Capital Wealth Planning: Monday Morning Observations – Markets Stutter
Monday Morning Observations
Fiscal Stimulus Hopes Fading
“What is the secret of success? One word answer: Rational.” -Charlie Munger
Stocks pulled back as stimulus talks failed to produce any meaningful progress. Increasing COVID-19 cases and the election also weighed heavy on Wall Street as all three major indices lost ground.
The Dow Jones Industrial Average lost 0.95% on the week to close at 28,335.57. The S&P 500 finished at 3,465.39, off 0.5%. The NASDAQ posted its first week in five, losing 1.1% to end at 11,548.28.
We’re about a week away from the final bell of the heavy weight fight as we metaphorically refer to the Nov. 3 Presidential election. Politics aside, what is relevant to the markets is the impending surge in new Covid-19 cases and the apparent postponement of a fiscal stimulus package until after the election. Ironically, both sides have laid claim to the intent to enact a larger package than presently contemplated. The fight will probably go the full fifteen rounds. Ironically, the Presidential contest might end decided by a technical knockdown in a decision by the U.S. Supreme Court. For the record, Justice nominee Barrett is scheduled for a Senate vote today.
We must evaluate markets based on what we know, and not on what we may hope for in the political spectrum. The strength of the economic recovery based on September data reaffirms what the Fed has been transmitting since its last meeting in September. The economy has sustained a grinding positive recovery, as best reflected in the strong housing numbers for September. It continues to show the consumer remains cautious but engaged in spending sentiment and consumption appetite.
Last week, Fed Governor Lael Brainard, spoke publicly at the Society of Professional Economists, echoing what Chairman Powell laid out after the October meeting. She said,“The recovery remains highly uncertain and highly uneven — with certain sectors and groups experiencing substantial hardship. These disparities risk holding back the recovery”. What the Fed is clearly saying is that without a fiscal stimulus package, we are going to impair the ability to sustain a “moderate” pace of recovery; and the longer we take to put together a fiscal stimulus bipartisan compromise, the larger the damage to the lagging economic sectors (i.e. small businesses and wage earners) that remain, to date most affected by the pandemic. We have been here-to-now benefitting from the Fed’s monetary initiative, but the Fed alone cannot print money fast enough to restore the worst affected and essential sectors to restore us to a balanced recovery.
Allow me to give you a graphic example of one of the major consequences of how this “uneven-to-date” recovery may impair the pace of recovery. You may not have noticed the steepening of the yield curve.
As usual, a picture says a thousand words:
We have moved the needle from a recent low of 0.63% on September 3 to today’s 0.84% At this moment is not the relative size of the move, but the trend upwards. What does the slope of yield curve have to do with stock markets? That’s a fair question, and we”ll answer by pointing out three relevant assertions:
- Higher risk warrants higher rates
- The 10-Year Treasury is the benchmark of mortgages
- Mortgage rates, and the housing industry, is the “backbone” of our economy.
We are somewhat distant from a critical point of inflection, but let’s keep in mind the Fed is trying to stoke inflation, and should rates rise accordingly, they become a counterforce to economic growth. Why? It affects mostly consumers, especially wage earners that depend on credit cards to maintain present consumption levels.
Let’s be clear, TINA (there is no alternative) is not in danger at the present time and stocks remain attractive on a risk/return basis. What we are saying is that economic growth is best served when all sectors of the economy work together, and presently we see the market reacting to the delay of a fiscal stimulus to complement the Fed’s work to date.
A day’s market, or even our cursory seven-day look-back, does not make a market trend. The ups and downs of this seven day glimpse reflects the uncertainty of the on-off-back on search for bi-partisan compromise on stimulus package, the skepticism of polls ahead of next week’s election (given the 2016 election track record), and most important, the implied volatility which remains in the high 20’s and above comfort range for the average investor. It’s a fair assumption the fiscal stimulus package has low probability of passage before Nov. 3, and high (100%) possibility of not helping the most affected sectors of this economy.
Last, but not least, the pandemic is still in our midst, and surging caseloads once again strain our hospitals and care providers. As care protocols improve, our fatality rate is holding well as a percentage of population, but never stay at an “acceptable” level. A vaccine remains a possibility by year-end, making public distribution a mid-2021 best case projection. The approval of Gilead’s remdesivir is certainly a step in the right direction. Until we get a vaccine, however, this will continue to adversely affect small businesses, and impact the lower rungs of wage earners, who wait on a new stimulus package to regain expired unemployment benefits.
Volatility will remain as markets remain beholden to breaking news.
It all boils down to what Charlie Munger (Warren Buffett’s “wingman”) describes as rationality as to what it takes to be a successful investor. Don’t bet on emotional preferences.
We need to remain focused on fundamentals: strong balance sheets and dividend-payout track records; but, more important, adhere to our process of rationalizing our investment decisions. This disciplined principle of our investment strategy best enables us to smooth out the bumps along the way and safeguard our journey along the path to prosperity. Nothing out there, in our horizon, presumes volatility will soon regain a more favorable degree of lesser uncertainty; but if we subscribe to Mr. Munger’s words of wisdom, and remain rational rather than emotional, we will find success in the gainful fruit of our endeavors.
If you missed my recent appearance on The Anderson File Podcast feel free to listen to the recording below:
- Oil Prices – West Texas Intermediate crude snapped a two-week winning streak and closed at $39.85 per barrel on demand concerns.
- Gold – Gold experienced another slight pullback, slipping to $1,898.40 an ounce.
- U.S. Dollar – U.S. dollar lost a little ground last week.
- U.S. Treasury Rates – The yield on the benchmark 10-year increased to a four-month high of 0.84%.
- Asian shares were mixed in overnight trading.
- European markets are trading mostly lower.
- Domestic markets are indicated to open in the red this morning.
Wall Street will focus its attention squarely on Washington again this week. The negotiations in Congress regarding another aid package and the Supreme Court will continue to dominate the headlines.
The election and stimulus talks won’t be the only talking point as third quarter earnings season rolls on with over 150 companies reporting. Highlights include: Microsoft, Caterpillar, Merck, GE, Amgen, Apple, Amazon, Google, Facebook and Chevron (just to name a few.)
According to Refinitiv, of the 135 S&P 500 companies that have reported, 84% have beat estimates. Of course, the bar may be set even lower than usual. Still, a beat is a beat. (Source: Refinitiv)
In addition to the earnings announcements, the economic calendar will also feature the first look at the third quarter GDP number. After the second quarter’s historic 31.4% decline in the wake of the coronavirus shutdowns, Refinitiv is reporting that economists are expecting a bounce of 32.5% for the third quarter. (Source: Refinitiv)
COVID-19 caseloads continue to increase, it’s more important than ever to wash your hands and do your part to combat the virus.
Stay healthy and be well!