Paulsen's Perspective
The Payroll Prophecy!
Should this morning’s payroll-employment report cause stock investors to tremble? Probably not.
Bull Market Possibilities
From its March 23rd low to its recent high, the S&P 500 surged by almost 45%! Is the speed and size of its rally too much, too fast?
Embrace Uncertainty!
Many believe the stock market rally during this pandemic is nothing more than a sugar high orchestrated by the Federal Reserve. Liquidity trends have always been important for the financial markets, and undoubtedly, the outsized policy-push by monetary officials has played a significant role in the market’s recent success.
Some Singulars
No big theme this week. Just half a dozen “one-offs!”
Profit Expectations To Lift?
Company earnings are currently collapsing but the coming year’s consensus profit expectations are poised to lift. Several indicators that have historically been highly correlated with improvement in profit forecasts have recently turned higher and the backdrop of massive policy stimulus is supportive for upgraded outlooks.
Another Positive for the Stock Market! Rising Bond Yields?
As economic activities restart around the country, bond yields have also begun to climb. Last week, the 10-year U.S. Treasury yield rose by about 25 basis points, to its highest level since March 19th, marking only the second time since yields collapsed that they showed any sign of leaving the “sub-1%” area.
Don’t Fade The “Economic” BOUNCE
Despite several issues of importance—national riots, an upcoming presidential election, Chinese relations, and an ongoing pandemic—the stock market is primarily focused on a single thing: the restart of U.S. and global economic activities. There is a worldwide, synchronized economic bounce afoot. Because of the unprecedented magnitude of the recent Covid-19 economic collapse (can it really get much worse?), economic news seems poised for a period of improvement.
Two Conundrums? A Single Answer!
Compared to historical norms, for much of the last 30 years valuations in the U.S. stock market have remained persistently high. Only rarely has it been considered cheap and many investors have purchased stocks that, by conventional metrics, were either uncomfortably or absurdly expensive.
Conjectures?
Things are moving fast! Attitudes and expectations are changing. On the health front. On the economic front. And, in the financial markets. Here are a few “Conjectures?”
Can’t Wait for a Return to Normal
Many believe it will take years to fully recover from Covid-19. Indeed, over the weekend, U.S. Federal Reserve chairman Jerome Powell suggested that although the economy will eventually recover, the process could stretch through until at least the end of next year and ultimately depends on the development of a vaccine.
Re-Opening The U.S. Economy Is ALL About Politics
The attempt to re-open parts of the U.S. economy amidst the ongoing Covid-19 crisis is either Red, Blue, or Purple! Using data from an employment tracking tool utilized by 100,000+ local businesses across the United States, the accompanying chart illustrates the speed and depth of the decline in hours worked and its recent slow recovery among traditional Republican, Democratic, and Swing states.
Growth Stocks Aren’t Winning… “Growth” Is!
Growth stocks have been outperforming for much of the last decade, particularly in recent years, and amazingly so since year-end. However, as the charts here illustrate, it is not so much that growth stocks are winning as it is “Growth!”
Policy POWER
Economic policies have long been a potent force for both the economy and the financial markets. Despite being unsure and worried about how the Covid-19 crisis will yet play out, investors are also currently fearful of ignoring the old adage “Don’t Fight the Fed.”
Some Valuation Vignettes
It is always challenging to judge value, particularly during recessions when earnings power temporarily (one hopes?) contracts. The difficulty has been magnified in the current situation because, like economic data in general, earnings are in freefall!
Broader Market Leadership? You Gotta Bring The HEAT!
Domestic, large capitalization, and growth have dominated stock market leadership for much of the last decade. During this stretch, investors (author included) have repeatedly attempted to exploit “undervalued and out-of-favor” segments of the stock market, only to be proved premature.
A Bottomless Economy?
Is there any way to judge when U.S. economic reports may finally bottom? Obviously, it depends on what happens with the virus. If it continues to burn hot or simply lingers longer than expected, keeping “stay-at-home” orders in place, could economic data prove bottomless?
The “Growth Style” Dominates With A Unique Profile
For the second time in the last 30 years, “growth” has dominated leadership within the stock market. After significant outperformance during the 1990s’ dot-com era, the growth style has again substantially outpaced since the start of the last recovery (Chart 1).
Earnings Are Going Down... But Maybe Not Stock Prices?
Earnings, like everything in the economy, are in freefall. Finance textbooks would argue this paints a bleak future for the stock market, but that isn't always the case.
Random Revelations
After another volatile week amongst the rubble of COVID-19, from a government-mandated “stay in place” prison that I lovingly refer to as my home, here are a few Random Revelations.
A VOL Anomaly?
Volatility within the stock and bond markets has recently parted company. Since 1990, the correlation in daily movements of the stock market’s VIX Volatility index and the bond market’s MOVE index has been about 0.60. While they do not move perfectly together, they usually move in the same direction.
A Bear At WARP SPEED!
This has been a “speedy” Bear Market. Measured through the first 22 days of all bear markets in post-war history, the contemporary bear market declined by almost 6.5 times more than all the others! In 2020, the market dropped 32% in 22 days versus an average of just -5.1% for the previous 13 bear markets. See Paulsen’s Perspective “Recession By Proclamation!” posted on March 23rd.
A Recession Without A Purpose?
The U.S. economy is in free-fall, perhaps headed for its deepest recession of the post-war era. Typically, recessions are necessary to correct overindulgences that build up during an expansion—for example, restoring liquidity, improving savings, purging bad debt, and realigning exorbitant risks. In the economic recovery that just ended, however, there were very few excesses or problems that needed to be addressed.
A Defensive Failure?
At its recent low on March 23rd, the S&P 500 had fallen much faster and by much more than any bear market in post-war history during its first 23 trading days. Indeed, it was off by about -34%, more than six times greater than any bear market post-1945.
Recession By Proclamation!
U.S. recessions are normally caused by private sector vulnerabilities. During an expansion, private players eventually get out over their skis, overdo risky behaviors, and expose themselves.
What Does The Bond-Yield Bottom Say About Stocks?
Overnight Tuesday, stock market futures hit their 5%-limit down trigger—this has become commonplace in the current crisis. Seemingly, in addition to the coronavirus, the stock market is also worried about rising bond yields, which many believe is occurring because governments around the globe are implementing massive fiscal-stimulus packages and, consequently, are poised to sell huge amounts of sovereign debt securities.
Some Impressions?
A pandemic sweeping across the globe leaving unprecedented human turmoil in its wake, while also abruptly freezing economic activities, has brought the longest bull market in U.S. history to a crashing and swift end. Wow! Unfortunately, investment textbooks offer little advice on the situation and this rapid change of events seems far from over.
A Pseudo 1987 Panic? Just something to ponder as you try to calm your nerves..........
There are of course many differences between today’s stock market and the 1987 panic. However, in both cases, the economy was at or near full employment and generally healthy going into the crash.
Yields?... Yikes!
Fear fills the financial markets! Although the frightening and unpredictable coronavirus is the headliner, investors are nearly as freaked out by the recent speedy collapse in the 10-year U.S. Treasury bond to a record low yield below 1%! Is the unthinkable, possible?
A PANIC RE-PRICE!
The stock market collapse has been shockingly quick and severe, causing considerable panic. However, as the charts illustrate, it has also significantly “re-valued” the overall stock market in record time!
A FUNKY FALL?
The collapse in the stock market in recent days has been swift, significant, dramatic and unnerving! And with the VIX volatility index still hovering near 27, who knows how much longer and how much deeper it may go?
Bond Yield Testing All-Time Low!
Fears surrounding the spread of the coronavirus spiked over the weekend bringing panic selling to the stock market. While the possibility of a global pandemic is frightening, anxieties have also been augmented because the 10-year U.S. Treasury yield is again nearing its all-time record low.
UNCERTAIN Undertow
Since the 2008 Great Recession, economic and investment uncertainties have been persistent and pronounced. The shocking depth of the last recession during the post-war era (the annual decline in real GDP growth had never been lower than -3%—until 2009—when it fell nearly 4%), its subsequent subpar recovery (real GDP growth has averaged only slightly more than 2% annually, a level which was traditionally considered the “stall speed” during past expansions), the wild actions of policy officials (Cash for Clunkers, TARP, a zero Fed funds rate, Quantitative Easing, and Modern Monetary Theory)..
Offhand Observations
A lot of moving parts of late. Record high stock markets with near record-low bond yields? A re-inversion of the yield curve. A pop in the U.S. manufacturing industry. Blow-out job numbers at full employment. Impeachment—Not. A botched Caucus. Brexit—Done. And, a Pandemic! Eh, just another day at the office…
Introducing The Intra-Market Volatility Index
Volatility has always been important when investing. It is one of the most widely accepted qualifiers of risk. All investors prefer a steady-return stream rather than the anxiety which comes with irregular and less predictable returns. But often, volatility provides financial signals.
Is Business Investment Alarmingly Weak?
Today, it was reported that fourth-quarter U.S. real GDP growth was 2.1%, nearly in line with expectations. However, business investment spending declined for the third consecutive quarter, continuing to raise fears that companies are pulling back and it is only a matter of time before they also reduce employment, sending the economy into a recession.
Will The ZONE Show Some ZEST?
Investing overseas has mostly been a black hole through this bull market. Price momentum remains terribly weak for international stock markets and this has given investors pause every time they consider reallocating some assets offshore.
When “Risk” Is Not As Risky?
Extraordinarily low bond yields—often negative bond yields outside the U.S.—have significantly elevated investor anxieties, leaving the impression of facing a high-risk, low-return world. Consequently, during much of the contemporary expansion, the existence of very low yields has pushed several investors toward a more conservative portfolio allocation.
Positive Until PRESSURE
Investors are wondering what will ultimately crack this stock market. Its rising trend of late has improved investor sentiment, which is not surprising given the abject fears evident last summer about an imminent recession. While sentiment has recently turned positive, it hardly seems broadly optimistic or ridiculously bullish.
Profits Please?
Geo-political conflicts, an oil crisis, impeachment drama, and an upcoming presidential election are all currently rattling the stock market. Yet, what really matters for stocks this year is profits. For the stock market to make sustained progress in 2020, companies’ bottom-line performance needs to show renewed life.
Super Cycles
Including those who are bullish for this year, few expect stocks to continue delivering superior returns during the next decade. The economic expansion and bull market are simply too long in the tooth, and valuations too extended, to produce another decade of solid results.