Nolte Notes 8.17.2020

Nolte Notes 8.17.2020


Whether sitting on the dock of the bay or under the boardwalk, the next few weeks are when everyone hits the beach for one last bit of summer. Even Congress has packed up for the summer, returning to work after Labor Day. The lack of a stimulus package for the next few weeks has not taken Wall Street off its gradual rise to all-time highs. The economic data continues to surprise to the upside, leading some to wonder whether a package is really needed. Retail sales are robust and weekly jobless claims are finally under 1 million. While claims are still 50% above the worst historically, retail sales are nearly 5% higher than a year ago. Thanks in large part to the very generous stimulus package that has expired and now awaits Congress to return and vote on something. However, once past Labor Day, the focus will narrow on the November election, so both parties want to be the friend to the “regular guy” who is still likely unemployed. The next few weeks may be instructive, if the data continues relatively strong, there a call for additional fiscal support may not come to fruition until after the election. Stay cool and use plenty of sunscreen, it will continue to be hot and steamy in Washington.

As highlighted above, the two big pieces of data were the retail sales, indicating the consumer remains very willing to spend and weekly jobless claims. Both were above expectations. However, it is hard to pin down the variance in the estimates as economists really have no idea how the economy will or is supposed to recover from the March/April shutdown. So, when looking at the “surprise” index, which measures how far away from reality the estimates are, the index is off the top of the charts. This means all the surprises have been exceptionally good. Of course, economists wonder it this can continue with so many businesses shuttered (many permanently) and well over 15 million people unemployed, or 10% of the workforce. Add to that a Congress that is shuttered for the next three weeks. There will be one more employment report before Congress reconvenes and that should provide useful information on how quickly employment is returning to “normal”.

Just when interest rates were heading to somewhere south of zero, the combination of better economic data, Congress adjourning for the summer and a poor reception to treasury bond auction last week, has pushed the 10-year bond significantly higher. Commodity prices have firmed a bit and the difference between short and longterm rates has expanded, all indicating that the economy and overall activity is picking up. We have seen this show before as yields back up for a few months, only to decline as either inflation or economic activity comes in “too low”. The Fed has indicated they are happy to allow inflation to run above their 2% target rate for some time, however inflation has remained stubborn below that 2% threshold for quite some time. The large amount of debt taken on by the government as well as many corporations is the wet blanket that should keep the inflation fires from burning too hot.

Technology, for one week, has taken a back seat to other sectors. Joining technology were the utilities and communications as the only sectors declining last week. The shift to value from growth has been called for over the past couple of years, but outside of a good month or two, it has remained a growth story. If the economy can gain some traction, we should see many of the value sectors, like industrials, financials and even the beleaguered energy sector take the performance lead. Early June has been the demarcation line for value vs. growth as well as international/emerging markets vs. domestic. That one month run ended about the fourth of July and since that time, the old leaders have gained the floor. Valuations remains a concern, as earnings are likely to take a couple of years to regain all-time highs, the stock market is well ahead of those earnings and near their all-time highs. Something will have to give in the months ahead. There will be plenty of things to watch, Covid, economic data and the election. While the beach is warm, we will worry about that another time!

The path of least resistance remains higher for stocks. The easy monetary policy, low interest rates and better economic data have been the fuel pushing stocks ever higher. Many of the historical supports, like earnings and strong balance sheets do not matter today. The speculative fervor has investors in its grip.

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.