocurrencies affect our economy?” BCA Research thinks over the longer term, blockchain poses a considerable risk to the tech behemoths that dominate today’s U.S. stock market. My studies find Blockchain to be a powerful innovation offering efficient, secure transactions. And though bitcoin may end up being just a digital gold in developed countries, smart contracts—as are currently in operation on the Ethereum blockchain—promise to greatly enhance productivity across many industries. Nearer term, crypto and fixed-income credit could be the next dominoes to fall if 2020’s “growth shock” and 2021’s “inflation shock” is followed by a 2022 “rates shock.” Breadth has wavered and up volumes have lagged amid all-time highs, suggesting a softening in dry powder committing to the market. Rising odds of a technical default in mid-December and worries about renewed Covid restrictions (more below) could make for turbulence over the next few weeks. With producer prices increasing faster than consumer prices, buying stocks of companies with high-end pricing power remain a key theme.
Arguments for why long rates may be capped are many. There’s the “greening” of the global economy, which likely will require further financial repression to help governments afford massive green investments and to make private-sector investment worthwhile. There’s the aging/retirement of baby boomers, declining fertility, the upwardly skewed distribution of wealth and generally slower global growth as the world gets older. Rates are going to move higher with central banks all over starting to pull back. But after four decades of declining rates, what constitutes high today may not be all that high. In 2010, the average mortgage had a yield of 4.6%, versus a current 3.4%. In 1990, the last time year-over-year inflation hit October’s 6.2%, the fed funds target rate was 8%! According to the September dot plot, even the most hawkish voting Fed members vacillated between two and three quarter-point hikes next year off zero-bound. Based on futures, the running inflation rate five years from now isn’t expected to deviate significantly from the Fed’s 2% target. In other words, the market’s not pricing in a persistent rise in inflation, a sign whatever wage-price spiral that’s currently occurring isn’t expected to last. Empirical Research still sees room for a barbell strategy between growth-sensitive value stocks (semiconductor stocks have broken out) and rate-sensitive growth stocks (Big Tech caught a strong bid this week). A policy error that could lead to an eventual “4” handle on the 10-year Treasury and an accompanying repricing of risk assets would change the equation. A worry for another day far away.
The dollar’s breakout to a 16-month high offers an obvious offset for runaway commodity prices and hyperinflation hyperbole and sets up a potential powerful expansion of breadth and a late-year seasonal surge. Santa Claus is coming, after all. The biggest difference between the Great Inflation of the 1970s and today is the dollar is strengthening and productivity growth is rebounding (tech capex plans were near a record high in Evercore ISI’s proprietary semiannual survey of CFOs). In the 1970s, productivity was collapsing, companies were shutting plants and disinvesting, and the dollar was very weak. Today’s technological innovations have never been cheaper, more user friendly or as useful for increasing the efficiency of every business as they are now. U.S. employment plans surged to the highest November reading in the history of the ISI survey as labor availability (more below) remains an acute challenge. Yet negative forward guidance on labor and parts shortages aren’t weighing on earnings expectations. Annual revenue and earnings estimates for 2021-23 are at record highs, with profit margin expectations plateauing at record levels. Jobless claims keep hitting new pandemic lows, jobs are plentiful and consumer wallets are flush. I know the sticker on my Thanksgiving turkey will shock, but I think I see Santa! (Plus, some eggnog in aisle 3.)
- Santa’s been busy October retail sales surprised, rising at their fastest pace since March. Even after excluding autos and accounting for inflation’s effects, the improvement was strong and broad, possibly reflecting an early start to the holiday shopping season amid worries about supply shortages. Bank of America credit and debit card data through mid-November indicate spending is continuing to run at an accelerated pace.
- Supply chains are starting to normalize, truly October industrial production (IP) and factory output jumped, with IP hitting a new pandemic high. Notably, auto and parts production ended two months of declines, spiking 11% month-over-month. Regional manufacturing gauges for New York and Philly strengthened further this month, the Port of Los Angeles reported the number of containers sitting on docks has plunged 30% from late October, container spot rates on the China-West Coast route have fallen a similar amount and Walmart, Target, Lowe’s and Home Depot say they’ve stocked up on inventories.
- The cure for higher prices is higher prices Using 2-year comparisons to temper the wild price swings that accompanied spring 2020’s collapse in demand and the subsequent speedy re-acceleration, core U.S. inflation has stayed within 2.5-3%. In Europe and the U.K., it’s still below 2%. Similarly, the past year’s big jumps in pay came after big cuts the prior year, putting the 2-year wage component of the Employment Cost index at 3.3%, almost a full point below Q3’s 4.2% pace that spooked markets.
- A Dark Winter ahead? Amid spiking Covid cases in Europe, Austria announced a nationwide lockdown for the unvaccinated and Germany wouldn’t rule one out. Deutsche Bank points out that the vaccination rate in Austria (64%) is somewhat lower than in Spain (79%), Italy (74%), France (69%), the U.K. (69%) and Germany (68%) but still higher than the U.S. (58%). As my colleague, R.J. Gallo, said on our just-recorded outlook webcast, “Be careful how much you think you know” about Covid.
- Single-family homebuilding fell ... But has probably bottomed out. November starts disappointed, falling for the third time in four months. But the pace of the decline is starting to level out, while permits have begun to trend up. The fact single-family homebuilder confidence has improved—it rose a third straight month in November to a 7-month high on higher traffic and sales—implies this sector may soon turn positive again.
- Where are the workers? Barclays views a labor-force participation rate that’s hovering 1.7 percentage points below its pre-pandemic level as the “Great Hesitation” rather than the “Great Resignation,’’ and thinks at least half of the decline could reverse by year-end 2022. Its analysis suggests there are 4.4 million “missing workers,” the vast majority of whom are married and live with their spouse, cut across age groups, lack college degrees, and had been employed in high-touch occupations in offices, services and sales.
Watch their wallets, not what they say The wide gap between Conference Board consumer confidence, which is rising again, and Michigan consumer sentiment, which last week plunged to a decade low, can be explained by divergent responses to questions exclusive to each survey. Michigan asks directly about purchasing conditions for durable goods, which are poor due to higher prices and limited supply, while the Conference Board asks directly about labor market conditions, which are very favorable.
Biden has an inflation problem The fate of the nearly $2 trillion “soft” infrastructure bill passed by the House this morning remains in the hands of skeptical Senate moderates who must vote on it and comes at the lowest point for President Biden’s approval rating amid high gas and food prices. A Harvard/Harris poll found 56% of respondents feel the social spending bill will lead to more inflation. New data also shows voters prefer Republicans over Democrats by 23 points in the eight most competitive Senate states.
Biden has an age/health perception problem A new Politico/Morning Consult poll found that only 40% of voters surveyed agreed with the statement that Biden “is in good health” vs. 50% who disagreed—a 10-point gap that represents a massive 29-point shift since October 2020. Independents, by a 23-point margin, don’t agree the president, who turns 79 tomorrow, is mentally fit.