Nolte Notes 6.1.2020

Nolte Notes 6.1.2020


Spoken in the tones of Maxwell Smart: Would you believe the SP500 could get over 8000 by New Year’s Day? Including weekend and holidays, the markets have increased at a pace rivaling the one month decline from the February peak to the nadir in late March. A long, strange trip does not even begin to capture the events of the past three months. The trillions of dollars spent by Congress and the buying of bonds by the Fed has done more for Wall Street than Main Street and part of the reason for the disconnect between consumer confidence and investor sentiment. Earnings are not likely to recover nearly as quickly as expected as dislocations, broken supply chains and spending habits are not likely to snap back. Yes, states and many businesses are beginning to open, but with some new protocols that are not going to result in booming businesses like the end of 2019. An easy bet would be that the SP500 does not maintain the same pace of the past month and there will be some reconciliation between the generosity of the Fed and Congress and the daily reality of getting back to work. Heaven forbid there is a surge in cases or postponing of the economic opening. The financial markets will not react kindly.

The market has put together quite a run over the last two weeks. Both weeks saw a better than 4 to 1 ratio of advancing to declining stocks on the week. The volume of advancing stocks doubled that of declining stocks mid-week, showing a strong appetite for stocks by investors. While the markets have put on a show since the March bottom, much of the excitement has been contained within the first hour of trading. The Dow has increased nearly 7000 points from the bottom. Looking at the first hour of trading, the Dow added 6500 points just within that hour. In the final hour of the day, the Dow dropped 500 points. What that means is that stocks really did not move too much over the course of the trading day. If you were not in the market the night before, you missed that opening jump in stocks the following day. Healthy? No, as retail investors tend to be very active in the first hour, while the specialists (or smart money) tends to be more active at the end of the day.

As the economy begins to open, commodity prices are beginning to perk up as well. Still down significantly from a year ago, they have been moving gradually higher over the past month. Interest rates have perked up a bit from their very-low levels as the Treasury is issuing a ton of bonds to pay for all the stimulus. All of this is pushing the bond model toward the negative zone, meaning that interest rates could be rising in the months ahead. Since late 2018, there have been a few weeks that were negative as interest ultimately fell to near zero. This change does not mean rates are going to soar, but it means to be a bit more cautious about extrapolating the past well into the future. This means that the discussion about negative interest rates could be a bit premature.

There are some small signs that there is a rotation underway from technology and healthcare and towards some of the lagging groups like consumer discretionary and even financials. Smaller stocks, value, and international all bested the SP500 last week. Whether the rotation lasts more than a few weeks is yet to be seen, but these parts of the markets provide some of the better overall returns due to their poor relative performance to the large US growth stocks that we have been highlighting over the past few weeks. Since many of the technology names also are large contributors to the SP500 performance, it may be that the index takes a bit of a breather and allows some of the economic data to play some catch-up. It may be hard to believe but a few decades ago the kings of the markets included AT&T, Exxon, and IBM. Yep, dinosaurs. What will be said about this decade’s behemoths?

The markets have had a tremendous few weeks and are likely due for a rest. Whether that means some of the market leaders take a break while others jump to the fore or a retracement of some of the recent gains, we should get a feel for that the next few weeks. Bond investors could be seeing interest rates slowly rise in the months ahead as the Fed and government begin to back away from their intense support to the financial markets.

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.