Nolte Notes 7.12.21

July 12, 2021

“We’re all mad here, I’m mad. You’re mad.” And so down the rabbit hole we go! Just when you think you have it all figured out, the economy and/or the markets throw you a curveball. Maddening, sometimes. But we are in a deranged time where everyone is a bit crazy. We celebrate huge employment gains, yet at the recent pace, it will take another seven months to regain the old employment peak. Job openings continue to grow as companies of all stripes can not find willing workers. Many “consumer-facing” businesses have shortened hours due to a lack of employees. The Federal Reserve believes easy money can solve this problem, so they keep rates at historically low levels while pumping over $100B into the markets every month. “When you have a hammer…”Goods are having a tough time getting to market and prices for nearly everything are rising. Many believe this will work itself out over the next year as companies fully staff up and supply chains are working properly again. Some wonder if the economy is permanently damaged. The coming week will have inflation, retail sales and sentiment indices released. The madness is not likely to get resolved this week!

Worries about the Fed “starting to think about thinking about” cutting back their bond purchases knocked down stocks for a day, but the “buy the dip” crowd piled back in on Friday, pushing stocks to yet another record and 14th weekly gain in the last 19 weeks. Yes, there are some chinks in the armor, but the easy monetary policy is what rules the day. Over those 19 weeks, 90% of the stocks within the SP500 remain above their long-term average price, however the last few weeks, barely 50% are above their short-term average price. Meaning stocks have rallied so strongly that any short-term pullback has done little to dent the long-term picture. Within the S&P500 industry groups, all but telecom are above their long-term average, so until the market “technical” begin to break down in a more meaningful way, the path of least resistance looks to be higher. Growth has been the big winner over the past few weeks as interest rates have declined. Could the rate decline be warning the markets that the best/fastest economic growth has passed? Potentially, however, we would like to see a few more indicators pointing that way before beginning to worry about the next downturn.

The yield curve flattening is a warning sign of slower economic growth. However, without a signification push higher in the yield differential between junk and treasury bonds, long-term worries are not yet heightened. Earnings season gets started this week, and there will be plenty of commentary about what companies are seeing in their “end markets” and their capacity to fill demand. Finally, comments regarding pricing and inflationary pressures could also impact bond yields, pushing them back up if investors believe those pressures are more than just “transitory” as the Fed currently believes.

The quick rotation between “growth” and “value” has been driven by changes in interest rates. As interest rates rise, value does well. As rates fall, growth does well. Both are tied to the re-opening of the economy. If investors believe that the re-opening is going well and pricing pressures are building, value does well. If investors believe the best of the economic growth is now behind us and we are heading back to the recent average growth of 2%ish, then growth will do well. From a long-term perspective, growth is very overvalued, with various companies selling at their highest price to earnings multiples going back to 2000. While value is also expensive in absolute terms, relative to growth, it is about as cheap as it has been going back to the late 1990s. We believe that over the next few years, the overall market will struggle to provide meaningful gains, but that value should shine relative to growth as the economy slowly works its way back to “normal”.

Interest rates have been driving the markets as well as various parts of the markets for the past nine months and that is not likely to change. Hence, we will be watching yield differences between various asset classes for clues as to when markets are likely to make a significant shift. Not yet in the cards but watching closely!

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.

Nolte Notes 6.2.21

June 1, 2021

What was Hollywood’s six-million-dollar man is now Washington’s six-billion-dollar man. Inflation impacts everything! The new budget rollout late on Friday will be the starting point for wrangling about deficits (do they matter?), spending programs (remember shovel ready?) and initiatives the current administration would like to put forward. An interesting provision is an increase in capital gains tax rates that would be retroactive to April. While many are wringing their hands about the proposals, what gets passed, should make for some interesting beach reading this summer. Back at the economy, the inflationary figures continue to run “hot” as the economy continues to lurch toward a full re-opening. Supplies channels are still not operating correctly and are unlikely to get back to normal before year end. Employment is getting better as the weekly jobless claims’ numbers fell again last week. The coming data dump for the first week of June will include the “official” jobs report that should see some improvement over last month’s disappointing figures.

The markets continue to chug along, even in the face of data that historically would have had the markets falling. Higher inflation and large job gains are generally a recipe for hiking interest rates. However, looking at the bond market, you would have to shake a few traders to get them to move. Ten-year treasury rates remain below their March peak, and “risky” high yield bonds have traded well. Investors are amazingly comfortable with a Federal Reserve that has been buying large quantities of Treasury securities every week. Along with a commitment to keep interest rates lower for longer, investors have little choice but to buy equities to get any kind of return. That has pushed valuations of the equity markets to extremely high levels, rivaling those of 1929 and 2000. What is currently missing is a reason to sell. Until the Fed begins to discuss withdrawing from their purchase program, or we begin to see investors move out of risky portions of the markets, the momentum is still on the bull’s side and stocks can get pricier still. The warm sun calls and living is easy…for now.

After a very rough first quarter, bond investors have been rewarded with “staying the course” as returns have been positive in each of the last two months. Bonds have even given stocks a run for their money since late April, providing essentially the same return without the daily swings. If there are concerns in the bond market, it is that the bond model has swung negative, indicating the direction for interest rates may be higher in the coming weeks. The model has been negative much of this year and even as rates have moderated, they really have not dropped too far from their March peaks. Commodity prices are likely to be the key driver for interest rates going forward.

The markets have been swinging back and forth between growth and value for much of the past six months, however value has been the “winner” overall, as it has been two steps forward, one step back for value stocks. These are the parts of the markets that will benefit from the continued opening of the economy as we go from virtual meetings to in person, from FaceTime to face-to-face. There have been and will be plenty of bumps along the way, however the differences in valuations between these two asset classes tends to favor value ahead of growth. Comparing technology’s performance vs. nearly every other S&P500 sector shows technology’s performance peaking in the third quarter of last year and underperforming since. Even comparing technology to international, shows a similar relationship. The rotation away from technology is hard for investors to do, as the allure of high growth keeps them from moving. However, the valuation on technology stocks in general is well ahead of their historical norms, while valuations of other sectors and asset classes remain near or below historical norms.

“Sell in May and go away” is a Wall Street adage that historically shows the markets doing poorly in the summer. However, the last few years it would be better to hold the stocks and just go away. Will this year be any different? Or will the Fed keep the good times rolling with as easy monetary policy? Stay tuned.

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.

Nolte Notes 5.10.21

May 10, 2021

“Jobs, jobs everywhere and not one to be had”. With apologies to Samuel Coleridge, the jobs report on Friday was in stark contrast to the news earlier in the week of large drops in weekly jobless claims. Employment reports embedded in various survey data also indicated that payroll gains would be close to 1 million, not just a quarter of that guess. Given the huge whiff, it would not be a surprise to see stocks take a header and drop a few percentages. However, they rose nearly 1% as investors feel the monetary spigots will remain wide open, fueling further stock gains and potentially higher inflation along the way. Excuses for the miss abound, from lingering fears about covid while heading back to work, schools still in hybrid and parents needing to hang around the house while kids are home. Finally, some point to the generous unemployment programs that are keeping potential employees at home until at least September, when the benefits are set to expire. Of course, the weaker report emboldened others to push for even more benefits.

The economy is in a strange place. Manufacturing is running full out and having trouble finding “stuff” needed to make their “stuff” (hence the rising prices on various inputs like steel, copper, grains, etc.). Services are beginning to come online as restrictions ease. Yet they are having trouble finding workers and still have capacity restrictions and higher prices for their needs (like jet fuel and foodstuffs). Housing is booming as many are leaving the larger cities and heading to the ‘burbs. Lack of building (and higher lumber/copper prices) has pushed up home prices at a pace last seen in ’07. GDP growth was over 6%, yet the calls for more stimulus and keeping the Fed’s rate policy in place were heard following the report. The key question is whether the combination of the enormous stimulus package (as well as the one proposed) and higher input prices for all sorts of goods will indeed be “transitory” or much more lasting than is presently assumed. Inflation in the financial markets have been deemed a good thing, however now that it is spilling over into the “real economy”, it could pose problems for officials.

Bond investors cheered the poor employment report, as they believe the easy monetary policy will continue for longer than expected. Since hitting 1.74% in mid-March, the 10-year Treasury yield has eased to 1.60%, trading in a very narrow range. If the bond market is indeed worried about inflation, it is not yet showing up in yields. Even the spread between short and long-term bonds has contracted when it would be expected to expand as the economy heats up. Investors in low-grade corporate bonds are not worried either, as high yield rates are their closest to Treasury yields ever, meaning the margin of default risk has never been lower.

Even with the much lower-than-expected job growth last month, the “re-opening” trade in the market continues to lead the way. Small US stocks and large US value have been out in front much of the year and have regained their leadership roll over the past two weeks. The dollar has weakened as well, allowing international investments to lead their US counterparts. A concentrated portfolio of US technology stocks has been the big winner over the past decade, starting in the depths of the financial crises of 2008 and (likely) culminating with the rollout of the vaccine late last year. Investors are paying a hefty premium for growth, as the average price to earnings for growth is 30x, 50% higher than that for value stocks. Both are at historically high levels, but for those that need to always be fully invested, the near historical difference between the two would argue that investors should be buying value and selling growth. The “reversion to the mean” trade would help investors who have a diversified portfolio of large/small/international holdings perform better than the averages, which are still dominated by large growth names.

The circular argument of “why are stocks going up? Because people are buying. Why are they buying? Cause stocks are going up”, will come to an end at some point. There are not yet any hints that stocks are going to do much more than correct their torrid run this year. A large “wow” drop is not yet in the cards. Still scanning the horizon for signs though…

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.

SVP Paul Nolte Interviewed on Global Banking and Finance 4.6.21

Kingsview SVP Paul Nolte discusses employment, economically sensitive cyclicals and small caps.

Click here to read the interview

Nolte Notes 3.22.21

March 22, 2021

The days are longer than the nights and the weather is beginning to warm up. Baseball starts in 10 days! Summer is just around the corner. The economic “issue” is that inflation is beginning to heat up as well. Getting lumber or copper for homebuilding or gas for your car is costing a whole lot more than a year ago. As a result, interest rates are rising and pushing the Fed to recognize that an ill wind that blows does nobody good. Inflation, in the words of the Fed, may be transitory, but for how long? Expectations are for an economy to be blowing hot during the summer as economies open around the world. With all the stimulus and people going back to work with extra money in their wallets, inflation may be around for something more than a transitory period. To be fair, the Fed has pulled the punch bowl from the party well ahead of things getting out of hand, but this time wants to wait until they start seeing the party really rolling before raising rates.

Last week’s economic data was less than stellar, but the key report will not be showing up until April’s jobs report. The weekly jobless data is stuck in low gear, without much change since Halloween. However, the continuing claims are about double that of early 2019 and about two-thirds of the peak in 2008/09. Other data points are indicating the economy is healing, albeit very slowly. The coming jobs report will be informative as to the type of jobs coming back. In early March, the jobs report showed a large pick-up in hospitality jobs, restaurant, hotel, and bars. The trend is expected to continue as various states are loosening the restrictions of the past six months or so. Commodity prices are beginning to roll over a bit, energy prices have dropped from their recent highs and agriculture prices are down for March. So, while inflation indices could continue to rise in the months ahead, some prices are beginning to decline. As vaccinations increase and economies open, the main debate is how much pent-up demand is out there. Many are hungry to get out, others remain cautious. Trying to guess human behavior after this year is a fool’s errand. We will watch how things unfold rather than trying to guess.

The direction of interest rates has been the focus of investors over the past month as rates on the 10-year bond is now at the highest level in over a year. However, looking back at the 10-year yield, rates have been in a range between 1.50% and 3% since mid-2011. Before collapsing to under 0.60% last summer, the yield on 10-year bonds was near 2%. The concern today is that inflation is going to spike, and the Fed will have to step in to raise rates. The Fed has stepped in early, anticipating the inflation that never came. Today, they want to see inflation before beginning to tighten rates. They should be on the sidelines until sometime in 2022.

The battle between growth and value continues to rage during March and has been dependent upon the direction of interest rates. When rates rise, growth stocks falter. When rates ease, growth races higher. Growth stocks are all about future expectations for earnings that get discounted back to a price today. As rates increase, that discount rate also increases, pushing today’s value lower. More cyclical stocks that are tied to economic growth benefit from a better economy. They tend to be very leveraged to economic growth, doing very well as the economy recovers and booms, and collapsing when the economy hits a recession. We have been concerned that growth stocks have “discounted” every possible bit of good news in their price, so any change could mean much lower prices if those expectations are not met. While not necessarily as egregiously priced as the tech bubble in 2000, many growth stocks are still priced for perfection and could fall dramatically if those expectations are not met. Meanwhile, little is expected of the consumer related stocks in the face of the pandemic. As the economy opens, many will do very well as consumers return and spend money. That rotation from growth to value is likely to continue in the weeks/months ahead as people start to feel better about mingling with others.

Interest rates are likely to continue to rise as economic growth should also rise dramatically over the summer months. While that growth may be temporary, investors will still fret about potentially higher inflation and a Fed that may begin to tighten monetary policy and push interest rates higher still.

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.

Nolte Notes 3.15.21

May 15, 2021

As we “celebrate” the first anniversary of the “just two-week lockdown” to bend the curve, the economy remains a mess even though Wall Street is doing fine. Another $1.9 trillion will be doled out over the coming weeks and months to help the economy and those impacted by job loss recover. Until the economy opens fully, it will be hard to restore jobs, especially in the service sector. Market psychology has shifted from benefiting companies helped by working/staying at home to a hopeful reopening of the economy. The bond market is sniffing inflationary pressures and concerns about the time when the population is unleashed from a restricted lifestyle. Interest rates have increased significantly and this week we will hear from Fed Chair Powell regarding their position on keeping rates low for longer and when it will begin to shift. As the weather warms and vaccines find arms, the summer is expected to be “more normal”. Anything less will be a huge disappointment after the past year.

The economic damage of the past year is still very evident in the weekly jobless claims figures. The average of the past year is roughly 50% higher than the average during the financial crisis. The response from the government has been multiples more than during 2008-’09. Unlike that period, this one is completely health related and will take broader vaccination and local governments to relax restrictions on the service economy to realize a stronger recovery. The inflationary worries have not yet shown up in the “official” data, as both consumer and producer prices were as expected and are still well below the Fed’s 2% target. That will change in the coming months as commodity prices have jumped by over 20% since the end of last March. Even pulling out the usually volatile food and energy, prices are expected to soon be above that 2% level. If consumers have money to pay the higher prices, inflation can linger. The extension of various programs into fall may allow many to have money in their pockets and keep the pressure on prices. Once the economy fully recovers, wage growth will be the key driver for “durable” inflation. This dynamic will be under the microscope at the Fed meeting and the press conference that will follow. The markets are sure to react.

The bond market has been at the center of investor’s focus as longer-term bond yields have been rising in response to expectations for higher economic growth and inflation. The impact has been felt more in the treasury market and to a lesser extent the corporate bond. Corporate bond (and to a lesser extent) municipal bonds are dependent upon the health of the specific issuer. Better economic growth and higher local tax revenue will benefit these parts of the bond market. The huge issuance of treasury bonds to pay for the various pandemic programs will have a tougher time to be absorbed within the market, pushing rates up on government bonds.

After being neglected for the better part of 10 years, other parts of the markets are indeed waking up. Small stocks are up better than 20% just this year. Energy, the black gold variety, is up over 40%. While much of the attention has gone toward technology, this shift toward “everything else” has been picking up steam over the past six months. Some of this is due to expectations for better economic growth. Energy has been pushed down so far that it was impossible to find storage a year ago and you could get paid to hold it (assuming you had a few tankers in the backyard!). Today, pump prices are at or over $3/gal. Smaller stocks tend to be more domestic and do not have as much international exposure as their larger cousins. Many of these companies suffered in the early days of the pandemic and for those surviving, they are likely to thrive as growth picks up.

Interest rates and investor ebullience may be the only things to derail the markets over the long-term. Over the short-term, stocks may take a rest especially in front of the Fed meeting this week. Volatility has not subsided, but few notice it when stocks rise!

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

Nolte Notes 3.8.21

March 8, 2021

“To everything there is a season… a time to gain and a time to lose.” Using a synonym for turn, Wall Street prefers “rotate, rotate, rotate”. Since the most recent “bottom” in the market just ahead of the election, there has been a rotation in the markets from technology toward more cyclical issues. Due in large part to the decline in COVID cases around the country and opening states like Texas and Mississippi, there is hope that summer will be full of concerts, ballgames, and movies. While maybe not at capacity, the expectations for “normal” has pushed investors toward companies that benefit from fully opening the economy. Inflationary worries have also crept back into investors’ minds, although Fed Chair Powell gave no indication of adjusting their low rates for a long-time policy. Commodity prices have picked up very noticeably as many indices tracking them are up over 15% from this point a year ago. If the economic expectations are indeed correct, it will be a time to build up and dance, rather than to mourn.

Expectations were high for the last chat by Fed Chair Powell before the Fed enters their “quiet” period ahead of their next meeting in mid-March to address the rise in rates. He basically said that there remains plenty of “slack” in the economy and any inflationary pressures are like to be “transitory”. To translate, with employment where it is today and the gains reported last Friday, were it to continue, it would take until late 2023 before the economy made it back to employment levels last seen just before the pandemic started. He (and the Fed) also believes that the rise in commodity prices will flatten out in the months ahead as supply and demand begin to balance out. There have been so many disruptions due to the virus, that getting goods into the economy has been tough, so what is available can be had at a high price. That should moderate as businesses open, and money begins to flow around the economy. The employment report on Friday showed the impact of businesses opening as many of the “new” jobs were in leisure and hospitality. As weather warms and (maybe?) restrictions eased, employment gains should be quite large in the months ahead. The bigger questions will be whether prices begin to moderate or will the Fed have to deal with rising inflationary pressures.

The excitement was not in stocks, but in the bond market last week and seemingly for the past month as investors wring their hands about incipient inflation. We have been down this road more than a few times over the past couple of decades. Commodity prices are up over 20% vs. a year ago, their fastest rate in 10 years. The steepening yield curve, or long rates rising fast than (the nailed down) short rates is a typical response. These bouts do not last long, a few months or so, before commodity prices begin to decline. What is normal too, is a steep yield curve. We have had more than 2 percentage point differences between short and long-term rates for years. Starting with 9/11/01, the next three years saw a very steep yield curve. Again, starting a year ahead of the stock market bottom in March of 2009 and for the next eight years the yield curve was steeper than today. What is less typical is the flat curve that we have had up until a year ago. During those periods, stock investors did just fine.

The death of technology has been called for quite often over the past few years. The rotation toward value and away from growth has had its moments before investors headed back to technology. Even international, where technology is a small portion of their economies is seeing investor interest pick up recently. The top stocks within the various popular averages are down an average of 10-13%, with the top 5 averaging a better than 20% drop. As we have highlighted often over the past few years, technology companies are selling at very high multiples given their recent earnings and sales. If the economy does indeed begin to re-open, people will be wanting to have “experiences” once again rather than be tied to a technology device. Just maybe this time we see the move toward other parts of the market as a lasting “thing”. Markets usually shift leadership coming out of recessions. This one has just taken longer than most.

We will be watching the yield curve and commodity prices to judge the staying power of any inflationary pressures. Bond investors are likely to suffer additional declines in value as yields rise. Finally, full passage of the stimulus package could be a signal to “sell the news” as investors have been buying the rumor for months.

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

Nolte Notes 3.2.21

Sign, sign, everywhere a sign. Yield is one sign that the equity markets were watching closely last week. As yields rose investors became cautious about adding to their equity exposures as there is now slowly becoming an alternative to stocks. Investors also stopped buying technology stocks as aggressively as they had been during the summer months and into early fall. Again, expectations for an economic re-opening are not only pushing yields up but stocks that will benefit from “going back to normal”. Merging has also been a favorite activity among the “SPACs”, or Specialty Acquisition Companies that are created with the express purpose of buying companies to list them directly on the US exchanges vs. going through an initial public offering. Many of these SPACs have increased in value, even though they have not yet bought another company. It is like spending two dollars to buy a dollar. Do all these signs point to the end of the 11-month rally? We will need to wait to see some more signs before making that final call.

The correction of the past two weeks has only hit the “normal” range of 3-5%, but already investors have begun panicking about the end of the rally. There are still over 70% of the stocks within the SP500 that are trading above their long-term average price. The net number of stocks rising to falling is still at a high level. Finally, the rotation to other parts of the market (other than technology) is a long-term healthy development for the market. Economically speaking, the data is decent. Retail sales continue to boom on the back of government checks sent out at the end of 2020. Real estate is doing very well due in part to historically low mortgage rates and a desire to move out of the big city as many companies are allowing working from home as a long-term proposition. Manufacturing is doing extremely well as companies work to supply all the goods that have been purchased over the past six months. There remain shortages of a variety of goods like semiconductors, that have been in high demand and supply is struggling to keep up. It is the imbalance between low supplies and higher demand that has given rise to the concern about higher inflation. So far, the reports of inflation are not (yet) high enough to warrant long-term concern.

The widening spread between short-term and long-term bond yields has been an indication of a return toward some stronger economic activity. Fed Chair Powell, in his testimony before Congress last week, reiterated their desire to keep interest rates lower for longer until the economy completely heals from COVID. Unfortunately, as we have repeated over the past six+ months, money is not going to make the economy better, until people are willing and able to go and do as they please as had been the case before the various state shutdowns. The seeds may be already sown for some unintended consequences of too much easy money for too long that will impact the financial markets in the future. For now, equities are living off the sugar high. The bond market is signaling that higher economic activity is already here and not really in need of additional stimulus. However, once the economy fully opens, many people will likely need additional aid until their prior jobs fully return.

Last week was a wild one for stocks, but in the end, saw a continuation of the rotation toward more cyclical parts of the market. There will be some corrections and short-term returns to what had been doing well, however, over the coming few years, the markets should be moving toward more cyclical companies and away from the technology favorites of the past 10 years. It is not that many of the technology companies are not good companies and have provided tremendous value to both shareholders and users alike, it is that these companies are selling at historically high multiples of earnings (and in some cases multiples of revenue) that it is unlikely for many of these company’s stock prices to continue their recent trajectory. There is a difference between buying a good company and buying a good company at a good price. Today, many good companies are selling at historically high prices to their underlying value.

The economy will continue to gradually and with many stops and starts along the way, demonstrate solid growth that should support stock prices and higher yields in the bond market. The Fed is not likely to move anytime soon and we will be watching the bond market for clues about an appropriate time to trim stock holdings.

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.

Nolte Notes 10.5.2020

Good-bye and good riddance to September, the first down month since the March market bottom. Though the quarter ending in September was very good, investors are increasingly worried about the election. With the revelation that President Trump has Covid, the election “season” gets tossed on its ear. The economic data from last week was generally good. The employment rate fell below 8%. That came as a large part of the unemployment left the workforce, while those looking for jobs took longer to find one. In general, the economic data signals a recovery that is losing its mojo and in need of additional stimulus, which given the President’s condition, may have a better chance than not in the weeks ahead. The coming week will be light on economic data points and will be the lull between the quarter end flurry of economic news and the start of earnings season. It is expected that earnings likely bottomed last quarter. Outside of the technology sector, how much did earnings really pick up from a slowly recovering economy? One final bit of good news. October is known for market crashes. However, it also marks the beginning of the best quarter of the year, especially in an election year.

While the markets snapped their four-week losing streak, it was not a pretty week. Trading volume rose as the markets declined. Investors anxious to buy early, were selling by the end of the day. Those strong opens and weak closes are not healthy over the intermediate term as it indicates stocks are held by “weak” hands. Unless stocks continue to gain this week, the advance decline line will put in the third “lower high” since August. Looking more like steps heading lower, it is another indication that stocks are still struggling to find their footing. A strong week this week could turn that tide and get the markets looking much better heading into the election as well as finishing up the year on a positive note. The market seems to be reacting more in the short-term to political news than the economic data, which is decent, just not as fabulous as it was a few months ago.

Just when things look precarious for bond investors, the bond markets surprise everyone. Yields have been rising ever so gradually. However, the “non-treasury” portion of the market, like corporate and high yield bonds continue to do well, taking their place as “equity like” bond investments. It is in this time of economic recovery that yields typically rise as inflationary fears enter the market, tight supplies, and rising spending. Usually the longer-term treasury yields rise to compensate for higher inflation rates, while corporate bonds “rejoice” as their changes of paying principal increase with economic growth. Surprisingly, the bond model is now actually forecasting lower interest rates. Higher utility stocks and lower commodity prices have been the key in shifting the model toward a better overall outlook on interest rates.

The better utility stock prices highlighted above is not all that great for stocks, as the utility index is performing better than the SP500. Since the SP500 peaked at the end of August, utilities are over 6% ahead of the SP500. Consumer staples and other “defensive” parts of the markets are shining compared to the broader indices. If the more defensive portions of the markets are leading, it pays to be cautious. Even the international portion of the market is doing relatively well. Down for September, but much better than the SP500. Last week the much maligned small, midcap and value portions of the markets took center stage. We have seen this show before, but like Bullwinkle’s hat trick, maybe this time for sure! The typical shift from growth to value has been expected for the past few years but has yet to make more than a month or two appearance. If the economic openings can stick, investors are likely to shift toward the more beaten down portions of the markets, which would mean value over growth.

As if on cue, the markets rallied last week, after four tough weeks in September. October, even with the historical reputation for crashes, marks the beginning of the best portion of the year. If the economic growth can pick up and we see a bit of help from Washington, investors are likely to be rewarded for being invested.

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.

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.