After spring's big rally, a possible pause in a still-bullish scenario.
“Yes, we have no new thoughts. And truth be told, the market itself, for the most part, is in a state of equilibrium, with the S&P 500 backing and filling above and below the 3,000 level for weeks and weeks and weeks.” That’s from Cornerstone Macro’s chief technical analyst. But I’ve got thoughts! After the Q1 crash, Q2 rebound and global resurgence in Covid cases, including new peaks in the U.S. on spikes in the Sunbelt, investors are cautious. Even though U.S. equities experienced inflows and money market funds net outflows for the first time in four months in June, the AAII Bull-Bear ratio fell to a historic low. Seasonality tends to be challenging into September and the market’s “V” scenario is fading. Still, short of widespread shutdowns and no more stimulus, it’s hard to get bearish. Secular and 4-year cycle backdrops buttress the case that March set major cycle lows, Fundstrat says. With support at 3,030 on the S&P (its 200-day moving average), pullbacks likely will be shallow. Trading at 3 standard deviations below their mean relative to cyclical growth stocks, cyclical value stocks seem particularly oversold, Ned Davis says. Cyclical sectors consistently have outperformed defensive ones from three months prior to the start of economic expansions to four months after a recovery’s underway—a period we arguably are in now. Technicals are supportive, too, with cyclical stocks near their rising 50-day and/or 200-day moving averages. With huge sums of money on the sidelines, it’s hard to get bearish here.
The “V” everyone is talking about these days isn’t about the shape of the recovery but about the virus. Unlike much of Europe and North Asia, the U.S. never contained it. Protests, a surge in imported cases from Latin America and careless compliance as millennials and Gen Zs flocked to bars and restaurants have the coronavirus spiking in about a third of the country. Texas, Arizona, California and Florida are being hit the hardest, prompting pauses and reversals in some reopenings. This raises the possibility of asymmetric outcomes and favors individual names over index/ETF exposure as the economic fallout is sure to vary among regions and industries. After two months of steady improvement, Jefferies’ real-time activity gauge has stalled, with small business activity, traffic congestion and web traffic on unemployment portals all flat-lining. Regional data is showing particular weakness in virus-hit states, suggesting the Covid resurgence is the primary culprit. Worries in the waning weeks of June appeared to stall the nascent cyclical value rally. Divergent sector exposure between value/risk-on and momentum/risk-off stocks could widen further absent progress on Covid, stimulus and the economy at large. It is difficult to envision GDP reaching its previous new high until 2022 even with a “V,” as almost all the improvements have been off unprecedented lows.
More stimulus is needed. The Fed is all in. But what will Congress and the White House do? Strategas Research believes the market already is pricing in about $300 billion in additional stimulus, on top of previous measures that it believes will offset this year’s $585 billion decline in U.S. compensation (employee and proprietors). The concern is next year. Even with late spring’s gains (more below), the labor market appears years away from getting back to where it was pre-virus. Without some extension in the extra $600 weekly benefit that is set to expire at the end of this month, laid-off Americans would receive an average $380 a week in unemployment compensation, about a third of their pre-virus paycheck. It would help if Americans spent more of their savings. With few places to go, the household savings rate has ballooned to above 20%. A decline to the pre-virus average of around 8% would easily cover next year’s projected shortfall in spendable income. Leuthold Group says this market’s rally off its March lows—the second quarter was the best in more than 20 years—looks very similar to the bull markets of 1982 and 2009. Both followed deep recessions and suffered pauses at this same time in their cycles, before going on to return an average 20% in the subsequent 12 months. Of the past four bull markets after recession, the average return was 14% in the first year and 27% over the first two years. How’s that for a holiday weekend thought!
- More signs the recovery has started June’s jobs report surprised again, with nonfarm payrolls surging 4.8 million and May’s outsized gain revised further up. One caveat is the survey was taken before the Covid spike cut into activity in the month’s final weeks. Also, ISM’s manufacturing gauge unexpectedly moved into expansion territory in June, led by a jump in new orders. Markit’s final read also rose but fell just short of expansion. Ward’s projects Q3 vehicle production will jump by the most in history.
- Housing a reliable positive Pending home sales surged a record 44% from April to May, almost three times the consensus for a 15% gain, recovering the majority of the record loss the prior two months due to Covid lockdowns. Year-over-year prices as measured by Case-Shiller accelerated to 4% in April.
- A “V” in earnings? While the coming second-quarter is going to be ugly, S&P forward earnings—the time-weighted average of the latest weekly consensus estimates for this year and next—rose the past six weeks after falling 21% over the previous 11 consecutive weeks. June saw more raises than cuts to estimates, a level of optimism Bank of America hasn’t seen since 2017’s passage of corporate tax cuts.
- CEOs don’t share consumers’ brighter mood Reflecting a lack of confidence in a second-half recovery, the Business Roundtable’s CEO Economic Outlook Index sank 38.4 points in Q2 to its lowest level in 11 years. Executives said they plan to reduce capital expenditures and hiring, moves that could weigh on the recovery. Most expect business to recover to pre-Covid levels by the end of 2021.
- Tech’s been leading this market, so … While Technology’s recent new highs were the strongest in 17 years, Strategas Research wonders if the sector is due for a comedown. The Tech/S&P 500 ratio is at a historical extreme, a mean-reversion risk, and at almost 30%, its weight in the S&P is at a 20-year high (even without the contributions of Amazon, Google and Facebook, which fall in other sectors). Tech’s weight in the Russell 1000 Growth Index has ballooned to an astonishing 45%.
- This hasn’t been priced in Betting markets keep raising the odds of a Blue Wave in November, an outcome that is certain to result in a broad range of tax increases. Biden is proposing raising the corporate tax rate from 21% to 28%, a minimum alternative tax of 15% and a minimum tax of 21 % on foreign revenue. It’s estimated in total the proposals would lower corporate profits by 15% in 2021.
Gold likes Modern Monetary “Policy” The precious metal made a new cycle high, cracking above $1,800 for the first time since 2011. With negative real rates and Modern Monetary Theory being put into practice, Leuthold sees gold becoming a viable alternative asset that could pay further dividends if the Fed ultimately is able to move inflation off the floor.
The dark side The period of appreciating the wonders of the internet and smartphone is giving way to an era of divisiveness as tech platforms become the black hats, Wolfe Research says. It shares this update to LinkedIn founder Reid Hoffman’s original list of the “7 deadly sins” social networks tap. Envy: Instagram; Sloth: Netflix; Greed: Amazon; Lust: Pornhub; Pride: LinkedIn; Gluttony: Grubhub; Wrath: Twitter.
Wither my canceled cruise with the Mister Consumer interest in cruising is not bouncing back like it is for other travel sectors, a worrying sign for future demand/pricing when the boats can finally sail again.