@theMarket: Markets Are in a Tug of War
The number of COVID-19 cases and deaths are surging way beyond those cases earlier in the year. That could indicate tough going for the economy over the next two quarters. On the other hand, two highly effective coronavirus vaccines have been announced, but won't be widely distributed until next year. In the middle sits the stock market investors.
We know that financial markets are discounting mechanisms, meaning that investors usually buy or sell stocks based on what may happen in six to nine months from now. At that time, so the story goes, at least two vaccines will be readily available to most of the public. One may be ready for limited distribution before the end of the year if all goes well. That should cause the economy to rebound and unemployment should decline. That is a bullish case for equities, so investors would normally anticipate that and buy now.
However, in the near term, the next three-four months, thanks to this second coronavirus surge, the economy is expected to slow, and unemployment to rise. The expectation that little to no fiscal stimulus is forthcoming from our divided government adds to investor worries. The impact on the economy in the short-term could be severe as a result. It is fairly certain, according to most economists, that the reason the economy bounced back as quickly as it did from the first nationwide shut-down was the quick response by the government to monetary and fiscal stimulus.
As of this week, there are no plans for a countrywide shutdown. Instead, individual states, cities, towns, etc. are closing some things down and leaving others open (schools versus bars and restaurants for example). Most businesses are simply ignoring all of it, while trying to convince workers that everything is all right when it isn't.
As a result, the coronavirus case numbers are increasing exponentially. Worse, there appears to be no way to prevent it. Next week, a large segment of the population is already making plans to visit the family for Thanksgiving week, despite medical advice to the contrary. The way we are headed, I expect that the caseload in hospitals should continue to mount. Friends, families and neighbors will continue to die and, at some point, a partial or total shut-down of the economy could occur out of necessity.
If so, this time around I expect there won't be an immediate stimulus response from the government. That could do lasting damage to the economy and prolong the time required to recover. Despite pleading from the Federal Reserve Bank and just about every economist in the nation, both the president and Congress are not listening. Both parties are far too engrossed in debating who won the election (or who will win the Senate in January) to worry about another couple hundred thousand deaths, let alone jobs and the economy. It is the America we live in.
Normally, the week leading up to a national holiday such as Thanksgiving, is positive for stocks. This year, the averages will likely be tugged in two directions — the bearish, daily rise in COVID-19 cases versus more good news on the vaccine front. It doesn't take a rocket scientist to predict the bad news should get worse, which leaves the markets dependent on more vaccine news to remain buoyant.
@theMarket: Vaccine Hopes Send Stocks Higher
The first real hope at ending the global coronavirus pandemic was announced on Monday. Drug company partners, Pfizer and BioNTech, announced their COVID-19 vaccine, which exceeded expectations. The news sent world stock markets screaming higher.
Later in the week, some profit-taking developed, but overall the news was met with relief and cautious excitement. Most investors expected the Pfizer drug would be, at best, 60-70 percent effective, so when the company announced it was more than 90 percent effective in preventing COVID-19, stocks soared.
While this was great news, there are a few drawbacks to the vaccine. For starters, Pfizer can manufacture only a limited quantity of the vaccine next year. Analysts are using a guesstimate of 1.3 billion doses. If that sounds like a lot, it is, but much of that supply (80 percent) is already spoken for by the U.S., Canada, Japan, the E.U. and the U.K. Second, in order to work, you need two doses. The most optimistic assessment is that no more than 12 million vaccine treatments could be available by the first quarter of next year.
The other issue with the vaccine is that it needs to be maintained, stored, and transported at really low temperatures — minus-176 degrees Fahrenheit. To give you an idea of what that means, your typical American freezer runs at about zero degrees Fahrenheit. As such, in order to be effective, the vaccine requires a super-cold freezer, which is unavailable in most hospitals, clinics, and doctor's offices and that's in a developed world country. Low and middle-income nations (think emerging markets) would not be able to take advantage of this vaccine easily, even if it were available to them in 2021.
Some of the market's euphoria wore off as the facts became known, but it was interesting to watch what market sectors did well, and what didn't, as the week progressed. Cyclical areas of the market and value plays did the best on Monday and Tuesday. Small-cap stocks and financials also led the indexes higher. Interest rates on long-term bonds rose, while gold and silver plummeted. Technology shares, long the market leaders, also sat this one out.
This all made some sense. A successfully-administered vaccine would ultimately put an end to the pandemic. In turn, global economies would begin to rise. Those sectors that had been hurt the worst by the coronavirus would benefit the most, while the "defensive plays" — stay-at-home stocks and technology shares — would no longer be the only game in town.
Higher economic growth would also mean greater inflation risk, so bond holders would want a somewhat higher rate of interest to compensate for that possibility. Higher rates are good for financials, so bank stocks gained.
As is usually the case, once investor excitement dissipated a bit, profit-taking set in during the latter part of the week. Traders snapped up some oversold tech shares, while taking profits in some airlines, cruise lines, and the like. The question is what happens next?
As readers are aware, I have been warning for months to expect a pandemic "dark winter" in the U.S. and some other parts of the world. In November so far, more than one million new cases of COVID-19 have been confirmed throughout the U.S. It will likely get worse. Should lock-downs nationwide occur, or more likely, selected closings on a state-by-state basis, which is happening as I write this, it could hurt investor sentiment, as well as economic growth and employment. That may keep a lid on the averages in the short term.
As a contrarian, the recent surge in optimism in the AAII Investor sentiment Survey is also somewhat troubling. Bullish sentiment improved by 17.9 percent last week. That brings the number of bulls to 55.8 percent. That is a seven-month high, while the number of bears declined to 24.9 percent. Those numbers make me cautious in the short run.
As for politics, in the face of the worst surge in coronavirus cases and deaths thus far, there is silence from the White House. I won't comment other than to say that the markets have already given their verdict, and nothing that has transpired this week has changed that narrative. Market catalysts that could drive the markets higher would be additional good news on additional vaccines, which is expected, and some progress on a stimulus package to help the nation through the next few months. I expect one or maybe both to happen, although a stimulus breakthrough is a long-shot. Until then, expect some volatility.
I still believe we continue higher through the end of the year. For now, let's pencil in a possible S&P 500 Index target of 3,800.
@theMarket: Markets Enjoy a 'Biden Bounce'
The nation spent most of the week wondering who won the presidential elections. While lawsuits, protests, and dueling press conferences occupied the airwaves and internet, global stock markets spent the time discounting the results. Have markets already picked the winner?
A Joe Biden win, with a Democrat House, and a GOP-controlled Senate was the conclusion reached by the markets on Tuesday. The "blue wave" that investors had expected and believed would unleash trillions of dollars' worth of stimulus, run up the national debt, and cause long-term interest rates to rise, was off the table. Instead, we would face at least two, if not four, years of political inertia. As I have written before, the financial markets thrive on the status quo and on deadlock. As such, the focus this week was on buying up equities that investors believe will benefit from a new political landscape.
"But wait a minute," say the bears, the vote is just too close to count in several states to make such a prediction. The make-up of who controls the Senate may come down to two Senators in a Georgia run-off in January. And what about the avalanche of lawsuits that the Trump campaign has announced?
None of the above seems to matter to the bulls. Biden's chances keep improving all week in most states, which add fuel to the equity bonfire. Trump's lawsuits were expected. The president telegraphed his intent to sue even before the elections. Investors do not see any proof that there was any wrong doing outside of the usual snafus and mistakes that take place in every election. As for the Senate, right now the numbers are split evenly between the two parties. Until and when that changes, there is gridlock on the legislation front.
Under the present market scenario, any disappointment that investors won't be getting a $2 trillion-plus new stimulus package (as presented by the Democrats before the election) has been somewhat alleviated by the belief that a smaller package could be passed before the end of the year. Senator Mitch McConnell said as much this week.
This is important, because the second wave of coronavirus is already underway, and is expected to worsen in November through January. We need a stimulus package passed now in order to help the economy (not to mention the nation) through this winter.
A blue wave stimulus package, most believe, would have had to wait until February when the Democrats took control of the House and the White House. By then, the damage would have already been done. Funny enough, with a divided Congress and new president, investors now believe the chances of compromise are higher than previously.
Bond markets have also breathed a sigh of relief. Without a humongous stimulus package, the government would not be racking up as much debt to an already-ballooning deficit.
On the tax front, equity investors have decided that a divided Congress would also put an end to all of Joe Biden's talk about individual and corporate tax increases. It is doubtful, believes Wall Street, that a Republican-controlled Senate would be enthusiastic about passing any increase in taxes.
On the healthcare front, while both sides might agree to some necessary compromises to fix the holes in Obamacare, there likely would be little movement toward more government control of the nation's health care system as threatened by Bernie Sanders and the left.
This belief that changes in taxes and healthcare policies would no longer be a threat to investors is one of the reasons the technology and healthcare sectors took the lead in this week's rally. Globally, Emerging markets and China stocks also did well. The thinking here is that while Biden may still be tough on China, his actions will be more measured and diplomatic. The unsuccessful on-again, off-again tariff strategy of the previous administration would likely take a back seat to coordinating a policy with other nations that might also harbor China trade grievances.
That said, I expect some pullback in the markets after this week's run up, but that doesn't make me bearish on the stock markets. Instead, I still see gains throughout the remainder of the year and new highs for the S&P 500 Index and NASDAQ. The U.S. dollar may also continue to slide. In which case, foreign markets (especially emerging markets), resource plays, basic materials, industrials, and precious metals sectors should continue to gain as well.
However, I remain greatly concerned that in the weeks ahead the pandemic will get much worse across the nation. COVID-19 cases and deaths are expected to rise. Most of the macroeconomic numbers still indicate a rebound in the economy, but that is backward looking data.
Rural hospitals, especially in those parts of the country that have not followed medical protocols, look to be coming apart at the seams. I expect the government will continue to sit on its hands (except to pass a smaller stimulus bill) and hope for a breakthrough on the vaccine front. But hope is not a strategy. If the economy and employment gains slow and even reverse in the meantime, investors would probably be looking to the Fed once again to save the markets, and I expect they will.
@theMarket: Politicians Play Cat & Mouse With Investors
It was a week of will they, or won't they. Both parties claimed to want another stimulus deal done before the election, but the proof is in the pudding and as of Friday, the plate is empty.
Investors may be coming to the conclusion that the latest negotiations between the Democrats, led by House Speaker Nancy Pelosi, and Republican U.S. Treasury Secretary Stephen Mnuchin, and White House Chief of Staff Mark Meadows, was simply an election ploy. A way to set up the other side for failure, while making their own position look both caring and, at the same time, blameless. Both sides already knew that the GOP-controlled Senate had no appetite for another bail-out that was any higher than $500 billion.
In any case, the markets have been living on "hopium" all week in anticipation that something might get done. I suspect that if there were to be a deal, most traders might "sell the news" at this point. The thinking is that in order to pass a pre-election fiscal package with only 11 days to go before the election, it would need to be so watered down that its impact on the economy would be minimal, and too late to deal with what will probably come next. Will it be a "dark winter," as Vice President Joe Biden warned in Thursday night's presidential debate?
Cooler temperatures are almost upon us, while the number of coronavirus cases continues to grow. Today we have been told that there are 77,000 new coronavirus cases in the U.S., which makes that the highest level since the beginning of this pandemic. That places the U.S. in an extremely perilous situation health-wise, according to just about every medical expert in the nation. Investors are worried that the doctors may be right, and that we are not "rounding the corner" as claimed by one of the presidential candidates. In which case, we could be headed for a reversal in economic growth that could sink the markets and the economy
For clues, investors are watching COVID-19 events in Europe, as I wrote last week. Europe appears to be a few weeks ahead of us in its increase of coronavirus cases. I listed some of the economic disruptions that this new surge was creating in places such as France, Germany, and the UK.
This week, that wave of infections continued to rise with at least 10 nations reporting record COVID-19 case numbers. Poland just announced that they are planning to all but shut-down their economy once again. The number of those hospitalized has reached the point where authorities are worried that they are facing a shortage of trained medical staff. The same situation could happen here in the United States.
In the meantime, the markets are uber-focused on the elections and the stimulus. By the look of what sectors are doing best in this choppy market (infrastructure, materials, alternative energy, China, and other emerging markets), it seems that investors are still expecting a blue wave to sweep the country. As for stimulus hopes, I fear nothing will come of it. Even if an agreement is reached by some miracle, it would probably not be voted on before the elections. In which case, I question whether anything would pass afterward in a lame-duck session of Congress.
Bill's forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at email@example.com.
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@theMarket: Investors Reduce Risk as Stimulus Talks Fail
Hope springs eternal, but even the most strident bulls threw in the towel this week. American politics took precedence over the country's economic well-being once again, as both political parties refused to compromise on a stimulus deal.
But it wasn't only politics that spooked investors. Across the Atlantic, investors watched as COVID-19 outbreaks escalated across Europe. Germany, Austria, the Czech Republic, and Italy reported new records in infections, while France announced a curfew in order to stem their own skyrocketing cases. In the U.K., Londoners are now banned from mixing with other households indoors.
In this country, despite denials by a large portion of the population, as well as some in government, coronavirus cases are surging across the nation. In the fall, schools, despite warnings by medical authorities, opened anyway with predictable results. Students became super spreaders, infecting their classmates and extending the infection into the surrounding communities. Now, U.S. medical experts are warning that the onset of cold weather and increased inside activities could generate a second resurgence of the coronavirus.
What could this mean for the U.S. markets and national economy? If we follow in the footsteps of the European Community, the U.S. could see an avalanche of new restrictions forced on individual cities and states, not by the government, but by the coronavirus. That's just for starters. Businesses would likely close, but if past actions are any indications, that would have to wait until our already-weakened national hospital system ran out of beds and hallways to treat coronavirus victims. Let's hope this doesn't happen, but you should be prepared if it does.
Only now are investors beginning to realize that a "cure," or at least a vaccine (despite the many statements of our officials outside of the medical community) is taking far longer than promised. It appears that even if there is a breakthrough tomorrow on this front, it would be far too late to save the country, or the economy, from a potential winter COVID-19 surge.
Despite the difference of opinion between who is right, or wrong, what is fake news, and what isn't, there are two truths that investors should understand. Number one: COVID-19 could care less about what you think, whether you wear a mask or not, or who you are going to vote for. It will do what pandemics do, so adjust accordingly. In my opinion, the best advice so far has been given by the medical community. Listen to it.
Number two: the stock market calls it as it sees it. It can be wrong at times, but only for a short while. In the end, the market ignores the hype, but not the facts, leaving investors who ignore its directions holding the bag. Right now, the U.S. markets are not giving us clear guidance, which reflects the uncertainty of this health crisis, lack of more stimulus, and the noise of the political elections, so look elsewhere.
Europe appears to be 4-6 weeks ahead of the U. S. in their battle with the coronavirus. Investors should therefore be following the events in Europe closely. If additional restrictions begin to pile up and/or the virus cases continue to rise, watch and compare what happens to Europe's main stock indexes as a prelude to what might happen in the U.S. in November.
The markets will continue to move up and down next week, as they have this week. As for the future, what I can promise you is that over the next 18 days, markets will become even more volatile than they have been month-to-date. After that, it depends on COVID-19.