Back To Square One

Back to square one.  Stocks posted a mixed close yesterday with the S&P500 breeching an all-time high which it achieved just 126 days ago… before the pandemic.  Homebuilders are building homes like crazy and lawmakers are zeroing in on a “skinny” stimulus bill.

N O T E W O R T H Y

Inflated.  I feel compelled to start here: the S&P500 just erased all of the losses it took since hitting its last high back on February 19th, OF THIS YEAR.  You remember February right? Things were good, maybe even great.  Record unemployment, high confidence in the economy, the Fed was on our side, stocks continued to make new highs after a 2019 of solid gains.  Good times, indeed!  Forgive me if I don’t detail what happened directly after that… it has been covered enough.  So here we are back at all-time highs, still in the midst of a cureless-at-present pandemic, with 10% unemployment, in an election year, in the traditionally dicey-for-stocks month of August.  It took just 126 days to get back up on top, which is a record recovery… fancy that, another record. According to Barron's, the average historical comeback took 1,542 days, so I would say… impressive.  All along this recovery, many of us have asked the question: “how can it be, with all the struggling in the economy?”  I have touched upon it in my notes many a time, and I am not the only one trying to make sense of it.  The best answer to this question is simply: stock markets factor in the future, while economic numbers reflect the past.  That is certainly 100% correct, but the question that still remains is: “what is the future going to look like?” If you ask the S&P500, it would say “the future looks bright.”  Earlier this week I covered the continued rise in retail sales while in one of last week’s notes, I covered the rise in consumer prices.  Consumer confidence numbers are not nearly what they were when the S&P500 made its prior high, but they have recovered from their lows.  Chalk it up to generous unemployment benefits, pent-up demand, animal spirits, or whatever you like.  The fact is that consumers continue to do their part in propelling the economy forward.  Now to the future.  The exact timing is still unknown, but let’s assume that we get a barrage of medical therapies for COVID over the next 12 months, consumption will only accelerate. Further, let’s assume that lawmakers will eventually agree on a stimulus package and that whatever party occupies the Whitehouse and the chambers of Congress will spend lavishly on infrastructure.  All of this adds up to further economic growth.  It also adds up to… inflation.  You remember, lots of demand leads to higher prices.  What does that mean for assets?  Well, for the stock market, it could lead to further gains (companies like to have pricing power).  Inflation also typically leads to higher bond yields, which would certainly be welcomed by bond investors, currently starving for yield.  For recently-risen-star Gold, high inflation has historically led to gains as investors flock to the supply-constrained precious metal in lieu of the diminishing value of the greenback.  For consumers… well we can expect prices of goods to go higher, which is almost never welcome… unless it means a return to normal. Let’s hope that stocks are correct in their assessment of the future.

THE MARKETS

Stocks had a mixed close yesterday on handily-beaten expectations in Housing Starts and Building Permits.  Hope remains that an agreement can be reached on a stimulus package as Republicans indicated that a new proposal was forthcoming.  The S&P 500 traded up by +0.23% which was enough to get a new all-time high, the Dow Jones Industrial Average slipped by -0.24%, the Russell 2000 Index fell by -0.99%, and the Nasdaq Composite Index gained +0.73%. Bonds posted further gains and 10-year treasury yields gave up -2 basis points to 0.66%.

NXT UP

- The Fed will release the minutes from its July 29th FOMC meeting at 2:00 PM EDT.  Traders will be keen to learn more about any potential policy changes to expect in September after the Chairman made hints to that effect in his comments last month.

- EIA Crude Oil Inventories (August 14) are expected to drop by -3.079 million barrels after falling by -4.512 million barrels in the prior week.

- The Treasury will auction off $25 billion 20-year notes.

- Richmond Fed President Thomas Barkin will speak today.

- This morning, Lowes and Target beat while TJX and Analog Devices will release results before the bell.  After the close, we will hear from NVIDIA, Synopsis, and L Brands.

daily chartbook 2020-08-19