Nolte Notes 8.3.2020

Nolte Notes 8.3.2020


There are plenty of Wall Street aphorisms, from “sell in May and go away”, to “don’t fight the Fed” and “the trend is your friend”. The overarching theme for investors is not to fight the Fed. In last week’s comments, they indicated that interest rates are likely to remain at the zero level for the foreseeable future. The economic data, while generally better than expected, has been showing signs of leveling as Covid cases rise in various states. Whether looking at hotel occupancy or restaurant reservations or even credit card spending, all point to a moderation in economic growth. So, the Fed will continue with its extraordinary measures to make sure the economy does not backslide in the fall. Congress is trying to figure out their plan to soften the blow of still-high unemployment and businesses shuttering. All of this adds up to more dollars sloshing around, looking for a place to go to earn a return. That place seems to be the stock market, especially in the tech sector. If the trend is your friend, then technology is the place to be, until that trend changes.

The economic data point of the week was the overall contraction in the US economy during the second quarter. Falling by over 30%, the decline in GDP was the largest on record. Even so, that number was better than the 35% decline estimated by economists. Having never experienced a global economic shutdown, estimates for the decline and recovery will likely be nothing more precise than sticking a wet finger in the air to determine wind speed. The monthly jobless report will hit on Friday and likely show continued improvement in the labor market, but the more frequent weekly claims numbers are indicating a slowing in hiring. So, the trend is better, but at a less robust pace than just a month ago. That is giving both lawmakers and the Fed reasons to continue to support the economy and financial markets with additional stimulus. The economy is not likely to get “fixed” by tossing dollars at it, but only after people feel comfortable moving about doing their routine things.

The comments by the Fed about interest rates pushed yields even lower last week. Projections are for interest rates in the US to be below zero sometime next summer. One metric we keep a close eye on is the difference between two-year and ten-year yields. That difference collapsed last fall and signaled some problems within the US economy. It was only after the virus hit that we began to see “what” it was signaling. After expanding following the various stimulus packages, the yield difference is once again declining. It is above our “worry” threshold, however, another month or two of lousy economic data points could once again signal trouble on the horizon. As a result, we have increased our weighting toward treasury securities that should hold up well and have performed in line with the stock market since early June. As of today, the way is clear for further declines in interest rates in the weeks/months ahead. Until the recovery gains traction, rates are likely to remain at historic lows.

Not much has changed since the 4th of July with the sectors and asset classes. Technology reigns supreme, confirmed by excellent earnings reported on Thursday by the biggest companies. There are a variety of ways we can look at just how the markets have performed without the aid of Big Tech. Technology stocks now account for more of the SP500 than the next two sectors (Health and Discretionary) combined. The largest five stocks within the SP500 have gained as much as the other 495 names have lost this year. Finally, the tech-heavy OTC market is up nearly 24% for the year, while the average SP500 stock is down nearly 8%. How long can the winners run, and the losers suffer? Like the late 90s, much longer than many expect. One final note on the markets. Instead of selling in May and going away, we should be selling in July and fly somewhere. Historically the two worst months of the year are August and September with September as the worst month in the calendar. Enjoy the beach!

Outside of the daily reporting on Covid cases, the markets are looking a bit tired and due for a rest. Our larger concern is the slow contraction in yield differences between the 2/10-year treasuries. We are slowly taking some profits in the technology sector and allocating toward treasuries as a precaution at this point.

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.