Cavalry en Route

Cavalry en route.  Stocks rallied yesterday as AstraZeneca announced that its vaccine could be up to 90% effective.  Flash PMI data suggests that the services industries are gearing up for a recovery and stocks liked the news.

N O T E W O R T H Y

The perfect angle.  It is hard to keep the bulls from running when they are in a running kind-of mood.  In this case, the mood may be justified, though.  Let’s start with the elephant in the room… er stock market: the once-in-a-century pandemic.  As of 6:28 AM this morning there have been 59,268,159 confirmed cases of COVID-19 globally, which has resulted in 1,398,029 deaths, of which the US accounts for 257,707.  Yeah, it’s terrible.  The havoc goes beyond the healthcare crisis causing much of the developed world to fall into an economic tailspin.  I am looking at a table of the year-over-year GDP growths of the G20 nations and every single member except for China and Saudi Arabia has receded.  The worst being India with a decline of -23.92%.  For perspective, the US is one of the better performers, only losing -2.9%.  Now that I have painted the bleak background, which I am sure by now, you probably don’t need reminding of, let’s talk about the markets and how they are doing.  Stocks are the embodiment of everything that is expected in the future.  Sure, they react, sometimes violently, to the news of the day, but for the most part a stock's price reflects a company’s prospects for the future.  On a high level, that explains the disconnect between the stock indexes and the economy.  Over the past 9 months one graph was more or less going up while the other was pretty much in a free fall.  Before you go on thinking that it was all dip buying and speculation, the moves in stocks were, at a high level, actually orderly and sensible.  Stocks which were not directly affected by the pandemic rallied (Apple, Microsoft, Google, FANG stocks) while those that were held back by the virus sold-off (United Airlines, Exxon Mobile, Carnival Cruises, Marriott).  Still, companies that were once household names were re-discovered as their products became pandemic necessities (Clorox, Kroger, Colgate-Palmolive), while a whole new batch of companies rallied because of their handiness in a lockdown (Zoom Video, Peloton, Take-Two Interactive).  The higher level trend favored large and mega cap growth stocks over value stocks and small cap stocks.  This makes sense as value and small cap stocks are directly impacted by current economic conditions.  It was clear throughout the past 9 months that any lasting economic turn-around would be reliant on successful medical therapies for the virus (treatments and vaccines).  Along the way, fiscal and monetary stimulus was there to keep the economy on life-support until the virus could be cornered and allow organic economic growth to take over.  As the summer months ended and the days began to get shorter so did tempers and tolerance for isolation.  The result was a surge in virus cases which coincided with a contentious election and a slowdown in economic activity. Stocks were mired and unknowns grew by the day.  The past three weeks however has seen some major positive developments.  We have had positive vaccine news on three consecutive Mondays. Three separate vaccines have been proven successful and if approved are set to deliver billions of vaccines in the year ahead. Those vaccines will pave the way for a full reopening of the economy putting companies on a true road to recovery.  We are not there yet and the road ahead will still be rocky, but the vaccine news from Pfizer, Moderna, and AstraZeneca along with treatment news from Regeneron is unarguably positive.  Still, there are several other companies which are due to announce results in the coming quarter, which can add further treatment capacity.  The Presidential elections are behind us now and the President-elect is clearly interested in tackling the virus and economic recovery.  The Fed, which continues to fight the economic fire on the front lines is in need of Administration support, which it rarely, if ever received from the outgoing Administration. Yesterday’s news that Biden is set to announce Janet Yellen as the next Treasury Secretary all but ensures a solid cooperation between the Central Bank and the Whitehouse, assuming she is confirmed by the Senate.  The result is positive investor sentiment… a rally.  But the recent rally is not one of indiscriminate buying.  The buying has been concentrated on value stocks, small cap stocks, and beaten-down industries, all of which would benefit from a full economic recovery.  There is some order in the chaos, after all. Finally, it is very important to remember that while all of the news is positive for now, we are still in the midst of a still-growing pandemic crisis with extended unemployment benefits for many running out at the end of next month.  Additionally, eviction and foreclosure protections are also due to expire next month.  The road to recovery will surely continue to be rocky but at least we are heading in the right direction.  Stay focused on the long term… stay healthy.

THE MARKETS

Stocks rallied yesterday on positive vaccine news from Astra-Zeneca and positive PMI numbers.  News of Biden’s expected nomination of Janet Yellen for Treasury Secretary sent bank stocks higher and helped boost the overall rally in stocks. The S&P500 rose by +0.56%, the Dow Jones Industrial Average climbed by +1.12%, the Russell 2000 Index leapt by +1.85%, and the Nasdaq Composite Index added +0.22%.  Bonds slipped and 10-year treasury yields added +3 basis points to 0.85%.  Crude oil continuing its climb on expectations of increased demand, added +1.51% to close just above $43.  The move sparked a rally in the energy sector which rose by +7.09% yesterday.  The sector has grown significantly this month and is on track to have its best month on record.

NXT UP

- FHFA House Price Index (Sep) is expected to have advanced by +0.8% compared to last month’s +1.5% growth.

- The Conference Board’s Consumer Confidence (Nov) may have slipped to 98.0 from 100.9.

- Fed speakers including Bullard, Williams, and Clarida will speak today.

- This morning, Dollar Tree, Tiffany & Co, Burlington Stores, Best Buy, and Dick’s Sporting Goods all beat Wall Street estimates.  Post-close, we will hear from Dell Technologies, American Eagle Outfitters, HP Inc, VMware, Nordstrom, and Gap Inc.

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