Stocks, for now, are looking past unknowns and seasonality.
It’s everywhere, even in Wuhan where the virus originated. Its 12 million residents are under orders to be tested after an eruption of cases. In the central tourist city of Zhangjiajie, all residents were told not to leave. Macau is shutting entertainment venues after four Covid cases, and China is imposing other restrictions as the delta variant reaches half the country. Remember how draconian China was last spring with lockdowns? Will it do the same now and slow global growth? We’ve got to wait to find out. In Japan, Tokyo hit a record of over 5K cases as the Olympics were set to close. Back in the U.S., Amazon is delaying its return-to-office plan until January. Major companies from Blue Cross giant Anthem to Walmart and United are requiring workers to be vaccinated. CNN just fired three workers who lied about their vaccine status. And starting in a week, New York City says customers must show proof of vaccination for indoor dining, gyms and venues. The Biden administration held to its ban on European travelers, forgoing reciprocity with the EU, and renewed an eviction moratorium in areas where cases are rising. (That’s most of the country. Wither the landlords??) In 27 mainly southern and western states where inoculations have lagged substantially, vaccination rates have jumped 30% or more the past two weeks, aided by pleas from reformed vax skeptics such as Nashville talk radio host Phil Valentine. He mocked the vaccine in “Vaxman,” a parody of the Beatles’ “Taxman’’ that he wrote and sang, then contracted the virus in July. He’s now fighting for his life, in “critical but stable” condition and on supplemental oxygen. The incidence of infection among the fully vaccinated remains very low—“well below 1%,” the Kaiser Family Foundation estimates. Maybe this means the resurgence in vaccinations and some level of immunity from prior infection could see delta variant cases soon peak, much as they did in the U.K. and India. Got to wait to find out.
We don’t have to wait for earnings. Of the more than 81% of the S&P 500 market cap that has reported, 86% of companies have topped projections. Even as they keep raising forecasts, analysts have been coming in low the past four quarters, struggling with an environment of unprecedented stimulus, QE-inhibited yields, supplies that can’t keep up with demand and negative year-over-year comps. Revenue and earnings-per-share growth are on track to rise a respective 23.5% and 86% once the Q2 reporting season ends, and upward earnings revisions as a percentage of total revisions are a record 73%! Yardeni sees earnings expanding 47% for the full year before moderating to 5% growth in 2022, with valuations pulling back a little but remaining elevated on a Fed that continues to provide ample liquidity even as it moves toward taper. Vice Chair Clarida was the latest Fed official to see rate hikes as likely in 2023, but futures are pricing in a mild cycle, with the Fed stopping at an historically low 1.75%, 75 basis points below its 2.5% long-run dot plot. A tech-led revolution in the way we work and live—one that the pandemic accelerated—could foster a prolonged period of productivity growth. That would be supportive of higher margins and real wages even if inflation persists. Valuations are about three things: earnings (the outlook is great), P/Es (they love low interest rates) and sentiment (flows into equities are only 18% of flows into money markets and bond funds). Plus, a vaccine panic. Plus, three Wall Street firms are calling for a 10% correction. Sounds good. But wait!
Seasonality tends to be tough from here through October. Of course, everybody who cares knows this. Indeed, cyclical sector ETFs in July posted their largest combined outflow since January 2019—a much-needed reset following a near $80 billion surge. Meanwhile, flows into the tech-heavy Nasdaq 100 have surged into aggressive territory (along with the long bond ETF, incidentally), suggesting to Fundstrat that the peak growth story is over-owned. And, while small caps have trailed large caps by 15% since mid-March, Jefferies says most of its indicators point to a bullish tone and better earnings growth for small going forward. Which is the correct move? Got to wait. Is the delta variant nearing a peak? The runup in inflation temporary? Peak earnings in the past? Got to wait. Every night at 6, my Maltese and BFF, waltzes into the kitchen and commences barking. “Where’s my dinner.” “Bad dog!” barks the chef right back. I pick Anthony up to see the Mister in action. “We’re all hungry, Anthony. You have to wait.” Now, the Maltese is not billed as the smartest dog in the pound. But these words he understands. For investors, this translates to a fully invested neutral position, commensurate with a mid-cycle economy and the above-mentioned unknowns. Got to wait!
- Is this as good as it gets with jobs? Nonfarm payrolls surprised, jumping 943K in July, the biggest gain in nearly a year, and the prior two months were revised up, too. Leisure & hospitality, local government education and professional & business services chalked up big gains as more of the economy reopened. Also, the jobless rate plunged to a pandemic low 5.4% and the participation rate inched up. One potential offset: the monthly survey took place before the delta variant spike in cases.
- Should we worry about “peak growth”? The ISM services gauge soared in July at its steepest pace since 1997 on surges in business activity and new orders. Markit’s separate measure also rose more than expected and above its initial take on the month, though July was still its softest reading since February.
- Europe is in a fine place Its vaccination rates have surged past those in the U.S., and its economies are rapidly reopening, too. German manufacturing orders surged to a new high in July and economic sentiment indicators for the broader eurozone reached new record highs, with the biggest gains coming from France, Italy, Spain and Germany.
- The consumer is moderating Partially driven by spiking delta variant cases, retail/recreation visits are down nearly 4% from pre-Covid levels, air passenger traffic has flattened (stuck around 79% vs. 2019), OpenTable reservations have plateaued and the Chicago Fed’s weekly measure of retail trade fell a third straight week. Bank of America’s tracking of credit card spending has decelerated meaningfully, while in Florida, which accounts for 1 in 5 new Covid cases, surveys show more residents are staying home. Its governor says he’s holding tight and expects numbers to improve in coming weeks. Got to wait.
- Should we worry about “peak growth”? July’s manufacturing ISM posted its weakest growth in six months on a second straight month of slowing factory activity as new orders and production softened. But the headline reading remained historically elevated, with the softness largely reflecting supply-chain issues, and Markit’s separate gauge rose to a new high on the month.
- China is the second-largest economy in the world, after all Between the accelerating delta outbreak, a marked slowdown in activity (China’s PMIs continue to be the weakest in the world) and Beijing’s regulatory shock, the global reflation trade could be dealt a blow. This would be a problem for all EM countries, supply-chain nations and China’s big tech names.
More building blocks for the Wall of Worry Credit Suisse notes that credit, which tends to lead equity at major turning points, has started to see spreads widen even as the S&P continues to make new highs. AAII’s survey shows equity allocations at their highest since December 2017. Corporate net buying has slowed. And rally volume has been light.
“Would you like some pepper on your 2-by-4?” Back in May, one internet meme suggested that if you wanted to impress your date by taking them somewhere really expensive, you should go to a lumber yard. No longer. Having rocketed more than 600% between early April and late May, the price for a 2-by-4 has cratered by two-thirds.
What the Olympics taught us about productivity Advances in tennis, swimming and the high jump came from challenging the “best practices” and finding better ways of doing these things. Likewise, BCA Research says the pandemic challenged the best practices on how we should work, do business and shop, catalyzing a productivity boom that it thinks could be a super-boom because the current disruption is not in just one sector but across the entire economy.