When it comes to the equity market, there remains a strong contingent of investors who are in complete denial.
Avoid getting swept up in the Coronavirus "fear" rhetoric. The stock market has voted and agrees with my assessment of the situation.
We have seen this playbook before. Aided by worries out of China, the Bears had an opportunity to take control of the market. Instead, investors witnessed stocks surging to a series of 12 new closing highs posted by the S&P in the first 32 trading days of 2020. Not many saw this coming, and they remain in denial of what is occurring in the equity market.
For quite a while now, there has been a contingent pushing an agenda that the U.S. economy is tripping up and will soon enter a recession. Enter Coronavirus and the stage sure seemed set for that to once again become fact. Investors heard the same rhetoric when it came to tariffs during 2019. It never materialized the way the skeptics envisioned.
Recent data have shown that the economy is already responding to the reduction of pressure from the trade war. The ISM January report on manufacturing is one example of that, as it was the first time the index has been in growth mode (above 50) since July. There was also a string of bullish data on the economy, along with corporate earnings that were not as bad as some analysts predicted. Instead of severe corrections and declines, savvy investors stayed with equity positioning in 2019 and that mindset has carried over to the first part of 2020.
We are constantly reminded that there are still a lot of "issues" all around us. Including of course what happens with the coronavirus during the days/weeks ahead, as well as the ongoing tensions between America and Iran, and you might as well acknowledge North Korea that could make news without warning. Those types of black swan events can be quite disruptive, but they are hard to predict in terms of their timing and ultimate power to impact the economy and markets. People keep highlighting and betting on the end of the world and so far they have lost.
Many investors are still perplexed and are having a hard time understanding how the market can remain so resilient. For that answer, I have to once again go back to the breakout in the S&P back in October 2019. New highs weren't celebrated, they were questioned. It was obvious many didn't view this as anything special. I can assure you the underlying strength that accompanied that move in the market WAS VERY special.
A global stock market rally ensued based on a change that was taking place. A bottoming in the manufacturing recession and a change to a more positive outlook. In part due to a mindset that now could see some relief in the U.S./China tariff tensions. The apocalyptic tariff war was not going to occur. In my view, it never was going to be an issue, and that is why there was no reason to abandon stocks in favor of an overweight position in safety.
The past two weeks it was more of the same, new highs weren't celebrated; they were swept under the rug by pundits that simply can't see the forest for the trees or one virus from another. There are many positives around, and the stock market agrees with that notion.
Given that backdrop, I revisit my theory on the economy that goes against the mainstream consensus view.
I like to take a contrarian approach and I am thrilled that so many continue to rebuild a wall of worry that bullish investors keep dismantling brick by brick. The stock market sees it the same way. Every week I hear from another pundit who wants to argue with the stock market, always proclaiming their view is better, and they assemble a novel to remind investors of that.
The market has rewarded the Bulls and now with the S&P hitting 3,370+, pullbacks can be part of the investment scene. Investors can now decide whether the "Coronavirus" or any other issue that may arise will put an end to the positive backdrop that few decide to mention. A backdrop that helped push the market to current levels. It has been 413 days since the last 10%+ correction. That tends to bring out the crowd that likes to tell us "the stock market is due for a full-fledged correction".
I agree, 413 days is a long time and I'm sure someone said that back in 1991 as well. The index went from October 1990 to October 1997 or 2,553 days without a 10+% correction. So if one wants to start making bets that we are due, it may be time to remember the famous Clint Eastwood moment:
The S&P closed out the week of February 7th on a negative note and part of that was likely related to concerns over what could potentially be some bad news related to the coronavirus. While there wasn't any concrete positive news over last weekend, there wasn't much in the way to suggest the outbreak is getting any worse either, and that in itself was good news. Given a neutral backdrop, buyers stepped in on Monday and sent the S&P to its ninth new high for the year. Strength in the Nasdaq continued as well as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT) and other large-cap technology names led the way to a record high for that index as well.
Turnaround Tuesday didn't make an appearance this week as momentum continued and equities moved higher. There was a fair amount of optimism across financial markets sending the S&P to a new high number ten. Investors took note of the lack of any major negative news regarding the Coronavirus and figured perhaps the worst is behind us on that front.
Wednesday was more of the same as the pain trade continued to be higher. This time the Dow 30 joined the Nasdaq Composite and the S&P making new highs. A change to a negative tone in global equity markets caused by, you guessed it, Coronavirus news, kicked off a much-needed pause.
A surge in the reported cases of the virus after the Chinese government instituted new reporting guidelines caught investors by surprise on Thursday. The jump in cases came a day after Chinese authorities reported the lowest number of new cases in two weeks. As we have witnessed lately the selling couldn't gain any traction.
The streak of three "down" Fridays for the S&P was broken, and the S&P closed at its 12th record high this year. So much for traders not wanting to hold positions going into the upcoming three-day weekend.
All of the major indices closed the week with gains, sending another gentle reminder this is a Secular Bull market that was born and first discussed here in 2013.
Given the price action around the globe, it should now be fairly obvious to investors what is important to equity investors in different parts of the world. China and Asian markets that are in the crosshairs of the virus remain cautious. While the U.S. and the Eurozone are reacting to the improved global picture now being presented by recent global PMI data.
Rising global sentiment and improved sentiment towards the virus outbreak in China helped move global stock markets out of "oversold" territory. The CSI 300 large-cap index (ASHR) has reclaimed its 200-day moving average and looks set on a move back above its 50-day moving average as well.
After hitting 52-week lows in the wake of the Lunar New Year, the index has bounced back thanks to hopes for stimulus intended to offset the virus fueled economic weakness. While re-started output may only come back slowly, it appears that several businesses are starting to move in that direction given the slowing growth rate of confirmed cases.
Around the world, only a few indices are off recent highs: Chinese stocks are over 9% from 52-week highs and Singapore 6.8% off trailing year highs are the only global indexes more than 5% from its highs. As far as valuation goes, all of the Chinese markets along with Singapore sell at inexpensive valuations.
In contrast, the Eurozone has fared much better. It is acting similar to how the U.S. market has performed since coronavirus made the news. The broad index trades at a record level as shown in the chart below.
Other global markets have made their way back to a "slight" overbought status with Italy and Switzerland closing in on an extreme overbought territory. Canada, Spain, and Sweden are close as well.
We are hearing all sorts of estimates now on how much the Chinese virus will impact GDP here in the U.S. At the moment the equity market is not overly concerned given the dire impact that some are touting.
The tariff situation in 2018/2019 started a trend for many U.S. corporations to lessen their dependence on China by moving some operations to other countries. How ironic will it be if those that reduced their exposure to China weather the storm much better than analysts expect?
Industrial production fell 0.3% in January, with capacity utilization slipping to 76.8%. Production dropped -0.4% in December and posted declines in 7 of the 12 months of 2019. Capacity was at 77.1% in December and was at 79.0% last January.
NFIB Small Business report started the New Year in the top 10% of all readings in the 46-year history of the survey, rising 1.6 points to 104.3 in January. Six of the 10 Index components improved, two declined, and two were unchanged.
"2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees. Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses."
The BLS updated its tracking of US inflation via CPI indices and the results were much stronger than expected. Core CPI rose 2.9% annualized in January, a big bounce-back from the 1.5% in December, while median CPI rose 3.7% annualized, its best month since January of 2018. That strength comes despite still weak core goods prices and unimpressive services inflation.
While January saw a big beat, the outlook for inflation remains unimpressive based on leading indicators. Neither GDP growth nor N.Y. Fed's Underlying Inflation Gauge is indicative of a dramatically disinflationary environment or some sort of deflation emergency, but they have both weakened of late.
U.S. January retail sales increased by 0.3% for both the headline and ex-autos. December's 0.3% headline gain was revised down to 0.2%, while the 0.7% ex-auto gain was bumped to 0.6%. The headline and core sales are 4.6% higher year over year.
Preliminary February consumer sentiment rose 1.1 ticks to 100.9 in the University of Michigan Survey, better than expected, after edging up 0.5 points in January. The index has bounced back to its best reading since March 2018 (101.4) as consumers show resilience to the spread of the Covid-19 virus after weathering various headwinds over the past year. There was some negative impact seen in the current conditions index, which dipped to 113.8 from January's 114.4. But the 2.1 point rise in the expectations component to 92.6 from 90.5 suggests the impact from the virus will be transitory.
U.S. JOLTS reported job openings dropped -364k to 6,423k in December after falling -574k in November to 6,787k. Job openings plateaued in late 2018 and have been moderating since then. This is a second month with openings below 7,000k, after holding above that mark for 19 months since April 2018. The JOLTS rate slipped again to 4.0%, after diving to 4.3% in November from 4.6% in October. It was at a 4.7% rate in December 2019. Quitters declined -80k to 3,488k with the rate holding steady at 2.3%. Hirings rose 80k to 5,907k, with the rate rising to 3.9% versus 3.8%. Despite the slippage in job openings and quitting, the January nonfarm payroll report shows ongoing strength in the labor market.
While some economists will focus on the downward trajectory of job openings in the last two months, we should note that there are still more available jobs than people looking for them.
Eurozone Q4 GDP rose just 0.1% quarter over quarter, in line with estimates. That was the weakest pace of growth since a 0.4 percent contraction in the first quarter of 2013. Among the bloc's largest economies, German GDP stalled, while France and Italy contracted 0.1 and 0.4 percent respectively. On the other hand, Spain's economy expanded by 0.5 percent.
Despite what is being heard on the daily news feeds, statistics show the likelihood of a massive global pandemic continues to decline based on the growth of cases, geographic spread, and death rate of patients. Of course, that does not mean that the disease can't have effects on the global economy.
At this stage, the coronavirus is likely to continue to spread in China, and additional isolated cases could appear in the US. China is likely to continue the travel restrictions within Hubei province for the next few weeks, and major production facilities are unlikely to reopen until that time. However, if China truly wants to stop the spread, it likely has to keep the travel lockdown for the remainder of February, which may extend the impacts on the global markets.
I ran across an interesting statistic last week that may shed more light on the severity of the viral outbreak. Data shows that 82% of the reported cases now are classified as "mild".
Bloomberg assembled a summary of economic impact effects, and what to watch for as the data for January and February roll out around the world. While we shouldn't downplay any economic impact, I caution taking a stance that suggests the worst possible outcomes. This, like all other issues, should be placed in perspective. At the moment we have seen many more deaths here in the U.S. due to the "Flu", about SEVEN times as many.
Readers can draw their own conclusions, my view remains that this is comparable to "seasonal" flu. Since we are all here as investors, not doctors, so far except for Asia, global stock markets agree with that assessment.
U.K. GDP was unchanged in the last quarter. Political uncertainty tied to Brexit was cited as the culprit. The rate of growth slowed from 0.5% in the third quarter against a backdrop of paralysis in Westminster before the snap poll and Boris Johnson's unexpectedly decisive victory. City economists and the Bank of England had forecast zero growth in the fourth quarter. Annual growth increased marginally to 1.4% in 2019, slightly above the 1.3% growth rate recorded in 2018.
We are now more than halfway through the Q4/19 earnings season with 70+% of S&P 500 companies having reported.
There has been a steady improvement in the blended earnings growth estimate from the start of earnings season when it was projected to be -0.3%. Here is where we stand on the current SPX operating earnings estimates (Source: I/B/E/S data from Refinitiv).
Q4/19 EPS growth is estimated to be up 2.3% (Figure 1). This is a solid improvement from the end of last week when the estimate was just 1.1%.
Of the 322 S&P 500 companies that have reported Q4 earnings, 70.5% have reported above analyst estimates and 18.9% have reported below analyst estimates.
Q419 earnings growth is driven by favorite cyclical sectors (Communication Services and Information Technology) providing the strongest beats relative to expectations. This cyclical strength is consistent with the 2020 outlook, as aggregate forward consensus earnings growth for cyclical sectors (10.2% YoY) is expected to outpace that of defensive sectors (5.8%).
The Q4/19 revenue growth estimate is 5.0%. This is also an improvement from the end of last week when it was projected to be up 4.7%.
The Chinese government signaled its commitment to upholding the covenants of the Phase One deal as it halved tariffs on $75 billion of U.S. imports, effective February 14th. This will occur in lockstep with the U.S.'s step to reduce tariffs on $120 billion of goods on the same date. We can expect positive trade progress will continue, removing any residual market uncertainty in the process. At the very least, the threat of escalation on this front is off the table.
The New Hampshire primary has done little to answer the question of who the ultimate Democratic nominee for president will be. Senator Sanders appears to have won, but with less than half of his 2016 support in the state. The moderate wing struck back with a strong second and third-place finish among Buttigieg and Klobuchar. When combined with the vote for Biden, this resulted in a majority of the vote vs. the 37% for the liberal candidates Sanders and Warren. With Bloomberg rising in the polls leading up to Super Tuesday (March 3) and no candidate above 30% in either of the first two contests, one has to start wondering about a brokered convention.
After New Hampshire, Senator Sanders is now the leader going into the Nevada primaries, but according to PredictIt the probability of the first brokered convention for the Democratic Party since 1952 is growing. New Hampshire has a poor record of forecasting the next president. Other than someone who was already in office, it has been 50 years since the winner in New Hampshire was elected president.
Sanders, Buttigieg, Biden, and Warren all remain viable candidates. The true test will be Super Tuesday (March 3), and factors such as proportionate allocation of delegates (vs. winner-take-all), fiscally well-supported candidates and the entrance of Michael Bloomberg increases this probability if the field is not whittled down soon.
This uncertainty has benefitted President Trump, who according to Gallup, now has the highest approval rating of his presidency at 49%. PredictIt also states Trump has a heightened probability of winning the election at 55%.
A healthy economy gives him an early edge, but we are still 260+days away from the election. The consensus view states the stock market will experience volatility and enough speculative surprises that could upset the Bull market.
From a market perspective, an investor should look at the new all-time highs in names like UnitedHealth Group (UNH) and Cigna (CI) this week to tell us the market believes Mr. Sanders is not being viewed as a viable candidate. His single-payer healthcare proposal wipes out the health insurers. It is doubtful these stocks would be in bullish mode if institutions thought Sanders had a chance of even sniffing the Oval office. That leads me to believe my assessment that Sanders's rise in popularity would rattle the market may have been overstated.
In the last six months or so, the 10-year Treasury rate rallied off the low of 1.47%, reaching an interim high of 1.94%. The 10-year Treasury has now settled into a trading range, perhaps building a base for a run higher. On the flip side, traders that live in fear of a global recession suggest this is a pause before the bottom (1.47%) is tested again. The 10-year note was battered down to 1.52% over virus fears before staging a rally indicating support has held. It settled where it closed the prior week at 1.59%
The 3-month/10-year Treasury curve inverted on May 23rd, 2019, and remained inverted until mid-October. The renewed flight to safety inverted the 3 month/10 year yield curve for ONE day this month. Neither the 3 month/10-year nor the 2 /10 treasury curve is inverted today.
The percentage of respondents in AAII's weekly survey that have reported as bullish has risen to 41.3% from 33.8% last week. That 7.5 percentage point jump in bullish sentiment may sound like a lot, but just one month ago, bullish sentiment rose an even larger 8.7 percentage points to a similar reading of 41.8%. Though it has improved, bullish sentiment is not overly extended as it is still within its normal historical range albeit near the upper end of said range.
According to the weekly inventory report, U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 7.5 million barrels from the previous week. At 442.5 million barrels, U.S. crude oil inventories are about 2% below the five-year average for this time of year.
Total motor gasoline inventories decreased by 0.1 million barrels last week and are about 3% above the five-year average for this time of year.
This build was a result of domestic production rising back to its record high of 13 mm bbl/day in addition to higher imports which managed to not come in at a five-year low for the first time this year and exports falling to their lowest level so far in 2020. As such, for the first time this year, net exports did not come in at a five-year high.
Despite bearish data, crude oil rallied to post the first positive week in the crude oil market since December. WTI closed trading at $52.08, up $1.80 for the week.
As has been the case for well more than a year now, the S&P 500's cumulative A/D line confirmed the S&P 500's new high last week. Breadth for the large-cap index has been and continues to be one of the most supportive aspects of this rally.
The DAILY chart of the S&P remains in a solid uptrend after the 3% pullback we witnessed in late January. It is time to revisit the notion that we will need to see a break in initial support at the very short-term 20-day moving average (green line) before we think about any meaningful pullback.
We've seen this movie before. Once an index/stock breaks out of a trading range and multiple new highs are set, it becomes difficult to extrapolate how far the rally can go. Guessing when it will end can cost an investor a lot of lost profits.
No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.
Short-term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short-term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.
A bevy of new market highs and a 30+% total return in the S&P with corporate buybacks declining from the previous year.
I'm getting ready for the pundits to now tell us we can expect sub-par returns for equities in the next few years. Reminds me of what I read in 2015:
"In short, given currently extreme valuations, the most historically reliable valuation methods instruct us to expect total returns of roughly zero for the S&P 500 over the coming decade."
We've often heard the saying "it's not a stock market, it's a market of stocks". I believe it may be best to continue to follow that approach. When I review the landscape now it is easy to see there are a lot of stock charts that are telling different stories. Some stocks are rolling over as they go into consolidation modes for one reason or another. On the flip side, some names are breaking out of trading ranges, and I view these as top candidates for additional research.
While a breakout of a trading range can lead to consolidation in the short term, inevitably they lead to a higher stock price down the road. In some cases that can be months of higher highs. Despite the rally, there remains plenty of opportunity in individual stocks these days.
Remember when the trade tariffs were going to be so disruptive to the earnings picture for many companies? The semiconductor industry was in the crosshairs of that conversation, and the tales of woe were everywhere.
Of the 30 semiconductor stocks that are in my database, 26 just beat earnings estimates, while 13 RAISED forward guidance. The growth in earnings continues in technology. As investors seek out "Growth" in a low growth environment, it tells us why "Value" continues to lag.
Before I add anything else to this week's narrative, it's best to get some housekeeping out of the way. The equity market ended the week in overbought territory. So before anyone assumes I am wildly and blindly bumbling along with my head in the sand or somewhere else, allow me to say there could easily be a drawdown from these levels. Each can decide how far and how deep that might be based on their assumptions and opinion.
Investors were in denial seven years ago when the S&P 500 broke out of a multi-year trading range posting new all-time highs. I'll never forget my reaction when I read this in 2013:
When it comes to the equity market today, not much has changed. After I read a comment addressed to me on January 31st, seven years later it's still more of the same:
"The stock market is more overpriced and perilous than at any time in history. It is not smart to stay in stocks when the market is priced to perfection. Sometimes things ACTUALLY do look perilous and should be treated as such."
The S&P 500, Dow 30, and the Nasdaq Composite made new highs on February 6th. It never ceases to amaze me how the vast majority of pundits keep missing what is right in front of them. In reality, it's very simple. It is the same issue many if not all market participants struggle with at one time or another. Very few want to accept and acknowledge how the stock market works. Primarily because that goes against what seems plausible to any of us at any given point in time.
The global stock market rally has the story right. The "improvement" it saw back in late 2019 may have just begun. One example of that improvement.
The immediate investor reaction. Oh, but it can't be that simple. It's not reasonable. Trade tariffs, the Fed and its repo market, Coronavirus, flat corporate earnings, high valuations, poor CEO confidence, and a crazy IPO market. Finally, Tesla's (NASDAQ:TSLA) stock price has gone parabolic and there is euphoria everywhere.
So let's review the situation, with all of the "concerns", the S&P 500, Dow 30, and the Nasdaq Composite made new highs this past week. When the S&P was at the October lows, and we heard many say it was time to leave the stock market, the S&P is up 16+%.
When it's easy to be negative and hard to be positive, I find it quite easy to maintain my current equity positioning. That is how the stock market works.
I would also like to take a moment and remind all of the readers of an important issue. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore, it is impossible to pinpoint what may be right for each situation. Please keep that in mind when forming your investment strategy.
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Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: My portfolios are ALL positioned to take advantage of the bull market with NO hedges in place.This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as there are far too many variables in everyone’s personal situation.Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel more calm, putting them in control.The opinions rendered here, are just that – opinions – and along with positions can change at any time.As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time.
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