Nolte Notes 8.24.2020

Nolte Notes 8.24.2020


Last week was the beach, this week is a bit of a hang-over from the sun and umbrella drinks, or so it seems on Wall Street. Yes, the economic data is heading in the right direction, if at a slower pace than many would like to see. Earnings season is “officially” over as the big retail companies reported huge earnings gains, which should come as little surprise since they were the only ones deemed “essential” and remained open during the various lockdowns. Too many “foo-foo” drinks may be impacting investors’ mental condition. Investor sentiment is getting very bullish as investors are getting comfortable with a Fed that has their back. Companies like Tesla are selling for gigantic multiples (Tesla is now on par with Wal-Mart in market value), many have yet to turn a profit. Two companies, Microsoft and Apple are now worth more than the entire financial services industry within the SP500. The five largest companies now account for nearly a quarter of the SP500, the greatest percentage in history. Yep, these companies have done well and benefit from the “shelter in place” mantra of the past few months, but they are selling like they will be the ONLY companies left standing in another decade. Time for another drink!

The various “high frequency” data points like restaurant reservations, gas usage, and airplane load factors have become the go-to for economists trying to determine not only if things are getting better (they are), but how quickly are they getting better (meh). The stock markets hitting all-time highs, recovering from the bear market in record time, is in stark contrast to the economy likely years away from achieving its own “record highs. The focus remains on Washington for another stimulus package. The last one was over $2 trillion; this one is likely to top $1 trillion. While the money is needed by those still out of work, without people feeling confident about being in larger groups (museums, ballpark, concerts, etc.) it will be very difficult, no matter the money, to get everyone back to where they were at the start of the year. Main street is NOT Wall Street as the past few months has aptly demonstrated.

All the money going out of Washington and the Fed must come from somewhere and that somewhere is from higher borrowing. The recent auction of Treasury bonds did not go well, and rates were pushed up a bit to entice buyers. This is normal, and some are fretting that buyers may not be able to absorb the huge amount of debt that the Treasury is borrowing. From the regular weekly auctions of short-term bills to the monthly auctions of long-dated maturities, the Treasury is borrowing $7-10 billion weekly in these various instruments. The appetite remains strong as US yields continue to be above zero (unlike other countries’ debt instruments) and it is the most liquid market in the world. Things may change, but for now, whatever gets issued is getting bought at a pretty brisk pace. Where is the tipping point? No one knows and so far, we seem to be far from it.

To say it was an odd week in the markets may be an understatement. The SP500 rose nearly 0.75% and the OTC markets by more than 2%, yet nearly twice as many stocks fell last week on the NYSE, while 50% more fell on the OTC market. Only Monday did more stocks trade higher than lower, yet the OTC market rose in three of the four remaining days of the week. It is a broken record; the largest stocks are having a large impact upon the “averages”. If the SP500 were weighted equally instead of by the biggest, it would still be down nearly 7% for the year. The smaller the stock, the worse the performance as the Russell 2000 is down nearly 9%. The time is ripe for at least a bit of a correction in the large names, as many of the smaller companies are or have already corrected their recent run-up from the March bottom. This does not mean the markets are going to decline by 30%+, but more along the lines of a 5-10% decline to reset investors’ expectations and put to bed the notion that stocks will forever climb to the sky.

Stocks should take a break from their weekly gains and “catch-up” to the economic data a bit. Bonds are struggling as well, as the difference between long-term and short rates widens. Widening yields has not happened this time around and may be signaling more worry in the bond market about a still-sluggish economy vs. the stock markets ebullience.

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.