Nolte Notes 8.30.2020

Nolte Notes 8.30.2020


Outside of a few hours this month in Chicago, it has been sunny and warm. Outside of four trading days, the markets have advanced 18 trading days and jumped nearly 10%. With the Fed keeping rates at zero for the foreseeable future, and expectations for a vaccine for Covid, what is not to like about stocks? Like the weather in Chicago, it will change, and these warm, sunny days will be just a memory. The economic data continues to improve but remains a long way from “normal” or even looking like a recession. The markets do like the fact that the numbers are improving, which is more important than the magnitude of the improvement. Whenever the data points begin to turn down, the markets will struggle. Because of the historic economic shutdown, the seasonally adjusted data points have become useless. The adjustments have been made to incorporate seasonal factors in employment, retail sales, etc. However, looking at the raw data, weekly jobless claims continue to improve, and housing has been “on fire”. Both are key components of the overall economy and will need to show sustainable improvement in the weeks/months ahead for the markets to maintain a positive tilt.

The relationship between the stock market and the economy is strained. The economy, while improving, still has 10% unemployment. More layoff announcements are coming as business remains slow. The service sector, which has become more than two-thirds of the economy, is stuck in low gear without the economy completely open and due to continued concerns surrounding Covid. The coming week will be chock full of the heavy economic data points that will get analyzed over the holiday weekend. From the surveys on manufacturing and services (both are showing expansion) to the unemployment report on Friday, there will be plenty for economists to chew on. It is expected that another 1.5+ million jobs were “created” during the month of July. Finally, due in large part to government assistance, spending continues to expand. Nonetheless without an extension, spending may start contracting in the coming months as 27 million people are still unemployed. The economy is improving, just not as quickly as many expected five months ago.

The big news of the week for financial markets was not the Republican Convention, but the online version of the Fed’s Jackson Hole annual confab. Unveiled by Chair Powell was their new policy in addressing inflation. Going forward they will be focused more on the average rate of inflation rather than a target of 2%, which has been in place since 2012. As measured by the Fed’s preferred core personal expenditures (PCE) inflation has been fairly consistently below 2% since 1996. Various Fed programs, from quantitative easing to cutting rates to zero have not managed to boost inflation in over 20 years. Why? Some is due to the lack of population growth in the US (and in most developed countries) as well as a heavier reliance on technology. Those trends will not be reversing anytime soon, so no matter what the Fed is doing, inflation is likely to remain relatively low in the future.

August historically has been one of the poorest months for stocks and fast on its heels is September. This August was extremely good for stocks, and more gains are anticipated into September as economic conditions continue to improve. The market averages do not fairly represent what is happening to most stocks, as we have highlighted over the past few months. If we weight all the stocks in the SP500 equally, that average is still down for the year, while the SP500 is up over 10%. Technology stocks are up over 30% for the year, small stocks are down over 5%. International has barely made it back to the zero line. Finally, the disparity between “growth” and “value” is at its largest spread in history. So, while the markets may continue to rise in the months ahead, it is likely to be coming from the value parts of the markets. The market differences are becoming reminiscent of the late 90s, the last time technology ruled the markets to this extent. Investors holding “non-tech” faired rather well in the early 2000s as the market “averages” dropped from 2000-’03.

We have been slowly shifting away from technology and toward more “value” and smaller stocks. Over the coming years, the more ignored portions of the markets are likely to perform better than the headline technology names in the years ahead. Bond investors are not likely to see higher interest rates anytime soon, as the Fed will be keeping rates low for the foreseeable future.

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.