– By Fred Dunlap –
Stocks are burping a bit this morning, stuck in the same trading range since the breathtaking advances made in early November.
We talked last time about the market’s need to digest its “food” and that a brief period of consolidation might ensue, something we have been witnessing since my last missive.
Hesitation seems to be abounding in this Holiday Season. Covered calls are popular for the pessimists out there and cash holdings remain at a stunning $4.5 trillion.
Yet the gas pedal seems to be the only device for the idiots who are gobbling up the Door Dash shares. And what about SPAC-mania? Yep, SPACs seem to be stylish picks for the perma-bulls out there. Memories are short, for that (SPAC) avenue to a public currency used to be a last resort, reserved for struggling companies with an infection or a limp.
Not today, however. SPACs are sexy. And alluring. But amid the lovefest, it begs the question: how long will “today” last?
Such is the climate we are in at this moment…when capital is cheap and there’s a Freshman Class of investors coming into the market by way of Robin Hood. Tens of thousands of accounts are now open, filled with Covid Relief dollars, among other sources. Draft Kings isn’t happy about this development–for it’s crowding their space. They were supposed to be the preeminent online gambling destination. But gamblers are alive and well in Robin Hood too.
“Take from the rich and give to the poor.” That’s the Robin Hood fable I know. But a toppy market, due for a pullback, might just provide the opposite story. And if so, for this Freshman Class, what an expensive education that might be…
The Coronavirus hasn’t been reading newspapers or watching the news. It hasn’t heard that there are two vaccine discoveries, with more on the way.
Instead it is doing its thing–infecting as many people as it can. And case counts are going higher.
Earlier this week, it was reported that new COVID cases in the US have averaged 247,000/day over the last week. Statistics like these are driving political leaders to consider or make hard decisions about lockdowns, curfews and imposing rules about mandatory testing.
Public rancor is growing. Small businesses (and their employees) are resistant to these limitations. Personal freedom advocates are angry too. Rebellions (one by one) are emerging, opposed to the thought of another stay-at-home Holiday. Another celebration without family and friends.
And yet large tractor-trailer trucks are screaming down the highways, filled with vaccines, heading to a prioritized group of would-be recipients. The government predicts that 20 million vaccines will be administered by the end of December. And another 100 million by the end of March.
Is the deployment elegant and smooth? It ain’t perfect. But it’s getting better each day.
So what do we make of two accelerating forces: one being new COVID cases and another intended to kill it?
Coping with Uncertainty – the US Economy
As details of the growing spread of COVID have been shared by the media, US citizens have grown more cautious. As I said in To Contest or Not To Contest, there is at least anecdotal evidence that people are hunkering down, making their purchases online, avoiding public places, with the rationale that ‘I have made it this far without getting COVID–I’m not going to risk getting it in the final weeks/months before I get the vaccine.’
Recent Retail Sales would corroborate this hypothesis–we got a weak report this week.
Housing starts are still strong, fueled by the easy access to low interest rate mortgages. But housing prices are soaring too, bringing hesitation to would-be buyers, who question whether the high prices will hold. Existing home sales have fallen somewhat as a result.
Economic wariness hasn’t been restricted to consumers. Corporations have also become cautious. Recent PMI reports are softer than expected. New Job creation has fallen. And initial unemployment claims have spiked. Just this week, there were 885,000 new unemployment claims–the highest weekly report since September 5th.
So at a marginal level, everybody appears to be hunkering down. Consumers and employers. Yet a vaccine is being deployed…full throttle.
Are we facing a second recession? Or is this just a frustrating period of uncertainty before the clarity emerges of the continuation of this new economic cycle?
Help for the Children
Who are the Children? They are: the free market capitalistic system. Full of corporations, workers and consumers, each of which falls under the definition of a human being, filled with emotion, hope or lack of hope. Each contributing to confidence or a lack of it. Each then being HUGELY instrumental to the direction of our economy.
My reference (children) isn’t derogatory and isn’t intended to be demeaning–it’s descriptive.
To stabilize our economy (filled with humans), we have needed the support from Congress and the Fed to manage the confidence level during uncertain times. Both have done so this year. But at this juncture, it appears more might be needed.
Far Fetched…and Perfectly Logical
On this day in 2019, it would have been far fetched to think that a pandemic was coming.
With the S&P 500 cruising along in February 2020 at 3400, it would have been far fetched to think that in just three short weeks, the index would plummet 36% to 2192.
It would have been far fetched to think that the world’s leading country would decide to shut down completely for two weeks. It would have been even more far fetched to think that the shutdown would be extended to nearly ten weeks.
Amid such a sudden crisis, it was perfectly logical that the Federal Reserve would immediately cut the Fed Funds Rate to near zero. And it was perfectly logical that Congress would usher forward a stimulus bill to assuage what were thought to be short term financial hardships on businesses and their workers.
The ferocity of the crisis required three additional stimulus programs, and given the tumult, that was logical too.
It would have been far fetched to think that the Fed would suddenly (in early April) announce that it would be a buyer of last resort for bonds of all kinds (including corporates). It was an unprecedented step. But given the stress that the shutdown was creating, the credit markets had virtually shut down, even for Treasuries. And to free up capital to ailing corporations, though shocking, it was perfectly logical that the Fed did that.
A year ago today, it would have been far fetched to think that businesses would need to reinvent themselves, reconfigure their stores, renovate their air filtration systems, and even move their commerce out onto the sidewalk. But given the innovation and ardor inherent in Americans, it was perfectly logical that they would jump to it to make these modifications.
Back in March, we didn’t know what we didn’t know. Our way of life was abruptly taken from us. Infringed upon. And though the hassle was significant, it paled in comparison to the worries we were left with. Yes, financial markets were reeling. That wasn’t good. But more precarious than that, we were straddled with an invisible foe–making it harder to know if we should relax or be afraid. Uncertainties were many: how contagious is it? How do we catch it? Or pass it on? And above all, amid this mandated time out, how long will this last and how will our lives change going forward?
Rumors and conjecture were coming rapid fire. “Don’t touch the Amazon boxes! Don’t touch the doorknobs or the elevator buttons! Don’t go outside without a mask, even if you are alone!” Lots of confusion and mis-information. Lots of speculation. All of it well-intended.
But now we are a year older. Happy Birthday to each of you!
And we know a lot more.
What was speculated to be a 4-5 year wait for a vaccine was shortened to nine months. Expecting it quicker than 4+ years would have been far fetched back in March, but knowing the spirit of Americans, it’s perfectly logical that it came in less than a year.
The Fed…Ahead!
Despite American innovation, the 2020 crisis required additional help, coming in the form of monetary policy support and fiscal stimulus.
On Wednesday afternoon, Fed Chair Jerome Powell reconfirmed his intention to keep the Fed Funds Rate near zero through the end of 2023. He also confirmed that the Fed stands ready to assist in other ways if circumstances warrant it.
Fiscal Stimulus – Congressional Acrimony
Fed Chair Powell also stated that the current economy is vulnerable (given the soft economic readings recently) and that more fiscal stimulus is needed.
The Senate and the House have been jousting since my last Newsletter. If you recall, in To Contest or Not To Contest, I was highly skeptical that a fifth stimulus deal could be reached.
It wasn’t that a stimulus package wasn’t needed. I have been clear that there is a subsegment of the economy that has been unduly hurt by the pandemic–those being businesses that rely on crowds/people gathering. Surely, those industries have needed additional support back as early as August.
But given the partisan rancor, I thought it was far fetched that Dems and Repubs could set aside their differences and find a way to help those in need.
The key points of difference since August have been Pelosi’s desire to enlarge the package to: 1. replenish/fix the loss of the SALT tax deduction, and 2. to allow people to sue businesses if they could prove that they caught COVID while they were at the business. McConnell was unyielding on #1 and wanted legal protection for businesses on #2 against frivolous lawsuits.
Months were lost (inexplicably) when a smaller (but helpful) package could have been agreed upon. A smaller package was offered repeatedly by McConnell, but ignored by Pelosi.
It was far fetched that Congress could leave this subsegment of America reeling. But it was all perfectly logical when Speaker Pelosi recently acknowledged that they/she didn’t want to agree to any stimulus package until after the election was over. Politics. Perversely logical…
Which is why I was so skeptical about passing stimulus.
So we head toward a budget deadline tonight. Yes, the government will shut down at midnight if a spending bill isn’t passed. Adding to the funding drama, members of the House and Senate have vowed publicly that they ‘won’t go home for Christmas until a stimulus bill is finalized.’ So they are committing to a two-fer. Funding the budget AND finalizing a stimulus package.
Well, Nancy should be cool with that, now that the election is over. But what about those gnarly two philosophical points of difference? We will have to wait to see if some bastardized, watered-down hybrid package comes forward.
My guess (now) is yes. Because the “stay through Christmas” pledge was just for the cameras. Are you kidding me? What they really think: “We aren’t going to impact our Christmas experience..” “Lots of parties and group gatherings to go to!” “What social distancing rules?”
On the Way Out…
The next few months look tenuous. For our society and for our economy.
Runoff elections and even election disputes continue on. And there’s at least a subsegment of our economy and society which is hurting badly right now. They must be helped, and Congress needs to get off their ass and get it done. And yes, they can then go home for the Holidays and break all of their rules on social distancing…
In March, when the S&P 500 had fallen to 2192, it would have been far fetched to think that (as of last night) the index would have recovered 70% to 3720.
But the stock market is forward-looking, taking into account current issues, yet extrapolating those issues/events into what the financial picture will look like 7-10 months ahead.
The Fed has infused massive liquidity into this economy. And they have given us a playbook on the future–a ZERO interest rate through 2023.
And in spite of their parochial behavior, Congress has already infused four fiscal packages and will most likely infuse another program in the next few days. God willing…
The combination of that financial backing, along with the emerging support of vaccines, bodes well for the strength of the US economy in the next 18-24 months. And hopefully, a return to what we each might define as NORMAL.
Yet on this day, 12/18, market prices remain rich. And elections remain unsettled. Election “disturbances” aside, the stock market is ripe for a short-term pullback. Perhaps 7-10%.
Is that far fetched? No, it’s perfectly logical.
Happy Holidays to you all, and
Stay thirsty my friends.
Freddie Deeeeeeeeeee