Posts tagged ‘economy’

GDP Figures & Election Jitters

Ever since the beginning of 2020, it’s been a tale of two cities. As renowned author Charles Dickens famously stated, “It was the best of times and worst of times.” The year started with unemployment at a “best of times” low level of 3.5% (see chart below) before coronavirus shutdown the economy during March when we transitioned to the “worst of times.”

Source: Statista

With the recent release of record-high Gross Domestic Product (GDP) figures of +33.1% growth in Q3 (vs. -31.4% in Q2), and a +49% stock market rebound from the COVID-19 lows of March, a debate has been raging. Is the re-opening economic rebound that has occurred a V-shaped recovery that will continue expanding, or is the recovery that has occurred since March a temporary dead-cat bounce?

Source: Business Insider

For many people, the ultimate answer depends on the outcome of the impending presidential election. Making matters worse are the polarized politics that are being warped, distorted, and amplified by social media (see Social Dilemma). Although the election jitters have many stock market participants on pins and needles, history reminds us that politics have little to do with the long-term direction of the stock market and financial markets. As the chart below shows, over the last century, stock prices have consistently gone up through both Democratic (BLUE) and Republican (RED) administrations.

Source: Yardeni.com

Even if you have trouble digesting the chart above, I repeatedly remind investors that political influence and control are always temporary and constantly changing. There are various scenarios predicted for the outcome of the current 2020 elections, including a potential “Blue Wave” sweep of the Executive Branch (the president) and the Legislative Branch (the House of Representatives and Senate). Regardless of whether there is a Blue Wave, Red Wave, or gridlocked Congress, it’s worth noting that the previous two waves were fleeting. Unified control of government by President Obama (2008-2010) and President Trump (2016-2018) only lasted two years before the Democrats and Republicans each lost 100% control of Congress (the House of Representatives flipped to Republican in 2010 and Democrat in 2018).

Even though Halloween is behind us, many people are still spooked by the potential outcome of the elections (or lack thereof), depending on how narrow or wide the results turn out. Despite the +49% appreciation in stock prices, stock investors still experienced the heebie-jeebies last month. The S&P 500 index declined -2.8% for the month, while the Dow Jones Industrial Average and Nasdaq Composite index fell -4.6% and -2.3%, respectively. It is most likely true that a close election could delay an official concession, but with centuries of elections under our belt, I’m confident we’ll eventually obtain a peaceful continuation or transition of leadership.

Regardless of whomever wins the presidential election, roughly half the voters are going to be unhappy with the results. For example, even when President Ronald Reagan won in a landslide victory in 1980 (Reagan won 489 electoral votes vs. 49 for incumbent challenger President Jimmy Carter), Reagan only won 50.8% of the popular vote. In other words, even in a landslide victory, roughly 49% of voters were unhappy with the outcome. No matter the end result of the approaching 2020 election, suffice it to say, about half of the voting population will be displeased.

Despite the likely discontent, the upcoming winner will be working with (or inheriting) an economy firmly in recovery mode, whether you are referencing, jobs, automobile sales, home sales, travel, transportation traffic, consumer spending, or other statistics. The Weekly Economic Index from the New York Federal Reserve epitomizes the strength of the V-shaped recovery underway (see chart below).

Source: Calafia Beach Pundit

It will come as no surprise to me if we continue to experience some volatility in financial markets shortly before and after the elections. However, history shows us that these election jitters will eventually fade, and the tale of two cities will become a tale of one city focused on the fundamentals of the current economic recovery.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 2, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 2, 2020 at 12:28 pm Leave a comment

Politics & COVID Tricks

Thanks to a global epidemic, trillions of dollars instantly disappeared during the first quarter of this year, and then, abracadabra…the losses turned into gains and magically reappeared in the subsequent two quarters. After a stabilization in the spread of the COVID-19 virus earlier this year, the stock market rebounded for five consecutive months, at one point rebounding +64% (from late March to early September) – see chart below. However, things became a little bit trickier for the recent full month as concerns heightened over the outcome of upcoming elections; uncertainty over a potential coronavirus-related stimulus package agreement; and fears over a fall resurgence in COVID-19 cases. Although the S&P 500 stock index fell -3.9% and the Dow Jones Industrial Average slipped -2.3% during September, the same indexes levitated +8.5% and +7.6% for the third quarter, respectively.

Source: Investors.com

Washington Worries
Anxiety over politics is nothing new, and as I’ve written extensively in my Investing Caffeine blog, history teaches us that politics have little to do with the long-term performance of the overall stock market (e.g., see Politics & Your Money). Nobody knows with certainty how the elections will impact the financial markets and economy (myself included). But what I do know is that many so-called experts said the stock market would decline if Barack Obama won the presidential election…in reality the stock market soared. I also know the so-called experts said the stock market would decline if Donald Trump won the presidential election… in reality the stock market soared. So, suffice it to say, I don’t place a lot of faith into what any of the so-called political experts say about the outcome of upcoming elections (see the chart below).

COVID Coming Back?

One of the reasons stock prices have risen more than 50%+ is due to a stabilization in COVID-19 virus trends. As you can see from the charts below, new tests, hospitalizations, and death rates are generally on good trajectories, according to the COVID Tracking Project. However, new COVID cases have bumped higher in recent weeks. This recent, troubling trend has raised the question of whether another wave of cases is building in front of a dangerous, seasonally-cooler fall flu season. Traditionally, it’s during this fall period in which contagious viruses normally spread faster.

Source: The COVID Tracking Project

Regardless of the trendline in new cases, there is plenty of other promising COVID developments to help fight this pandemic, such as the pending approvals of numerous vaccines, along with improved therapies and treatments, such as therapeutics, steroids, blood thinners, ventilators, and monoclonal antibodies.

Business Bounce

From the 10,000-foot level, despite worries over various political outcomes, the economy is recovering relatively vigorously. As you can see from the chart below, the rebound in employment has been fairly swift. After peaking in April at 14.7%, the most recent unemployment rate has declined to 8.4%, and a closely tracked ADP National Employment Report was released yesterday showing a higher than expected increase in new private-sector monthly jobs (749,000 vs. 649,000 median estimate).

Source: U.S. Bureau of Labor Statistics

From a housing perspective, house sales have been on fire. Record-low interest rates, mortgage rates, and refinancing rates have been driving higher home purchases and rising prices. Urban flight to the suburbs has also been a big housing tailwind due to the desire for more socially distanced room, additional home office space, and expansive backyards. Adding fuel to the housing fire has been record low supply (i.e., home inventories). The robust demand is evident by the record Case-Shiller home prices (see chart below).

Source: Calculated Risk

There are plenty of industries hurting, including airlines, cruise lines, hotels, retailers, and restaurants but the economic rebound along with government stimulus (i.e., direct government checks and unemployment relief payments) have led to record retail sales (see chart below). Spending could cool if an additional coronavirus-related stimulus package agreement is not reached, but until the government checks stop flowing, consumers will keep spending.

Source: Calculated Risk
Besides trillions of dollars in fiscal relief injected into the economy, the Federal Reserve has also provided trillions in unprecedented relief (see chart below) through its government and corporate bond buying programs, in addition to its Main Street Lending Program.

Source:The Financial Times

There has been a lot of political hocus pocus and COVID smoke & mirrors that have much of the population worried about their investments. In every presidential election, you have about half the population satisfied with the winner, and half the population disappointed in the winner…this election will be no different. The illusion of fear and chaos is bound to create some short-term financial market volatility over the next month, but behind the curtains there are numerous positive, contributing factors that are powering the economy and stock market forward. Do yourself a favor by focusing on your long-term financial future and don’t succumb to politics and COVID tricks.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (October 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

October 1, 2020 at 1:11 pm Leave a comment

Bridge to Vaccine or Nowhere?

We are approximately eight months into a global pandemic that has infected an estimated 18 million people and taken almost 700,000 lives. Everyone is wrestling with the ripple through effects that COVID-19 has not only had on our personal lives, but also on the broader aspects of our economy, including science, politics, economics, education, mental health, food supply, and transportation. The 7.8 billion people on the planet, including investors, are waiting for a bridge to a COVID-19 vaccine cure to come as soon as possible, so people and the world can begin returning towards normalcy.

The bridge to a COVID cure is not complete yet, but investors are currently paying notice and giving researchers the benefit of the doubt. Last month, stocks continued their advance with the S&P 500 catapulting another 5.5%. Since the low in March this year, stock prices have appreciated an astounding +49%, and are actually in the black (i.e., positive) for the year despite unemployment climbing above 11% and a massive 2nd quarter economic contraction in GDP of -32.9%. Some stock enthusiasm can be attributed to forecasted 3rd quarter GDP growth of 16%. The stock market story is even brighter, if you consider the technology-heavy NASDAQ index rose +6.8% for the month, +62% from this year’s low, and +20% for 2020.

With the destruction of lives and economic activity so severe, how can stock prices be so lofty? In short, after the economy ground to a virtual halt in March, business has been slowly getting better. At the heart of this improvement, the learning curve in treating this deadly virus has slowed the bleeding of the COVID-19 disease. The progress in controlling the virus can be seen in the declining number of daily COVID-19 cases (see chart below).

Source: The COVID Tracking Project

The stabilization and the beginning of a downward trend of cases can be explained with the successful application of therapeutics like remdesivir (manufactured by Gilead Sciences); generic steroids like dexamethasone; improved ventilator implementation in conjunction with blood thinners; and better compliance with social distancing/mask-wearing protocols.

In California, we appear to be on the right path of the curve, as well. Daily infections peaked at 12,807 however, and as of August 1st, daily COVID-19 cases declined to 6,542 (see chart below).

Source: The COVID Tracking Project

The hospitalization picture tells a similar story (see chart below). Even though the number of daily cases more than doubled nationally to record highs, the number of people hospitalized plateaued because of better treatment and the concentration of newly infected cases in the younger demographic age level.

Source: The COVID Tracking Project

In addition to current trends mending, optimism for a COVID-19 vaccine cure is also building, as I alluded to earlier. Economist and blog writer Dr. Ed Yardeni summed up the research developments well.

“The Trump administration has launched “Operation Warp Speed” with the goal of delivering 300 million doses of a safe, effective vaccine for COVID-19 by January 2021, as part of a broader strategy to accelerate the development, manufacturing, and distribution of COVID-19 vaccines, therapeutics, and diagnostics. Congress has directed almost $10 billion to this effort through supplemental funding, including the CARES Act. More than 100 clinical trials of dozens of potential coronavirus treatments are already underway around the world.”

If these timelines are correct, the bridge to a cure is almost here.

Housing Market on a Tear

One of the very positive byproducts of the pandemic has been the red-hot housing market (see chart below), which has been driven by record low interest rates and demand for COVID-friendly housing. People are migrating from tight urban quarters to the suburbs, where people can obtain a home office, a spacious backyard, and a swimming pool. This ravenous home demand is coinciding with generationally low interest rates, including a jaw-droppingly low 30-year fixed-rate mortgage hovering around 3%. All else equal, lower interest rates means consumers make lower monthly payments and can carry more debt, which improves home affordability.

Source: CNBC

Fears of a COVID Collapse

Although there have certainly been some tangible improvements since the depths of the pandemic, there are definite challenges ahead.

Consider the following challenges:

  • Consequences to Unmitigated Government Spending: Congress is working to approve another $1 – $3 trillion dollar stimulus package to buttress our strained economy during the COVID-19 crisis. In the short-run, this money can provide relief to millions of people and businesses that have suffered through the global pandemic. However, in the longer term, spending cutbacks will likely be necessary. Just like somebody going on an endless credit card spending spree, eventually the money borrowed and spent needs to be paid back, or alternatively, a credit limit will ultimately be reached. Sooner or later, the trillions of dollars in spending will trigger collectors (investors) to come knocking. Under these possible scenarios, fiscal responsibility will force dramatic cuts to benefits and services like Social Security, Medicare, education, and military, among other areas.
  • Rising China Tensions: It doesn’t take a genius to figure out our president’s view on China. All one needs to do is read his daily posts on Twitter. Our president’s commentary includes, but is not limited to, our massive trade deficits with China; political unrest in Hong Kong; Chinese consulate closure in Houston, Texas and American consulate closure in Chengdu, China; and blame regarding intellectual property theft and the spread of the “Wuhan” virus. These are only some of the factors contributing to the strained bilateral relationship between the United States and the #2 global economy, China.
  • Presidential Election: The November 3rd presidential election date is just around the corner, and the outcome will likely create uncertainty regarding the trajectory of future U.S. tax rates and other policies.
  • Burst in Tech Bubble? The top 1% of companies in the S&P 500 (Apple Inc., Microsoft Corp., Amazon.com, Alphabet Inc., Facebook Inc.) account for 22% of the value of the index, or more than $6 trillion in market value. Some observers explain this explosion in concentrated technology values by pointing a finger at the Federal Reserve’s zero-interest-rate policy and lack of government regulation, while others point to a behavioral shift in technology demand and usage.
  • Potential Inflation: The inflation threat has been created by trillions of dollars in money printing policies by the Federal Reserve. But it’s not only the trillions of U.S. dollars being printed by the Fed, it’s also trillions in euros, Japanese yen, and Chinese yuan being printed by other global central banks. As a result, the danger of rampant inflation could become a reality.

The foundation may not be fully sturdy yet, but a clear bridge to a recovery is under construction, and the blueprint confirms we have the pieces needed for completion (i.e., a vaccine). As I pointed out in last month’s newsletter (Record Rebound), volatility has been a constant throughout the rebound. Given the pace and questionable sustainability of the bounce, active management is necessary. At Sidoxia Capital Management (www.Sidoxia.com), we continue to prudently manage our client portfolios with the purpose of meeting their customized objectives. Getting from here to achieving your financial goals is a serious challenge, and reaching your economic destination requires a well-designed bridge that won’t collapse.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (August 3, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, AAPL, AMZN, GOOGL, FB, MSFT and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in TWTR or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

August 4, 2020 at 9:41 am Leave a comment

Pedal to the Metal Leads to Record Rebound

Like a race car pushing the pedal to the metal, the stock market sped to its best quarterly stock market gains in decades. The +20% rebound in the 2nd quarter S&P 500 index was the best result achieved since 1998. Moreover, the Dow Jones Industrial Average saw its largest quarterly gain (+18%) since 1987, and the technology-heavy NASDAQ index (+31%) saw the most appreciation since 2001. While a snap-back after a shockingly dismal 1st quarter should come as no surprise to many investors, the pace of this rebound is unlikely to be sustainable at this trajectory, given the challenging economic backdrop and COVID public health crisis.

Racing Ahead Via Re-Opening

After experiencing six months of the coronavirus pandemic, the country has been re-opening across all 50 states at differing paces. We can see the benefits of a V-shaped recovery in various indicators, such as the following:

  • Airline Traffic
Source: Calafia Beach Pundit
  • Hotel Occupancy
Source: Calculated Risk
  • Gasoline Consumption
Source: Calculated Risk

Thanks to unprecedented support from the Federal Reserve in the form of trillions of dollars in stimulative money printing that has been injected into the economy (see chart below), and trillions of government support (including 4.8 million PPP [Payroll Protection Program] loans totaling $519 billion), the economic benefits of the re-openings have been tangible. Not only did the economy unexpectedly add 2.5 million jobs last month, but economic growth is also projected to rebound in the back-half of 2020. More specifically, Treasury Secretary Steven Mnuchin recently testified in front of Congress that 3rd quarter economic growth (GDP – Gross Domestic Product) is currently projected at +17%, and 4th quarter at +9%.

Source: Dr. Ed’s Blog

The Stubborn Virus Remains

Many Americans feel liberated from the lifting of stay-at-home orders, but if the re-openings are not handled with proper precautions, the consequences can result in an economic equivalent of serious speeding tickets or jail time. We have experienced this phenomenon firsthand as a surge of new COVID-19 infections has spread predominately across the Southern and Western states, skewed towards younger Americans.

Now that the economic genie has been released out of the bottle, it’s going to be very difficult for state governors and city mayors to stuff the genie back in. Even if the new surge in COVID-19 cases continues, we are more likely to see required health guidelines instituted (e.g., mandatory mask wearing) or rollbacks in certain re-opening phases (e.g., closures of bars, restaurants, and other large gathering establishments). For instance, Disneyland (ticker: DIS) hit some speed bumps when the company just announced its re-opening originally scheduled for mid-July has been delayed indefinitely.

Although COVID infections have been on the rise, driven in part by complacent or irresponsible younger individuals not adhering to social distancing and mask-wearing recommendations, the healthcare treatment regimens have kept the level of deaths at a flat rate (see chart below) and national hospitalization rates at a relatively stable level (see chart below).

Source: IMHE
Source: CDC

The Bridge to a Vaccine

Despite the recent rise in COVID-19 cases, investors have been focused more on the half-glass full developments relating to the pandemic. Approved therapeutics, such as remdesivir by Gilead Sciences Inc. (GILD) and dexamethasone, have proven effective in treating COVID. In addition, ventilator and PPE (Personal Protective Equipment) supplies have become plentiful; virus testing has risen dramatically (see also COVID Comeback); and contact tracing is slowly improving. If you layer in the more than 100 vaccines being developed, including expected Phase 3 trials this year by Pfizer Inc. (PFE), Moderna Inc. (MRNA), Astrazeneca PLC (AZN), Glaxosmithkline PLC (GSK), and Johnson & Johnson (JNJ), there is room for optimism. With all these developments, coupled with more stringent guidelines by governors/federal government/health agencies, and more responsible behavior by individuals (i.e., social distancing, personal hygiene, mask wearing), especially in hot spot regions, there is a credible bridge to managing the virus until a vaccine is approved.

The stock market has been racing ahead at an amazing pace in recent months (+41% since late-March), but with the COVID public health crisis starting to overheat the engine with rising COVID cases, investors should not be shocked to see the driver tap the economic brakes a little in the coming months. For long-term investors like my clients, Sidoxia Capital Management will continue to take advantage of opportunities, while pushing to safely avoid the risky potholes, during these highly volatile times. In periods like these, when your race car has created a large lead, it’s perfectly okay to reassess your circumstances and temporarily take your foot off the pedal before the next turn.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (July 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, MRNA, PFE, JNJ, AZN, GSK, and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

July 1, 2020 at 3:23 pm 2 comments

The COVID Comeback

Rocky Balboa (“The Italian Stallion”) the underdog boxer from the movie, Rocky, was down and out until he was given the opportunity to fight World Heavyweight Champion, Apollo Creed. Like the stock market during early 2020, Rocky was up against the ropes and got knocked down, but eventually he picked himself up and rebounded to victory in his rematch with Creed.

The stock market comeback also persisted last month as the COVID-19 pandemic health situation continued to stabilize and the broader economy accelerated business re-openings. For the month, the Dow Jones Industrial Average increased +4.3% (+1,037 points to 25,383), while the S&P 500 index bounced+5.3%, and the NASDAQ catapulted the most by +6.8%.

How can the stock market (i.e., the Dow) rebound +39%, or more than 7,100 points, from the March 2020 lows? The large move is even more surprising once you consider 41 million people have lost their jobs since the epidemic hit American soil (see chart below), and COVID-19 related deaths have climbed to over 100,000 people.

Source: PBS

Getting Back to Fighting Shape

By the time we reached Rocky VI, Rocky Balboa was retired and recovered from brain damage. But Rocky is no quitter, and he trained himself into championship fighting condition and got back into the boxing ring. With unemployment rates approaching Great Depression levels, the U.S. economy has been experiencing challenging circumstances as well – a self-induced coma (shutdown). Fortunately, our country has been slowly recovering day-by-day, and week-by-week. The economy may not be back to peak fighting shape, but activity is slowly and consistently getting better.

There are many different perspectives in looking at this extremely complex, unprecedented coronavirus pandemic. The speed and pace of selling stocks during February and March reached radically-high panic levels, as measured by objective indicators like the Volatility Index (i.e., the VIX – or Fear Gauge). However, like a coiled spring, the stock market sprung back up during April and May as stay-at-home orders and quarantine measures around the world significantly bent the curve of COVID-19 infections and deaths (see chart below). As you can see, with the exception of a few countries globally (e.g., Brazil and Russia), the number of daily confirmed deaths has been broadly declining for many weeks.

Source: Our World in Data

Estimated infections have been coming down as well, according to the Institute for Health Metrics and Evaluation (IMHE). IMHE estimates also show the number of daily infections has consistently been coming down over the last couple months.

Source: IMHE

In addition to the stay-at-home orders and social distancing protocols, what has also contributed to the declines in COVID-19 deaths and infections? Two words…”increased testing.” Although, arguably COVID-19 testing got off to a rough start, as seen in the chart below, nevertheless daily tests have risen dramatically over the last couple months from about 100,000 per day to roughly 500,000 per day (see chart below). Increased testing capacity has and will continue to help better control the spread (or lack thereof) of the virus.

Source: Calculated Risk

Not only has the spread of the coronavirus been substantially mitigated, but the fighting economy has also received an adrenaline shot in the form of trillions of dollars of fiscal and monetary support as I described in my previous article ( see also Recovering from the Coma).

Investors Need to Keep Guard Up

Like Rocky Balboa, the U.S. is a strong, respected fighter but even though strength is being regained, the economy and stock market is susceptible to a surprise upper-cut punch or hook. What could potentially hurt the financial comeback?

  • Flare Ups & Second Wave: As cities, counties, and states carry on with expanded business openings, we could experience “flare ups” of COVID-19 infections or a “second wave.” But the good news is, we should be in much better shape to handle these scenarios thanks to expanded stockpiles of ventilators; larger supplies of PPE (Personal Protective Equipment) for frontline workers; increased production of therapeutic drugs like remdesivir from Gilead Sciences Inc. (GILD); and improved contact tracing from the magnified number of tests. And this analysis doesn’t even contemplate the more  than 100 vaccines being developed (i.e., a potential cure) for COVID-19, which could be available in limited quantities as early as the end of this year.
  • Social Unrest: The death of George Floyd, an African-American man who died after a Minneapolis police officer forcefully restrained George by keeping his knee on his neck, which triggered lethal complications to the victim. As a result, nationwide racial injustice protests and disruptive violence have erupted, thereby forcing government intervention with the hope of limiting violence and damage caused by non-peaceful protesters.
  • Strained Relations with China Due to Actions in Hong Kong: Recent political actions mandated by the Chinese government to strip autonomy from Hong Kong has strained relations with the United States, and progress made with the previous U.S. – China trade deal could erode.
  • Inflation: Despite no near-term evidence of rising prices, the unparalleled increase of trillions of dollars in fiscal debt and deficits has the credible long-term potential of creating incendiary inflation that could burn through consumers’ buying power.

Rocky Balboa faced many formidable foes in the boxing ring, including Clubber Lang (Mr. T) and Russian Ivan Drago, but Rocky survived and persevered. The stock market is bound to face future punches from unforeseen challengers in the form of impending known and unknown threats, but the alarmist calls for a COVID knockout appear to be overstated.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (June 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

June 1, 2020 at 1:26 pm 1 comment

What the Heck & What Now?

The Covid-19 viral pandemic that hit our shores in early 2020 shut down the economy to a virtual halt, and unemployment has skyrocketed to an estimated 19%, as 30 million people have now filed for unemployment benefits over the last six weeks (see chart below). Shockingly, we have not seen joblessness levels this high since the Great Depression. All this destruction has investors asking themselves, “What the heck, and what now?

Forecasts for 2nd quarter economic activity (Gross Domestic Product) are estimating an unprecedented decline of -12% (see chart below) with some projections plummeting as low as -34%. Despite the dreadful freefall in the stock market during March, along with the pessimistic economic outlook, the major stock indexes came back with a vengeance during April. More specifically, the Dow Jones Industrial Average soared +2,428 points, or +11% for the month. The other major indexes, S&P 500 and NASDAQ, catapulted higher over the same period by +13% and +15%, respectively.

Source: The Atlanta Fed

Certainly, there have been some industries hurt by Covid-19 more than others. At the top of the misery list are travel related industries such as airlines, cruise lines, and hotels. Retailers like Neiman Marcus, Pier 1, and JCPenney are filing for bankruptcy or on the verge of closing. Restaurants have also been pummeled (partially offset by the ability to offer pickup and delivery services), and entertainment industries such as sporting arenas, concert venues, movie theaters, and theme parks have all painfully come to a screeching halt as well. Let’s not forget energy and oil companies, which are battling for their survival life in an environment that has witnessed oil prices plunge from $61 per barrel at the beginning of the year to $19 per barrel today (with a brief period at negative -$37…yes negative!) – click here for an explanation and see the chart below.

Source: Trading Economics

What the Heck?!

With all this horrifying economic data financially crippling millions of businesses and families coupled with an epidemic that has resulted in a U.S. death count surpassing 60,000, how in the heck can the stock market be up approximately +34% from the epidemic lows experienced just five short weeks ago?

I was optimistic in my Investing Caffeine post last month, but here are some more specific explanations that have contributed to the recent significant rebound in the stock market.

  • Virus Curve Flattening: The wave of Covid-19 started in China and crashed all over Europe before landing in the U.S. Fortunately, as you can see from the chart below (U.S. = red line), social distancing and stay-at-home orders have slowed the growth in coronavirus deaths.
Source: Our World in Data via Calafia Beach Pundit
  • Fiscal Stimulus: The government fire trucks are coming to the rescue and looking to extinguish the Covid fire by spraying trillions of stimulus and aid dollars to individuals, businesses, and governments. Most recently, Congress passed a $484 billion bill in stimulus funding, including $320 billion in additional funding for the wildly popular Payroll Protection Program (PPP), which is designed to quickly get money in the hands of small businesses, so employers can retain employees rather than fire them. This half trillion program adds to the $2 trillion package Congress approved last month (see also Recovering from the Coma).
  • Monetary Stimulus: The Federal Reserve has pulled out another monetary bazooka with the announcement of $2.3 trillion dollars in additional lending to small businesses  . This action, coupled with the long menu of actions announced last month brings the total amount of stimulus dollars to well above $6 trillion (see also Recovering from the Coma for a list of Fed actions). You can see in the chart below how the Fed’s balance sheet has ballooned by approximately $3 trillion in recent months. The central bank is attempting to stimulate commerce by injecting dollars into the economy through financial asset purchases.
Source: Dr. Ed’s Blog
  • Improving Healthcare System: Treatments for sick Covid patients has only gotten better, including new therapeutics like the drug remdesivir from Gilead Sciences Inc. (GILD). Dr. Anthony Fauci, the NIAID Director (National Institute of Allergy and Infectious Diseases) stated remdesivir “will be the standard of care.” With 76 vaccine candidates under development, there is also a strong probability researchers could discover a cure for Covid by 2021. With the help of the Defense Production Act (DPA), the government is also slowly relieving critical manufacturing bottlenecks in areas such as ventilators, PPE (Personal Protective Equipment) and Covid test kits. Making testing progress is crucial because this process is a vital component to reopening the economy (see chart below).
Source: Calculated Risk
  • Economy Reopening: After I have completed all of Netflix, participated in dozens of Zoom Happy Hours, and stocked up on a year’s supply of toilet paper, I have become a little stir crazy like many Americans who are itching to return to normalcy. The government is doing its part by attempting a three-phase reopening of the economy as you can see from the table below. You can’t fall off the floor, so a rebound is almost guaranteed as states slowly reopen in phases.

What Now?!

In the short run, it appears the worst is behind us. Why do I say that? Covid deaths are declining; Congress is spending trillions of dollars to support the economy; the Federal Reserve has effectively cut interest rates to 0% and provided trillions of dollars to provide the economy a backstop; our healthcare preparedness has improved; and global economies (including ours) are in the process of reopening. What’s not to like?!

However, it’s not all rainbows, flowers, and unicorns. We are in the middle of a severe recession with tens of millions unemployed. The Covid-19 epidemic has created a generation of germaphobes who will be hesitant to dive back into old routines. And until a vaccine is found, fears of a resurgence of the virus during the fall is a possibility, even if the masses and our healthcare system are much more prepared for that possibility.

As the world adjusts to a post-Covid 2.0 reality, I’m confident consumer spending will rebound, and pent-up demand will trigger a steady rise of economic demand. However, I am not whistling past the graveyard. I fully understand behavior and protocols will significantly change in a post-Covid 2.0 world, if not permanently, at least for a long period of time. Before the 9/11 terrorist attacks, nobody suspected air travelers would be required to remove shoes, take off belts, place laptops in bins, and carry tiny bottles of mouthwash and shampoo. Nevertheless, a much broader list of social distancing and safety codes of behaviors will be established, which could slow down the pace of the economic recovery.

Regardless of the recovery pace, over just a few short months, we have already placed our hands around the throat of the virus. There are bound to be future setbacks related to the pandemic. Physical and economic wounds will take time to heal. Turbulence will remain commonplace during these uncertain times, but volatility will create opportunities as the recovery continues to gain stronger footing. Although Covid-19 has produced significant damage, don’t let fear and panic infect your long-term investment future.

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (May 1, 2020). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in GILD, Zoom, Netflix , and certain exchange traded funds (ETFS), but at the time of publishing had no direct position in Neiman Marcus, Pier 1, and JCPenney or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

May 1, 2020 at 3:22 pm 3 comments

Investors Scared Silly While Stocks Enjoy Sugar High

jacko

China trade war, impeachment hearings, Brexit negotiations, changing Federal Reserve monetary policy, Turkish-Kurd battles in Syria, global slowdown fears, and worries over an inverted yield curve. Do these headlines feel like a conducive environment for stock market values to break out to new all-time, record highs? If you answered “no”, then you are not alone – investors have been scared silly despite stocks experiencing a sugar high.

For the month, the S&P 500 index climbed another +2.0% and set a new monthly-high record. The same can be said for the Dow Jones Industrial Average, which also set a new monthly record at 27,046, up +0.5% from the previous month. For the S&P 500, these monthly gains contributed to what’s become an impressive 2019 total appreciation of +21%. Normally, such heady gains would invoke broad-based optimism, however, the aforementioned spooky headlines have scared investors into a coffin as evidenced by the hundreds of billions of dollars that have poured out of stocks into risk-averse bonds. More specifically, ICI (Investment Company Institute) releases weekly asset flow figures, which show -$215 billion fleeing stock funds in 2018-2019 through the end of October, while over +$452 billion have flocked into the perceived safe haven of bonds. I emphasize the word “perceived” safe haven because many long duration (extended maturity) bonds can be extremely risky, if (when) interest rates rise materially and prices fall significantly.

Besides the data showing investors fleeing stocks and flocking to bonds, we have also witnessed the risk-averse saving behavior of individuals. When uncertainty rose in 2008 during the financial crisis, you can see how savings spiked (see chart below), even as the economy picked up steam. With the recent spate of negative headlines, you can see that savings have once again climbed and reached a record $1.3 trillion! All those consumer savings translate into dry powder spending dollars that can be circulated through the economy to extend the duration of this decade-long financial expansion.

personal saving

Source: Dr. Ed’s Blog

If you look at the same phenomenon through a slightly different lens, you can see that the net worth of consumer households has increased by 60% to $113 trillion from the 2007 peak of about $70 trillion (see chart below). This net worth explosion compares to only a 10% increase in household debt over the same timeframe. In other words, consumer balance sheets have gotten much stronger, which will likely extend the current expansion or minimize the blow from the next eventual recession.

us balance sheets

Source: Calafia Beach Pundit

If hard numbers are not good enough to convince you of investor skepticism, try taking a poll of your friends, family and/or co-workers at the office watercooler, cocktail party, or family gathering. Chances are a majority of the respondents will validate the current actions of investors, which scream nervousness and anxiety.

How does one reconcile the Armageddon headlines and ebullient stock prices? Long-time clients and followers of my blog know I sound like a broken record, but the factors underpinning the decade-long bull market bears repeating. What the stock market ultimately does care about are the level and direction of 1) corporate profits; 2) interest rates; 3) valuations; and 4) investor sentiment (see the Fool-Stool article). Sure, on any one day, stock prices may move up or down on any one prominent headline, but over the long run, the market cares very little about headlines. Our country and financial markets have survived handsomely through wars (military and trade), recessions, banking crises, currency crises, housing crises, geopolitical tensions, impeachments, assassinations, and even elections.

Case in point on a shorter period of time, Dr. Ed Yardeni, author of Dr. Ed’s Blog  created list of 65 U.S. Stock Market Panic Attacks from 2009 – 2019 (see below). What have stock prices done over this period? From a low of 666 in 2009, the S&P 500 stock index has more than quadrupled to 3,030!

panic attacks

For the majority of this decade-long, rising bull market, the previously mentioned stool factors have created a tailwind for stock price appreciation (i.e., interest rates have moved lower, profits have moved higher, valuations have remained reasonable, and investors have stayed persistently nervous…a contrarian positive indicator). Investors may remain scared silly for a while, but as long as the four stock factors on balance remain largely constructive stock prices should continue experiencing a sugar high.

Investment Questions Border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (November 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

November 1, 2019 at 7:31 am Leave a comment

Are Stocks Cheap or Expensive? Weekly Rant and the Week in Review 4-7-19

The Weekly Grind podcast is designed to wake up your investment brain with a weekly overview of financial markets and other economic-related topics.

Episode 7

Weekly Market Review and This Week’s Rant: Are Stocks Cheap or Expensive?

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

 

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April 8, 2019 at 1:22 am Leave a comment

March Madness Leads to Gladness

jump ball

As usual, there was plenty of “madness” in March, and this year did not disappoint. Just as is the case with the annual NCAA basketball tournament, certain investors suffered the agony of defeat in the financial markets, but overall, the thrill of victory triumphed in March. So much so that the S&P 500 index posted its largest first-quarter gain in more than 20 years. Not only did the major indexes post gains for the month, but the winning record looks even better for the year-to-date results. For 2019, the S&P 500 index is up +13.1%; the Dow Jones Industrial Average +11.2%; and the tech-heavy NASDAQ index +16.5% for the year. The monthly gains in the major indexes were more muted, ranging from 0% for the Dow to +2.6% for the NASDAQ.

Busy? Listen to Wade discuss this article and other topics each week on the Weekly Grind podcast:

 

While 2018 ended with a painful injury (S&P 500 -6.2% in Q4), on fears of a deteriorating China trade deal and a potentially overly aggressive Federal Reserve hiking interest rates, the stock market ultimately recovered in 2019 on changing perceptions. Jerome Powell, the Federal Reserve Chairman, indicated the Fed would be more “patient” going forward in increasing interest rates, and President Trump’s tweet-storm on balance has been optimistic regarding the chances of hammering out a successful trade deal with China.

With the new cautious Fed perspective on interest rates, the yield on the 10-Year Treasury Note fell by -0.28% for the quarter from 2.69% to 2.41%. In fact, investors are currently betting there is a greater than 50% probability the Fed will cut interest rates before year-end. Moreover, in testimony before Congress, Powell signaled the economic dampening policy of reducing the Fed’s balance sheet was almost complete. All else equal, the shift from a perceived rate-hiking Fed to a potentially rate-cutting Fed has effectively turned an apparent headwind into tailwind. Consumers are benefiting from this trend in the housing market, as evidenced by lower 30-year fixed mortgage rates, which in some cases have dropped below 4%.

Economy: No Slam Dunk

However, not everything is a slam dunk in the financial markets. Much of the change in stance by the Fed can be attributed to slowing economic growth seen both here domestically and abroad, internationally.

Here in the U.S., the widely followed monthly jobs number last month only showed a gain of 20,000 jobs, well below estimates of 180,000 jobs. This negative jobs surprise was the biggest miss in more than 10 years. Furthermore, the overall measure for our nation’s economic activity, growth in Gross Domestic Product (GDP), was revised downward to +2.2% in Q4, below a previous estimate of +2.6%. The so-called “inverted yield curve” (i.e., short-term interest rates are higher than long-term interest rates), historically a precursor to a recession, is consistent with slowing growth expectations. This inversion temporarily caused investors some heartburn last month.

If you combine slowing domestic economic growth figures with decelerating manufacturing growth in Europe and China (e.g. contracting Purchasing Managers’ Index), then suddenly you end up with a slowing global growth picture. In recent months, the U.S. economy’s strength was perceived as decoupling from the rest of the world, however recent data could be changing that view.

Fortunately, the ECB (European Central Bank) and China have not been sitting on their hands. ECB President Mario Draghi announced three measures last month that could cumulatively add up to some modest economic stimulus. First, it “expects the key ECB interest rates to remain at their present levels at least through the end of 2019.” Second, it committed to reinvesting all maturing bond principal payments in new debt “for an extended period of time.” And third, the ECB announced a new batch of “Targeted Long-Term Refinancing Operations” starting in September. Also, Chinese Premier Li Keqiang announced the government will reduce taxes, primarily Value Added Taxes (VAT) and social security taxes (SST). Based on the rally in equities, it appears investors are optimistic these stimulus efforts will eventually succeed in reigniting growth.

Volume of Political Noise Ratcheted Higher

While I continually try to remind investors to ignore politics when it comes to their investment portfolios, the deafening noise was especially difficult to overlook considering the following:

  • Mueller Report Completed: Robert Mueller’s Special Counsel investigation into potential collusion as it relates Russian election interference and alleged obstruction of justice concluded.
  • Michael Cohen Testifies: Former President Trump lawyer, Michael Cohen, testified in closed sessions before the House and Senate intelligence committees, and in public to the House Oversight Committee. In the open session, Cohen, admitted to paying hush money to two women during the election. Cohen called President Trump a racist, a conman, and a cheat but Cohen is the one heading to jail after being sentenced for lying to Congress among other charges.
  • Manafort Sentenced: Former Trump Campaign Chairman Paul Manafort was sentenced to prison on bank and tax fraud charges.
  • North Korea No Nuke Deal: In geopolitics,President Trump flew 21 hours to Vietnam to meet for a second time with North Korean leader Kim Jong Un on denuclearization of the Korean peninsula. The U.S. president ended up leaving early, empty handed, without signing an agreement, after talks broke down over sanction differences.
  • Brexit Drama Continues: The House of Commons in the lower house of the U.K. Parliament continued to stifle Prime Minister Theresa May’s plan to exit the European Union with repeated votes rejecting her proposals. Brexit outcomes remain in flux, however the European Union did approve an extension to May 22 to work out kinks, if the House can approve May’s plan.

Positive Signals Remain

March Madness reminds us that a big lead can be lost quickly, however a few good adjustments can also swiftly shift momentum in the positive direction. Although growth appears to be slowing both here and internationally, corporate profits are not falling off a cliff, and earnings remain near record highs (see chart below).

corp prof

Source: Calafia Beach Pundit

Similar to the stock market, commodities can be a good general barometer of current and future economic activity. As you can see from the chart below, not only have commodity prices remained stable in the face of slowing economic data, but gold prices have not spiked as they did during the last financial crisis.

gld v cmmd

Source: Calafia Beach Pundit

After 2018 brought record growth in corporate profits and negative returns, 2019 is producing a reverse mirror image – slow profit growth and record returns. The volatile ending to 2018 and triumphant beginning to 2019 is a reminder that “March Madness” does not need to bring sadness…it can bring gladness.

investment-questions-border

www.Sidoxia.com

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2019). Subscribe on the right side of the page for the complete text.

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions and certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.

April 1, 2019 at 1:37 pm Leave a comment

Podcast 3/24/19: Week in Review and Interview: Russ Murdock, CFA

The Weekly Grind podcast is designed to wake up your investment brain with weekly overviews of financial markets and other economic-related topics.

Episode 5

Market Review and Interview: Russ Murdock, CFA – Small Cap Value Manager and Founder of Seabreeze Capital Management

Don’t miss out! Follow us on iTunesSpotify, SoundCloud or PodBean to get a new episode each week. Or follow our InvestingCaffeine.com blog and watch for new podcast updates each week.

SoundCloud: soundcloud.com/sidoxia

 

PodBean: sidoxia.podbean.com

 

Spotify: open.spotify.com

March 25, 2019 at 12:32 am Leave a comment

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