Top Weekly Themes
- Manufacturing Moves into Expansion. The ISM Manufacturing PMI returned to expansion territory in the U.S., increasing to 52.6 in June (May reading was 43.1; readings above 50 indicate expansion) with a large increase in the month-over-month new orders component. This is important because PMI readings provide key business-cycle insight and the new orders component tends to be a reliable leading indicator. Although this does not mean that economic activity has suddenly reverted back to pre-virus levels, it is additional evidence that data is likely to get incrementally better from here…the worst is over. The critical factor going forward, which we believe will ultimately be the governor on the speed of the recovery, is the labor market. The reduction in initial claims for unemployment has slowed some, and data series like total non-farm payrolls remain depressed. Encouragingly, the June jobs report showed the U.S. economy added back 4.8 million jobs. Our fear, however, is that high unemployment may linger, making the plateau of the recent recovery meaningfully below pre-virus levels. As such, more stimulus is likely needed.
- More Fiscal Stimulus is Likely Needed. In our view, the stock market will be disappointed if we do not see another fiscal stimulus bill passed by July 31. We think current prices reflect a quick economic recovery, and part of that calculus likely includes additional fiscal stimulus. Although we believe the base case should be that a deal is reached by month-end, there are risks. As reported by Strategas Research Partners, “First, police reform legislation has delayed some discussions on stimulus. Second, Republicans continue to push for more time to see the economic effects of the previous stimulus rounds. Some Republicans probably would not mind a September package. Third, a virtual Congress has been less efficient than initially thought and the lack of in-room discussions has made collaboration nearly impossible among members.”[1]
- Time for a Tech Pause? The Technology sector continues to be a standout performer. Year-to-date, the sector is up a staggering 14.4% versus the S&P 500 which is down 3.5%. We have documented how expensive the sector has become versus other areas of the market, but its strength is undeniable. Although we are not convinced that Tech’s best days are behind it, there are certain data points that give us pause…especially when thinking about near-term performance. From a technical perspective, the sector seems stretched. The Tech sector is 17% above its 200-day moving price average, which is in the 95th percentile of all observations. Other extremes include the fact that Tech now accounts for 30% of the S&P 500 – the highest percentage in 20 years. The fact that Amazon, Google, and Facebook are NOT included in that calculation (they reside in Consumer Discretionary and Communication Services) makes that statistic even more remarkable. Microsoft and Apple alone are each about 6% of the S&P 500. Flows into Tech have also been aggressive recently, so a near-term pause (at least) might be warranted.
[1] Clifton, Dan. Strategas Research Partners.
Returns Table
| Equities | Week (%) | YTD (%) | 1-Year (%) | 3-Year (%) | 5-Year (%) | Div Yield (%) |
|---|---|---|---|---|---|---|
| S&P 500 | 1.5 | (2.1) | 7.4 | 37.1 | 66.9 | 1.86 |
| Russell 1000 Value | 1.0 | (16.0) | (9.2) | 5.8 | 25.1 | 2.76 |
| Russell 1000 Growth | 2.3 | 11.8 | 23.8 | 71.5 | 111.2 | 0.87 |
| Russell 2000 | 1.4 | (13.5) | (6.9) | 5.5 | 23.1 | 1.80 |
| MSCI EAFE | 1.6 | (9.7) | (4.0) | 5.5 | 14.3 | 2.85* |
| MSCI EM (Emerging Markets) | 2.2 | (6.9) | (1.1) | 10.2 | 20.8 | 2.84* |
| Fixed Income | Week | YTD | 1-Year | 3-Year | 5-Year | Yield |
| Bloomberg Barclays US Aggregate | 0.3 | 6.3 | 8.7 | 17.0 | 23.9 | 1.25 |
| Bloomberg Barclays US High Yield – Corporate | 0.0 | (3.1) | 0.6 | 11.1 | 27.0 | 6.62 |
| Bloomberg Barclays Municipal Bond | 0.1 | 2.1 | 4.4 | 13.2 | 21.4 | 1.52 |
| Bloomberg Barclays Global Aggregate x US (Country) | (0.0) | 1.1 | 1.9 | 8.9 | 17.5 | 0.79 |
| Commodities | Week | YTD | 1-Year | 3-Year | 5-Year | Current Level |
| Crude Oil WTI (NYM $/bbl) Continuous | 5.0 | (33.4) | (27.7) | (11.7) | (28.6) | 40.7 |
| Natural Gas (NYM $/mmbtu) Continuous | 12.2 | (20.8) | (22.6) | (42.9) | (38.6) | 1.7 |
| Gold NYMEX Near Term ($/ozt) | 1.2 | 17.4 | 27.0 | 43.8 | 53.4 | 1,784.0 |
| Copper Cash Official LME ($/mt) | 3.4 | (1.2) | 2.9 | 2.9 | 5.5 | 6,080.0 |
| Currencies | 1 Week Ago | YTD | 1-Year Ago | 3-Years Ago | 5-Years Ago | Current Level |
| U.S. Dollar per Euro | 1.12 | 1.12 | 1.13 | 1.14 | 1.11 | 1.12 |
| Japanese Yen per U.S. Dollar | 107.19 | 108.68 | 108.12 | 112.36 | 123.07 | 107.63 |
| U.S. Dollar per British Pounds | 1.24 | 1.32 | 1.26 | 1.30 | 1.56 | 1.25 |
As of July 2, 2020 (close) *Dividend Yield For MSCI EAFE and MSCI EM are from 5/29/2020.
Chart of the Week
Key Takeaways
- Political affiliations aside, the outcome of the upcoming presidential election is going to have major consequences when it comes to many things investors care about.
- Perhaps most critical will be the prevailing tax backdrop post-election. Former Vice President Biden has made it very clear that, if elected, he will likely propose a rollback of President Trump’s corporate tax cuts.
- Simple math indicates this would likely create an estimated 7% reduction in corporate earnings, all else equal. In an environment in which corporate earnings have a long way to recovery to reach pre-virus levels, this is something investors will be watching very closely.
- We don’t want to be in the business of qualitatively forecasting election outcomes, so we will take a “just the facts approach”.
- Since 1928, the S&P 500 has predicted 87 percent of the US presidential election winners and every presidential winner since 1984 using a simple formula. If the S&P 500 is positive in the three months ahead of the election, the incumbent party has won, and if stocks are lower, the opposition party has won.[2]
- Only one president in history has been reelected when experiencing a recession in the 2 years leading up to his reelection bid – Calvin Coolidge in the mid 1920’s.
- History is simply a guide, and rules are made to be broken, but these are two track records worth acknowledging heading into November.
[2] Strategas Research Partners.
Commentary
The Same, But Different
In many ways the market is starting to feel like it did in February. A general sense of calm has befallen, and stock prices seem intent on rising in the face of an ever-growing wall of worry. As was the case earlier this year, stocks continue to advance as it is again becoming apparent that the coronavirus is unlikely a fleeting risk. We will not attempt to forecast the extent to which the virus resurgence is likely to impact the economic outlook in these pages, but we believe it is hard to argue that the market is pricing in very little risk of a slower than anticipated “re-opening”. To be sure, we are seeing encouraging data points as we inflect off a very painful bottom. For example, TSA traveler checkpoint data indicates an increase of about 500% in daily travelers. However, we believe one must keep the proper perspective. This recovery still leaves us about 75% below the daily travel activity seen this time last year. Markets are forward looking, and they currently believe we will see an uninterrupted improvement across the economy.
We also notice some other, under the surface, similarities to early 2020. In hindsight, we were given a few warnings signs in February that may have been indicating a worsening situation. For example, interest rates began to fall – usually a sign that there are concerns about growth, inflation expectations are falling, or investors are beginning to shift into the safety of bonds…often it is some combination of all these things. From the beginning of the year to the all-time high in the S&P 500 in February, the 10-year U.S. treasury yield fell from 1.92% to 1.57%. Gold also was perhaps signaling risk on the horizon, as it rallied 7% over that same time period. Again, we are now seeing falling yields (10-year yield from 0.90% to 0.68%) and rising gold prices (rallying 5% over the past few weeks). Finally, more cyclical areas of the market started to weakness before the broad market just prior to its peak in February. A similar pattern is emerging today.
Perhaps these asset price moves are simply coincidental, but we feel they are at least worth acknowledging. The key difference, however, is the massive stimulus that has been unleased via both monetary and fiscal policy makers. Whether they should be doing what they are doing is an entirely different discussion, but we believe the Federal Reserve has made it very clear that they intend on using every tool they have should they deem it necessary. And although Congress has yet to formally pass any additional stimulus, our sense is they likely will. This is a clear distinction between the backdrop pre and post COVID-19.
We therefore are left with an epic tug-of-war…really unlike anything we have ever seen. Budding signs of incremental economic improvement bolstered by massive stimulus versus a stock market that has clearly disconnected from fundamental reality as we head into a particularly consequential presidential election. Our sense is that a market stalemate will be the result as we move into the fall, as additional stimulus is contemplated, and as election outcomes are handicapped. Volatility is likely the order of the day.
