Herding is the strongest trading bias
That’s the title of one my slides in my new Behavioral Finance presentation for corona times. There are two types of herding, people racing to sell and to buy. March featured panic selling. The market’s subsequent melt-up features fear of missing out (FOMO). This week, numerous “bullish” Wall Street strategists and technicians suggested that this rally, which saw the S&P 500 post its strongest 50-day rise ever off the March 23 low, has gotten way ahead of itself. That’s also what clients are telling Strategas Research; 67% believe the next 10% move will be lower. While euphoric stock investors are going “all in,” Wolfe Research notes companies are refinancing and terming out debt (abetted by a Fed that’s squeezing risk aversion out of the market), and insiders are dumping stock. Weak summertime seasonality also looms, while investor sentiment has risen to contrarian negative levels.
Evercore ISI thinks the easy money has been made, with tightening credit spreads and recent value, small-cap and cyclical outperformance suggesting the market is normalizing. It still thinks stocks may tilt higher, but with more volatility and a slower pace of returns. But there’s a lot of money coming in and the potential for a lot more. Jefferies notes last week saw investor capitulation, with flows pouring into all risk assets. There’s a mountain of dry power ($5 trillion in money markets, $2 trillion in private equity $1 trillion in net new corporate cash). This morning’s surprising jobs report (more below) suggests the deep recession may quickly make way for a V-shaped recovery. Fundstrat is watching to see if Covid cases spike in the next few weeks following this past week’s protests and riots across more than 350 cities and towns. It thinks "social-distance victim" groups (theme parks, casinos and airlines, etc.), which soared this week, could act as an early barometer for this V-recovery trade. With the S&P already at new cycle highs, if outbreaks fail to materialize, it puts the next line of resistance at the S&P’s all-time high of 3,393. Surely the herd will take a break sometime in the interim. Empirical Research has been making the case for cyclicals, but says if the recovery doesn’t come as quickly as some think it might, mainstay tech and health-care stocks that have done well and driven the market for much of the pandemic may offer refuge, though it notes their multiples are getting rather high.
Policymakers overseas unleashed stimulus far beyond what markets were expecting, bringing their countries in line with what’s been done so far in the U.S. The European Central Bank almost doubled its bond-buying program to nearly $1.4 trillion, Japan added a second round totaling $1.1 trillion with hints of more to come, and Germany became the first major country on the continent to spur post-pandemic spending through a series of tax breaks and incentives. With President Trump’s polls slipping, expectations had been rising that a fourth round is likely on these shores, perhaps larger than what’s been seen to date. If another package is on the way with the momentum in economic growth turning a corner, stocks are poised to scream higher, Renaissance Macro says. But today’s bombshell jobs report puts hopes for new fiscal stimulus at risk, though the Fed is likely to remain at zero for a very long time. Still, the overseas moves, when combined with dollar weakness (it’s down against other major currencies by almost 7% since late March), oil’s continuing recovery and the VIX’s decline to pre-Covid levels, add to factors propelling the increasingly broad rally. Almost 70% of the S&P traded to a 20-day high on Tuesday, one of the best readings in 50 years, and today’s action appears likely to be even better. A surge in new highs can be climactic in the short term but historically tends to be very bullish longer term, with returns six to 12 months out well above historical averages. Clearly, the herd got this memo.
- Jobs good for earnings and the market This morning’s surprise showed jobs coming back heavily from areas where they were lost the quickest due to social distancing and its reversal. With most representing lower-paying service jobs, this explains why average hourly earnings fell. The report makes consensus earnings estimates more achievable and, Evercore ISI says, put a fair value on the S&P at 3,400-3,750 by 2020.
- This is a consumer-led economy and consumers have cabin fever Proprietary data Jefferies collects from 40 million cellphones across the country shows the median time at home falling 25% to 12 hours per day and the percentage of the population leaving home rising to 65%, vs. 75% normal. Nearly all consumer destinations are seeing noticeably elevated foot traffic, from both workers and their customers, implying a return to more normal conditions.
- Has the economy hit bottom? The ratio of leading to coincident economic indicators is flashing a buy signal for the economy on improving stocks, housing, jobless claims, consumer expectations and money supply data. Ned Davis reports a 100% accuracy with this measure historically.
- Contrarian negative At 53%, bullish investor sentiment in Consensus Inc.’s weekly survey was near levels where Renaissance Macro turns cautious, and this was before this week’s rally.
- Where’s the beef? With plants shut down over Covid concerns, U.S. beef prices have doubled as supplies continue to run short. A fifth of Wendy’s restaurants report being out of beef, and Kroger’s has set “purchase limits” on ground beef and fresh pork.
- Energy stocks were left for dead A "socially distant" American is going to use a lot more gasoline, which is one reason Energy has had a strong run off its March bottom—energy stocks recorded their highest monthly return ever in April. Cornerstone Macro wonders if it’s been too strong. With the sector on the verge of topping its 150-day moving average for the first time this year, it suggests investors may want to take profits. Indeed, numerous Wall Street strategists are terming the cyclical run “just a trade.”
Election watch Social unrest across the U.S. has added to the recession and geopolitical headwinds already facing the Trump administration’s re-election. PredicIt odds of Joe Biden winning the upcoming election has spiked to 54%. A Biden presidency is seen as a move toward higher corporate taxes and lower profitability.
Will people get on planes to visit Sin City? The evidence suggests yes, Yardeni shares. With Las Vegas set to reopen in a socially responsible distancing sort of way, people snapped up 2,000 free one-way tickets there from Derek Stevens, who owns The D Las Vegas and the Golden Gate Casino properties. Increased air travel will go a long way toward buoying the business of airlines, industrial companies such as Boeing and GE, hotels and restaurants. Airline data that Deutsche Bank monitors has shown a broad recovery in demand for air travel since mid-April’s lows.
Grading fiscal policy Data show market concerns over a second wave is falling while individuals’ comfort level with various activities is growing. In an interview with Investment News this week, I and fellow panelists were asked to grade the Fed and the administration. All agreed the Fed did well, but my fellow panelists did not give credit to fiscal responses. I disagreed, noting direct payment programs were the strongest in the U.S. and should help our country come out of the crisis more quickly than most.