Crazy times call for crazy markets. Everyone was euphoric on Monday as markets made new highs, only to return to the doldrums of COVID by today. Below are some things we are seeing and hopefully we can keep some perspective heading into year-end.
Schizophrenic Markets. After Monday morning’s announcement that Pfizer / BioNTech had 90% effectiveness for their COVID vaccine in their latest large-scale tests, the markets flew to new all-time highs during the day. We saw a considerable rotation to “value” names and a migration away from Tech names, especially the darlings of the COVID shutdowns. Now that daily COVID cases are making new highs the euphoria from Monday has all but vanished. What changed? Nothing really, other than some mention by one of Biden’s advisors that a 4 to 6 week shutdown would be enough to end the spike in new cases. Ladies and gentlemen – a vaccine will be ready soon, grown adults have to take whatever precautions they deem necessary (which they appear to be doing), but we have to get back to business as normal and not destroy our own economy for a 2nd time. Chicago and New York ordering stay at home orders has the market jittery right now, but a recent Gallop poll shows that the majority of Americans do not favor shutting down the economy versus nearly 67% who favored shutting the economy down back in the Spring. I’ve been wrong before about the foolishness of our fearless leaders, but shutting down our economy a 2nd time would be completely self-destructive.
Fundamentals Still Rule. While technicals and sentiment can move markets in the short-term, the three pillars we always discuss – Fiscal Policy, Fed Policy, and Corporate Earnings – are the key drivers for equity prices. Again, Fed Policy looks to be steady through 2023. Corporate Earnings are having a great quarter and so far the 4th quarter looks to be strong as well. So, if we can figure out what Fiscal Policy will look like next year, we make adjustments at that time. Until then, it’s steady as she goes in terms of asset allocation and keeping clients diversified. What does the economic data indicate? On Monday, the NFIB Small Business Optimism Index hit 104 for October, which was higher than the 102.2 expected. Weekly Jobless Claims were lower than expected – 709k vs 735k expected. This is the lowest level of weekly claims since the COVID Crisis began. While the National Financial Conditions Index (NFCI) marched considerably higher between Jan 31st and March 13th by 6900%, we are not seeing that level of increase at this point. So far, the Index has been very stable (see graph below). We have only seen an 8.5% increase over the past six weeks. In fact, the latest release this morning shows only a slight difference in the Index (-0.48 today vs. -0.51 on Sept 18th). If we do look at the Technicals for some hint at direction, it looks like we could be range-bound for a little while. The S&P set a resistance level of 3,535 on Sept 2nd. Since then we haven’t been able to break out above that level, until Monday when the S&P hit an intra-day high of 3,645, but couldn’t close out the day at that high. Until we close higher than 3,645 we could be range-bound for a little while. The next several days will tell us if we’re headed back down to the support level of 3,209 or if we’ll break through the ceiling. Patrick Swayze made a great comment in the movie “Roadhouse.” As the lead bouncer, he instructed those under him to “Be nice, until it’s time not to be nice.” So, at this point, we’re saying, “Stay calm, until it’s time not to be calm.”
Sources: National Financial Conditions Index derived from the Federal Reserve Bank of Chicago (https://www.chicagofed.org/publications/nfci/index). Weekly Jobless Claims derived from the St. Louis Federal Reserve (https://fred.stlouisfed.org/series/ICSA). S&P 500 performance derived from Investing.com (https://www.investing.com/indices/us-spx-500).
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