Cabin fever may come early this year as the coronavirus keeps many of us inside which means most of you can’t wait for spring. The Spring of 2021 will be known as the inoculation period (hopefully) from the coronavirus and a pivot to resuming a normal life. The price action in the stock market tells us that next year should be pretty interesting.
If we focus on the last three months of trading for the S&P 500 in the chart below, we have see-sawed since September which is now giving way to a breakout off of the October low. The parallel yellow lines show a start to a potential trending market. However, we are testing the lower trend line and a break next week would likely bring us down to the 3530 area (a 5% pullback from the most recent all-time high).
Small caps are outperforming after several years of lagging as shown in the chart below of the Russell 2000 (futures contract). As you can see there is a breakout underway from the previous all-time high last made in August of 2018. This price action in this index is giving a clue that a recovery next year could be widespread which is good for market breadth.
There is also life in sectors like energy and steel which has been dead money for years so that is encouraging. For many years we have seen a handful of large cap technology stocks (Apple, Google, Facebook, Amazon, etc..) push the major indices higher so a handoff to a wider breadth of stocks and underperforming sectors could be the pathway to higher prices next year.
Chart of the Week!
As the following chart shows, the COVID-19 crisis accelerated the shift to online retail as millions of Americans have resorted to shopping online. This trend will likely accelerate through the holiday season.
Economic & Central Banking Snippets
- Japan said its October machinery orders figure jumped by 17.1% m/o/m, well better than the estimate of a 2.5% gain – a definite sign that global trade is coming back.
- The European Central Bank scaled up its emergency bond-buying program by more than a third and unveiled a new batch of ultracheap loans for banks, a bold stimulus package aimed at backstopping the region’s governments and businesses as they navigate a resurgence of the Covid-19 pandemic. The move, which takes the ECB’s monetary stimulus to $3.6 trillion, underscores the rocky path ahead for the 19-nation eurozone economy. Europe has been hit much harder than the U.S. and other advanced economies as strict lockdowns have repeatedly closed businesses and hurt the south’s large tourism industry. There is now $18 Trillion of negative yielding bonds mostly outstanding in Japan and Europe. (WSJ)
- Initial jobless claims rose to 853k from 716k last week (725k expected) while the 4 week average rose to 776k from 741k. Almost 19 million people are still receiving benefits of some sort. The economic recovery has downshifted, with job growth slowing and layoffs persisting at a high level amid rising coronavirus cases and related restrictions.
- Americans are poised to take out more mortgages this year than they did during the mid-2000s housing boom. In the first nine months of the year, lenders extended $2.8 trillion of mortgages, according to industry-research firm Inside Mortgage Finance. The boom has extended into the final quarter of 2020, prompting analysts to predict origination volume will exceed the prior record of $3.7 trillion in 2003.
- The U.S. budget deficit widened 25% in October and November from the same period last year to $429 billion, a record for the first two months of the fiscal year. Higher spending and shrinking revenue tied to the coronavirus pandemic and the resulting economic downturn pushed the country deeper into debt.
- Brent crude oil futures crossed $50 for the first time since March yesterday as investors bet on a strong recovery. This was despite U.S. crude oil stockpiles surging by 15.2 million barrels last week to 503.2 million barrels, according to the EIA, when analysts were expecting a 1.4 million-barrel drop. (Bloomberg)
- The first-ever water futures contract, launched by CME Group and based on the Nasdaq Veles California Water Index (NQH20) started trading this week. It is meant to help users in California’s $1.1 billion water market, like farmers and manufacturers, hedge price risk associated with scarcity. By 2025, 1.8 billion people will experience absolute water scarcity, and two third of the world will be living under water-stressed conditions, according to the United Nations.
- There are 137 million paid subscriptions for Disney’s streaming services and the company expects it to more than double to 300–350 million by fiscal 2024. Current subscribers include 11.5 million for ESPN+, 38.8 million for Hulu, and 86.8 million for Disney+. For comparison, rival Netflix had 195 million subscribers in Q3 and expects to hit 201 million by the end of 2020.
- Chinese president Xi is ramping up control of China’s private sector. The government is installing more Communist Party officials inside private firms, starving some of credit and demanding executives tailor their businesses to achieve state goals. In some cases, it is taking charge entirely of companies it regards as undisciplined, absorbing them into state-owned enterprises. The push is driven by a deepening conviction that markets and private entrepreneurs are unpredictable and not to be fully trusted. The view that state planners are better at running a complex economy has gained currency this year, with Beijing relying heavily on state directives to engineer a V-shaped recovery from the shock of Covid-19. (WSJ)
- General Electric announced it just spent $4 billion to repair its balance sheet and solidify its financial position. It pre-funded $2.5 billion of pension plan funding requirements and repaid $1.5 billion of its intercompany loan to GE Capital. It forecasts at least $2.5 billion of industrial free cash flow in the fourth quarter and positive free cash flow in 2021. (Bloomberg)
- Goldman Sachs is reportedly planning to move one of its key divisions from New York to Florida in what would be a massive blow to New York City’s economy and stature as the de facto hub of global finance. The investment bank has been looking for locations to move its asset management business to the sunshine state, and thousands of employees with it. (Bloomberg)
That is all for now and thank you for being a subscriber!
President – Kisco Capital