Nolte Notes 5.26.2020

Nolte Notes 5.26.2020


A year ago we sat watching parades, fireworks displays and a concert in the park. The stock market was in roughly the same spot it is today, however, our lives are far from that “normal” we enjoyed a year ago. The most recent jobless claims numbers now show over 35 million people out of work and an economy that is contracting at a pace not seen since the Depression. Amongst all the bad news, there are glimmers of hope in various states opening their economies and a turn higher in many bits of economic data. While America honors those who have sacrificed their lives for our freedom, it also looks forward to better days ahead as we grapple with the containment of the virus. The holiday-shortened week will still have plenty of economic data points to assess the state of the economy. However, the financial markets, it is said, are forward-looking. Investors are banking on a “V” recovery once states open their doors wider and people get comfortable with the “new” normal. There will be plenty of people keeping an eye on the beaches and subsequent reports of changes in infection rates to determine the actual “letter” of recovery. The good news is that summer is here and hopes are high for easier living.

After May’s mid-month swoon, stocks recovered those losses and more by the close on Friday. Granted, much of the gains came right at the open last Monday, as the SP500 jumped nearly 3% in the first 30 minutes of trading. From there, the markets traded sideways much of the week. Last week was one of the first in a while that showed some participation from the broader markets. The smaller the stock, the better the performance. Technology and healthcare took a back seat to energy and industrials. International and commodities also performed better than the SP500. All that said, only one-third of the stocks within the SP500 are trading above their long-term average prices. It has been a slow grind higher over the past month as stocks, in general, begin discounting a recovery rather than the economic contraction we are experiencing. If more stocks can continue to best the popular index, we can see the recovery continuing well into the summer.

The fear of central bankers around the world is not rising prices, which they can handle, but falling prices, for which they have no tools to deal with in their toolkit. Deflation, or the general decline in prices across the economy, is a risk at this point with consumer and business spending slowed dramatically. The important issue for the Fed, and investors, is whether that price decline is temporary (disinflation) or a more permanent feature (deflation). If consumers believe that by waiting, they can get lower prices in the future, no amount of money or interest rate cuts will “create” the need to spend. As a result, we think the Fed is likely to keep interest rates at the zero level for quite some time. At least until we begin to see persistent pricing/inflationary pressures.

Thanks in large part to the performance of Amazon and Home Depot, the consumer cyclical sector has joined technology and healthcare above their long-term average prices. Looking at various asset classes, only the bonds can make that claim. The SP500 is between the long and short-term average price, and once it hurdles the long-term, many believe the next stop will be all-time highs from February. As has been the case for quite some time, the largest US stocks are the ones leading the markets. It is concentrated in the FAANG names (Facebook, Amazon, Apple, Netflix, Google, and Microsoft for good measure). All of them are higher on the year and have skewed overall market returns as well as earnings for the SP500. Without those names in the index, the markets would be closer to the 16% decline of the equal weight index year-to-date rather than the 7.50% for the SP500.

The markets are following the money coming from the Fed and the government. As long as interest rates remain near zero and the Fed is supportive of the financial markets, investors will feel comfortable taking the risks of investing. Whenever the Fed decides it is time to “normalize” rates, the financial markets will be throwing their usual hissy fit. But that time remains a long way off.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.