Nolte Notes 9.28.2020

Nolte Notes 9.28.2020


Without a furious rally early in the week, this will mark the first month since March that the markets have declined. Judging by the various comments in the financial press, an economic collapse is on the horizon. While sensationalistic, the economy is showing some signs of slowing in key parts that could spell some trouble. As has been the case since the beginning of the economic shutdown, we look at the “high frequency” data points to determine if things are opening, stagnating, or backsliding. From people moving through the airport to restaurant reservations to using phone apps for directions. All are showing modest improvement during the month of September, but that “rate of change” has slowed from the summer months. The weather has been very nice in the northern climes, but the beginning of fall marks the beginning of the end of dining outside. The focus, at least temporarily, will shift this week to the elections as the first of three debates is set to take place on Tuesday. The economic data will be coming hot and heavy afterwards, culminating in the monthly jobs report that will get the usual scrutiny. Another week of tossing and turning all night!

Fear is once again entering the financial markets. Last week marked the fourth consecutive week that the SP500 fell, the first time that has happened since August of last year and only the third time in the last five years. It is little wonder that investors are beginning to worry. Even the market decline in March was split into two terrible weeks around one positive. From a very short-term perspective, one third of stocks are trading below their short-term average prices, the lowest since the March bottom. Historically, the markets should rally some from this point, however the political and still rough economic data may keep a lid on any “friskiness” in the market. The volatility is likely to remain through the election. Once the election is in the rearview mirror, stocks could stage a yearend rally as investors sigh a bit of relief and turn back to the economic and virus data.

One of the indicators for the stock market is the spread between high yield bonds and treasuries. Historically, the spreads get very wide when the economy hits the skids and this year was no different. Once past, those spreads get smaller as investors begin getting comfortable with an economic recovery. This time around, those spreads are indeed much lower than in March, however they have hooked up over the last few weeks. This is being confirmed with a narrowing of yields in the treasury market. Both indicate the recovery remains in question and the potential for another leg lower in the economic data remains relatively high. Even the performance of the very safe utility sector has outpaced the SP500 nearly every day since the start of September. The uneven recovery is likely to keep investors on edge until we get better medical data on a vaccine.

One of the “tells” in this market is the action of technology stocks. They skated through the March decline and came out the other side as market leaders. They were leaned on heavily as people worked from home and ordered nearly everything online. Technology has become the “conservative” play if the economy struggles to reopen. However, one other sector also provides some insight into investors desires to take on risk, utilities. As we noted above, the utility sector has been performing well vs. the SP500 since the start of the month. This has coincided with the market correction and was also a leading indicator of the market decline early in the year. Small and mid-cap stocks have done well during September as investors sold some of their tech shares. That said, there has been no changes in the ranking of the various industry groups within the SP500. Technology remains at the top, while energy sticks at the bottom.

While stocks have fallen in four straight weeks, they may be ready to rise this week as investors may be coming back into the technology sector after many companies have fallen 15-25% this month. The debates, election and earnings will keep investors focused and still jumpy, so volatility is likely to remain with us for the next 4-5 weeks.
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.