Markets want You, Uncle Sam. Stocks continued to slide yesterday as hopes of near-term stimulus faded on comments made by the Treasury Secretary. Positive earnings were, once again not enough to bring back the bid.
N O T E W O R T H Y
Goliath benched. It has been a couple of rough days for equities and today appears like its sizing up to be another tough one. Lawmakers continue to talk without action. Nobody would go on record stating that a stimulus deal would happen before elections, but many have harbored a secret hope, that maybe - just maybe - the two sides could deliver at least something. This hidden hope has helped buoy the markets, somewhat, in the past several sessions since the President called off, called on, made it small, then made it big after his bout with COVID. Biden appears to be leading in the polls and commentators are building their bull cases around a Democratic win. Not surprising is that there is also a bull case if President Trump wins a second term. No matter who occupies 1600 Pennsylvania in January, they will be faced with bringing the nation back to its feet, economically. That means: more stimulus, regardless of whose signature is on the bottom of the check. Of course, stock markets are not known for their patience and reflect investor sentiment up to the very millisecond. Those traders with their secret hopes were probably disappointed yesterday when Secretary Mnuchin stated that it would “be difficult” to get a deal done before the elections. The Secretary’s comments sent stocks from green to red, which is where they closed. Earlier in the day, all of the major indexes, led by the small caps, were up. Wait, “did he just say small caps?”, you ask. Yes I did, and it is worth noting. From time to time I like to remind my readers that, while they are important companies, Apple, Microsoft, Amazon, Facebook, and Google, which represent around 20% of the S&P, do not truly represent the what is going on the in the real economy. That is precisely why investors flock to those stocks even when the long term economic outlook looks dim. Those stocks have rode a wave of bullish interest through the US-China trade war, which sapped global economic growth, and they continued to climb through the pandemic, helping to drag the indexes which they dominate back into positive territory and to new all-time highs. Though the economy was in the midst of a record-breaking expansion leading up to the pandemic crisis, there were many signs that growth was slowing. The trade war between the US and China added further drag to the slowing economic growth. Fortunately, consumer confidence remained strong and the 2017 tax package supplied corporations with fresh capital to invest… and provide stock buy-backs. The stock buy-backs certainly benefited the stock markets, specifically the large caps. Small caps were in a different place, altogether. Since the economy began to stumble and the trade war picked up, the small cap index vastly underperformed the large caps. From 2017 to current, the S&P500 gained +55.8% while the Russell 2000 Index only added +19.49%. The reason for the poor performance is that small cap stock performance is a far better reflection of the real economy. They are often the first group to be hit in an economic slowdown. When you see CEOs on Capitol Hill or in the Whitehouse, it is always the usual suspects. When you hear congressional leaders talking about bailouts, they often reference the large-cap beneficiaries by name. You don’t hear them mentioning Farm Bros, do you. It is actually a real company (stock symbol FARM) with a market cap of $78 million. The Texas-based company sells coffee to restaurants and fast food establishments. See where this is going? Business was going well for the company in 2019 and earnings grew by +126%. As you might expect, this current year’s earnings have been down by a lot, and so is its stock. The actual number is not important, nor is the company. What is important to note here is that there will be no special dividends or stock buy-backs to help the stock regain its 2019 highs. Also not present is an unproven, obscure, cloud play or battery technology that will send it into the mega-cap index overnight. When Farm Bros sells more coffee, things will improve. It will sell more coffee when the economy recovers. The stock will begin to trade up when investors believe that an economic recovery is afoot. Ah, finally, he gets to the point. Something interesting has been happening recently. Since the beginning of this quarter (just 2 weeks ago) the small cap index has outpaced the aristocratic S&P500. In fact, the Russell 2000 Index added +13.62% since the beginning of last quarter, beating the +11.96% growth of the S&P. This could mean that investors are starting to gain confidence in an economic recovery. Good news for Farm Bros... and all of us for that matter. On a final note, the small cap index outpaced the S&P500 handily over the past 20 years (+237.5% versus +153.9% respectively)… never underestimate the underdog.
THE MARKETS
Stocks fell yesterday on waning hope of a near-term stimulus package. The S&P500 fell by -0.66%, the Dow Jones Industrial Average lost -0.58%, the Russell 2000 Index dropped by -0.93%, and the Nasdaq Composite Index traded down by -0.80%. Bonds advanced and 10-year treasury yields remained flat at 0.72%.
NXT UP
- Initial Jobless Claims (Oct 10) are expected to come in at 825k, down from last week’s 840k new claims.
- Continuing Jobless Claims (Oct 3) are expected to be 10.55 million, down from last week’s 10.976 million claims.
- Another big day of Fed voices including Bostic, Bullard, Quarles, Kaplan, Barkin, and Kashkari.
- This morning, Walgreens Boots Alliance and Morgan Stanley beat estimates. After the bell we will hear from Intuitive Surgical, Bank of New York Mellon, VF Corp, and GoPro.