Double dovish Double dovish\images\insights\article\doves-flying-small.jpg August 28 2020 August 28 2020

Double dovish

Ultra-easy Fed and record stimulus represent a double dose of support for stocks.

Published August 28 2020

A layman might call what the Fed did this week double dovish. Policymakers didn’t just shift to soft/flexible inflation averaging, Evercore ISI says, they also adopted an expansive view of the full employment side of the Fed’s dual mandate. This effectively takes pre-emptive rate hikes off the table whenever unemployment is near or even below conventional estimates of its natural rate, a dramatic break from a framework that’s dominated global monetary policy the past quarter century. It means the Fed’s determined to convince investors it will remain ultra-easy for years, confirming a stance that arguably has been the primary catalyst behind the equity melt-up—not declining Covid death rates or continuing upside economic surprises. More aggressive Fed policy increases the odds of sustainably faster growth and higher inflation—the core rate is rising but it is still well below the Fed’s previously desired 2%, a level that it now indicates can run hotter to make up for this prolonged sub-2% era. The Fed wants to build bubbles and won’t stop until the data significantly disappoints or inflation unexpectedly spikes, Wolfe Research says. By lessening the influence from macro variables and leading to lower correlations, this strong Fed put is supportive of stock-picking strategies. Deeply negative real rates make stocks, homes and other hard assets such as gold particularly attractive.

What Empirical Research calls the “Big Growers,’’ the 75 large-cap stocks with the very-best all-around growth credentials, are trading at 4.25 times the market’s trailing P/E multiple, while their opposite, value stocks, are priced at half the market’s P/E. Given this extreme spread in valuations, it seems prudent to hedge runaway growth leadership with some deeper value bets. Empirical is sticking with a barbell strategy that dips into both, a move Fundstrat also is advising, and is adding daily vaccine sentiment to its dashboard of early indicators of a shift in style bias. Why vaccines? Positive developments on that front tend to be headwinds for big growers, largely because they’ve behaved defensively when the news has been bad and because a vaccine would be positive for economic growth and thus cyclicals. Big Growers have been negatively correlated with news about the election, possibly due to their exposure to potential tax law changes a Biden administration and Democratic-controlled Congress might enact. Whatever the reason, it’s another indicator to watch as the volume of election news is about to go parabolic. As September approaches, Strategas Research sees seasonality as a tactical risk. The month has a deserved reputation for weakness, and equity markets appear vulnerable to a near-term pullback. That said, September’s worst performances have tended to come with the S&P 500 below its 200-day moving average, which clearly is not the case today. This would suggest weakness may be viewed as a buyable opportunity.

Despite the worst quarterly GDP decline in the post-war era, S&P earnings-per-share (EPS) in Q2 suffered only a relatively mild 15% decline from its peak. Leuthold Group believes several primary factors played a role. No. 1, unprecedented response—the combination of monetary growth and fiscal stimulus is a record 47% of GDP at present, 2.2 times the size of the stimulus provided during the 2008 financial crisis, 3.6 times that employed after the 1980-82 double-dip recessions and 7 times greater than in the aftermath of the dot-com collapse! No. 2, these rapid and overwhelming policies buffered company sales trends from the normal fallout associated with impaired consumers and businesses—current S&P sales growth is stronger than it was in the 1990, 2001 and 2007-09 recessions and has been no worse (and mostly better) than the non-recessionary slowdowns experienced in 1997-98 and 2015-16. No. 3, companies cut far more jobs than typically mandated by an EPS decline of 15% and liquidated inventories by a post-war record amount. And No. 4, the U.S. output gap (a measure of the underutilization of the economy’s productive resources) collapsed to an all-time post-war low in Q2, suggesting companies cut all costs—labor, capital and materials—by unprecedented amounts to survive a mandated pandemic recession. As a result, gross profit margins have hardly been impacted. Given all this, it’s not that surprising the Q2 earnings season saw upside surprises by 83% of companies that have reported, with the average beat topping 23 percentage points. Indeed, Fundstrat suggests S&P EPS of $190 next year! Ultra-low rates for longer and record stimulus. Double dovish (is this code for Modern Monetary Theory??).


  • This sure looks like a ‘V’ Led by motor vehicles and parts, durable goods orders shot up again in July and now stand just 6% below their February level, having unwound much of the 32% decline from February to April. Notably, core capital goods measures that exclude volatile defense and aircraft components have rebounded rapidly, with new orders and shipments essentially fully recovered. Elsewhere, the Philly Fed’s state coincident indexes indicate the recession that started in February ended in Q2.
  • So does this Pending home sales—a gauge of future final sales of existing homes—shot up in July at a 15.5% year-over-year (y/y) rate, while July new home sales blew past expectations, jumping nearly 14%. The reports continued the recent string of positive news that has housing on the verge of a possible long up-cycle.
  • What benefits cliff? Four weeks after $600 extra weekly jobless benefits expired, Redbook offline retail sales continue to rise and are now up y/y vs. late July’s 8.7% y/y decline. Weekly chain stores sales also keep improving. Gavekal Research says it seems consumers are starting to spend income they saved from government checks during the lockdown and still have a fair amount in the kitty, as the personal savings rate remained in the 99th percentile in July at 17.8%.


  • This benefits cliff Bank of America says as well as it’s held up, consumer spending is slowing—July’s 1.9% increase was less than a third of June’s bump and a quarter of May’s rise—and may be headed for a rough patch. It notes credit card spending is now declining among those who receive jobless benefits and could worsen if Congress and the White House don’t come up with more relief. It’s estimated the combination of generous unemployment benefits and stimulus payments accounted for 10% of personal consumption in recent months, not including other support such as student loan relief, mortgage forbearance and credit card deferments.
  • Still, nothing is more important than jobs Initial jobless claims remained above 1 million for the 22nd week, 150% above the recession highs in 1980-82 and 2007-09. More than 27 million—20% of the workforce—are still collecting benefits, vs. 1.7 million in late February. A Goldman Sachs analysis suggests almost a quarter of temporary layoffs will become permanent.
  • Hard to feel confident without a job The Conference Board’s survey of consumer confidence fell again in August to a 2-year low, as both present conditions and expectations components declined. It stood nearly 50 points below the year-ago level, the steepest y/y decline since February 2009. Final Michigan sentiment for August improved but remain depressed, with prospects for the year ahead half as favorable as six months ago.

What else

Reconciling stocks and the economy While the “Stocks are not the economy” platitude has long been used to imply the market is divorced from fundamentals or ignoring the economy altogether, Renaissance Macro sees the reality as being more nuanced. The stock market and economy look at different things. Most firms traded in the equity market sell goods to other businesses and households. By contrast, the economy has a lot of activity not captured in the market. A trip to the barber or dry cleaner is not something that registers in equities, but these people-to-people services make up a large chunk of GDP.

There are still plenty of bears Schwab clients are still selling equities to buy bonds, TD Ameritrade’s gauge of investor preferences continues to lag the rebound in equities and ISI’s review of fund flows and hedge funds shows many investors remain underweight stocks.

A car befitting of Shangri-la A few weeks ago, I mentioned we fixed up our backyard space to create our own sort of Shangri-la during this pandemic. Well, on a client call this week, a very friendly Q&A, someone brought up the big rise in Tesla stock and I mentioned that, needing a new car, the Mister picked up a Tesla this week. He asked, “How are you enjoying a car that taxpayers subsidize?” My response: “I’m separating church and state here.”

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Tags Equity . Markets/Economy . Monetary Policy . Fiscal Policy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Correlation expresses the strength of relationship between distribution of returns of one data series and its benchmark. The coefficient correlation is always between +1 (perfect positive correlation) and -1 (perfect negative correlation).

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Growth stocks are typically more volatile than value stocks.

Modern Monetary Theory (MMT): A macroeconomic theory postulating that sovereign currency-issuing governments (such as the U.S.) can finance any budget deficit by simply printing more money. Advocates suggest through higher interest rates and taxes, the government can effectively remove excess liquidity to cool the economy and prevent inflation.

Price-earnings multiples (P/E) reflect the ratio of stock prices to per-share common earnings. The lower the number, the lower the price of stocks relative to earnings.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Conference Board's Consumer Confidence Index measures how optimistic or pessimistic consumers are about the economy.

The Federal Reserve Bank of Philadelphia produces a monthly coincident index that gauges economic activity in all 50 states.

The University of Michigan Consumer Sentiment Index is a measure of consumer confidence based on a monthly telephone survey by the University of Michigan that gathers information on consumer expectations regarding the overall economy.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

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