Nolte Notes 6.29.2020

Nolte Notes 6.29.2020


Nothing matters until it does. The focus on Wall Street has been on the opening of the state economies, the generosity of the Fed and the US government providing money to the financial and economic systems. The financial markets took off, well ahead of the economic data, and seemingly solely on the Fed largess until last week. Then the virus numbers started rising as people began going about their business as usual. The rise in cases worried investors that the second wave is upon us and the economy will have to once again shutter, meaning earnings will take that much longer to recover, additional resources will be spent and the “V” recovery becomes wishful thinking. The economic data does show the economy is recovering; however, the weekly jobless claims and continuing claims are not coming down as quickly as many were expecting. The holiday-shortened week will have the unemployment figures released ahead of the fourth of July and should provide plenty to chew on over the three-day weekend.

The markets have been holding up well in the face of persistently high virus numbers in the US, however, last week succumbed to selling pressure as worries about the second wave spread across the southern US. Most disconcerting has been how quickly many stocks “lost” their staying power above short-term average prices. After 90% of all stocks recently were trading above their 50-day average price, that figures have fallen below 60% and in jeopardy of getting below 50%. The story is worse when looking at long-term average prices, where the figure poked above 50% and today is below 25%. The net number of advancing to declining stocks is also rolling over, all of which paints a much more negative picture for stocks going forward. While the SP500 is barely trading above its average prices, many other broader indices have dipped below last week. Much like the reaction to the virus spread, the markets are taking a breather from the heady rally that nearly recovered all the losses in March.

The interest rate picture remains a bright spot for investors. As low as rates are today with the 10-year treasury at 0.66%, there remains room for yields to decline further if the recovery proves elusive. The Fed continues to buy bonds, supporting not only treasuries but also corporate bonds through their various programs. The yield curve, which steepened following the March bottom in stock prices, is once again flattening out. This is a warning sign that the economy remains tentative at best and could take longer than many expect in getting back to “normal”. As a result, bonds should be a good hiding place while stock investors figure out where to turn to next. Inflation should not (yet) be a concern for bond investors. Once the economy fully recovers, we should begin to see inflationary signs, but that date remains well in the future.

Technology continues to be the “safe” trade for investors. While we are working from home and ordering things online, these companies have been direct beneficiaries. As a result, technology is now gone into “overbought” territory, meaning a correction in prices or selling of technology and buying of other sectors or asset classes is likely at hand. The flattening of the yield curve and overall high valuations of the markets, in general, is beginning to give us pause about the sunny outlook for stocks. Within the SP500, there are now only three sectors that are trading above their average short-term prices, which was as high as eight of the ten in positive territory a month ago. While it may be sunny and warm poolside, storm clouds are beginning to gather over Wall Street. At this point, a correction in stock prices has been overdue but worries about the virus spread may provide fuel for more than a corrective selling phase for stocks.

At this point, we are taking off some of the “risk” in the portfolios, taking hefty gains in technology stocks, and increasing the bond exposure, especially treasuries. This may be a temporary shift, and actions by the government or the Fed for additional measures may allow us to reinstate a more bullish tilt. This is not a “bearish” call, but a realization that stocks, and investors, may be taking a summer holiday.

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.