- Equities finished higher to close out the week, led by the Tech-heavy NASDAQ which gained 2.17% on the week, followed by the Russell, S&P 500, and Dow Jones.
- Energy was the best performing sector on the week, overcoming OPEC + decision to begin tapering production cuts in January. The sector posted positive gains for a fifth straight week and rallied a record 28% in November.
- Consumer Discretionary lagged broader index strength with weakness in homebuilders after pending home sales came in lower than expected.
- Non-farm payrolls came in lighter than anticipated, posting an increase of 245K jobs for November. The headline number was the slowest pace seen during the economic recovery.
- The S&P 500 has posted 109 (47%) daily 1% swings in either direction this year, the most since 2009.
- Hiring slowed the most within sectors who are most susceptible to rising COVID-19 cases, including leisure, retail and the hospitality sectors.
- A group of bipartisan senators released a proposed $908B aid package which was generally well received by members of both the Democrat and Republican parties. The deal did not include another round of $1,200 direct payments to Americans.
- Valuations may be over-extended in the near term with multiple firms highlighting why including Deutsche Bank, Bank of America, and Bloomberg.
- Shoppers flocked to Cyber Monday deals, racking up a record $10.8 billion in U.S. sales, or a 15% increase over last year, according to Adobe Analytics.
- Chinese Foreign Minister Wang Yi said that China remains committed to a Phase 1 trade deal with the United States despite a record monthly trade surplus of $37.5 billion with the United State in November. The Shanghai Composite Index was up 1.06% last week.
Equities finished higher to close out the week, led by the Tech- heavy NASDAQ which gained 2.17% on the week, followed by the Russell, S&P 500, and Dow Jones. Value outperformed growth slightly, however both posted healthy gains of over 1.50%. It continued to be a volatile week, and one of the most volatile on record amid the ongoing pandemic, economic uncertainty, and U.S. Presidential Election. The S&P 500 posted its 109th session on Tuesday in which it experienced a 1% move in either direction, the highest absolute figure since 2009 when there were 118 sessions which crossed the 1% threshold.
- Vaccine optimism that remains elevated
- Unexpected positive developments regarding a fifth stimulus package
- COVID-19 trends which continued to worsen
- Overextended valuations in the near term
Energy was the best performing sector again and posted gains of 4.5% on the week with crude ending higher for a fifth straight week. The continued move higher came after a record ~28% gain in November, and overcame the decision by OPEC+ to begin tapering production cuts in January.
Healthcare was the second best performing sector and outperformed with strength in vaccine candidate-related names. Hospitals, Biotech, and select insurers were also pockets of strength throughout the week.
Technology provided leadership after Semiconductor and Hardware-related names were among the standout performers, including Western Digital Corp +12.9%, Qualcom +9.6%, Apple +4.9%, and NetApp +12.6%.
Financials outperformed slightly with strength in banks as rates climbed near their higher levels since March. The 10-year on Friday closed at 0.965%.
One of the primary tailwinds behind market price action continued to be COVID-19 vaccine optimism, although there was nothing incremental to note. Despite Pfizer slashing 2020 production targets for their vaccine candidate by 50% last Thursday due to previously announced supply chain disruptions, the company said that they remain on target for 2021 deliveries. Most recently, a new poll from the Pew Research Center showed that 60% of Americans respondents now say they would definitely or probably get a vaccine, compared to the 51% from September’s results.
HIGH FREQUENCY DATA
Economists, analysts, and companies continue to note a slowdown in high-frequency data as states continue their rollback and re- opening plans. Visa was the most recent credit card company to note a slowdown in November payment volumes, while Delta also highlighted that they have seen the slowing of bookings as cases throughout the U.S. spike.
Additionally, with the holidays right around the corner and the virus surging, spending could slow into the mid-to-later part of December as some holiday shopping may have been pulled forward due to lesser overall travel and scaled back holiday plans. This year consumers spent a record $10.8B on Cyber Monday, an increase of 15.1% a year ago, however falling short of Adobe Analytics’ forecasted $12.7B.
In addition, although the labor market has been a relative bright spot throughout the economic recovery, nonfarm payrolls missed expectations on Friday, posting an increase of 245K jobs. The headline number was the slowest pace seen during the economic recovery as hiring slowed significantly in industries who are most susceptible to rising Coronavirus cases, including leisure, retail, and the hospitality sectors.
Renewed hopes for a fifth Coronavirus relief bill also helped buoy the risk-on tone seen throughout the week. In an unexpected turn of events, a group of bipartisan senators released a proposal for a $908B aid package which included:
- $300B in PPP funding
- $180B for unemployed Americans ($300/week for four months)
- $160B for state and local governments
- $80B for schools, $10B for USPS
In the surprise move, Democratic leadership supported the package despite originally holding out for a $2T+ stimulus deal prior to the November election. Helping add to the optimism was Senate Majority Leader Mitch McConnell who said things are starting to move in the right direction and that a compromise was within reach, although stopped short of endorsing the plan.
EQUITY RALLY OVER-EXTENDED?
In recent weeks, discussions surrounding the equity rally and how it may be overheated have come back into focus. This is partially due to the incredible run seen in November as the Dow posted its largest gain since 1987, while the S&P had its best November since 1928, and the Russell 2K gained the most on record, posting an 18.29% return for the month.
While it appears the largest fundamental risk to U.S. equities is related to a vaccine and the subsequent ability to distribute it, there have also been focus on the valuations in the near term. With the S&P 500 trading at 23x forward earnings, slightly below the June peak of 25x, and 71 companies across the U.S. whose valuations now exceed $100B (the most number of companies ever with the next closest being 65), multiple notable firms have come out highlighting the potentially overextended levels seen including:
Deutsche Bank who said the S&P 500 CAPE ratio is now at its second highest level ever, only behind the 2000 dotcom bubble.
Bank of America highlighted that their Bull/Bear indication has accelerated toward extremely bullish levels.
Bloomberg pointing out numerous potential warning signs, including a 20-year low in the put/call ratios five-day moving average, a seven-year high for companies trading above their 200-day moving averages (93%) and the recent inflows seen into equities which stands at $115B in just the last four weeks alone.
U.S. domestic stocks fell to start the week as Coronavirus infections surged across the U.S., triggering investor fears of additional restrictions. The S&P 500 fell 0.19%, from an all-time high, led by Energy, Real Estate, Materials, and Financials. After more than a month of outperformance, Energy-related names finally succumbed to pressure, declining 2.44% while Crude declined 1.3%. The reversal was a noticeable one after the Energy sector gained over 30% since the start of November, while broader index gains stood at 11%.
Eight of the 11 sectors finished lower on the session, however Communication Services, Utilities, and Technology were the standout performers, catching a safety bid and closed higher. Growth outperformed value, with stay-at-home names buoying the broader momentum/ growth trade.
It was a quiet Monday session with U.S. benchmarks trading in negative territory for most of the session. Indexes took a leg lower in the morning after New York Governor Andrew Cuomo announced that indoor dining would be closed if the regional hospitalization rate has not stabilized after five days. Additionally, adding to downside pressure was Dr. Anthony Fauci commenting and warning that the middle of January could “really get bad”.
THIS WEEK INTERNATIONAL
Last week, global equities advanced 2.34% higher led by Energy and Financials. Every sector was in the green as investors remained optimistic about a global recovery. The spread between Growth and Value narrowed further as value stocks gained 2.82% last week and growth stocks moved 2.06% higher. Volatility is stabilizing across the globe, which seems to imply increasing risk appetite from investors. For instance, volatility in the German DAX index reached a nine-month low of 22.02 last Friday, despite ongoing lockdowns and business restrictions. The next test of investors’ resilience will be the upcoming economic data, which is expected to be mixed.
Bank of France Governor, Francois Villeroy de Galhau, said that he is in favor of ending the dividend ban on European banks, sending Euro STOXX Banks 1.15% higher on Friday. The comment came after two other European Central Bank (ECB) members made similar suggestions. Besides lifting the dividend ban in December, the ECB is expected to be proactive on the monetary policy front after executive member Fabio Panetta said that “the consensual idea at the ECB Governing Council is that our instruments need to be recalibrated in December”. The Euro STOXX Index was up 1.83% last week, led by materials and banks.
The Chancellor of Germany, Angela Merkel, extended the four week partial lockdown which started on November 2nd, until at least December 20th. Despite slowing virus spread, the chancellor said “we can’t be satisfied with this partial success. We need yet another act of resolve.” Germany now registers over a million COVID-19 cases, 16,663 deaths, and 739,100 recoveries according to Worldometer. The DAX index gained 1.51% last week.
In the United Kingdom, Brexit talks continue as no deal has been reached between the UK and the European Union. The European Council will hold a summit from December 10-11th to discuss COVID-19, climate change, trade, security, and external relations. If there is no agreement by that date, the probability of a hard Brexit will be higher. December 31st is the hard deadline for the Brexit transition period. Without a deal, Britain will trade with the EU on World Trade Organization terms. The FTSE 100 was up 0.25% last week.
In China, industrial profits rose 28.2% year-on-year in October, which is the sharpest increase since 2012. While increasing demand and stronger exports explained the surge, the base effect inflated the perception of a recovery, given profits were down 9.9% last year at the same period. The China manufacturing PMI ticked up to 52.1 in November, improving from 51.4 a month earlier. Bloomberg Economics points out that “the manufacturing sector powered through holiday effects that tend to cause output to dip in October due to the golden week break and rise in November when there are more working days.” The Shanghai Composite Index was up 0.91% last week led by conglomerates, up 3.22%.
In Japan, the newly appointed Finance Minister, Taro Aso, asked financial institutions to provide smooth corporate lending to accommodate for a loan demand spike due to the global pandemic. In fact, weak consumer spending continues to shrink corporate margins as inflation remains negative. Bloomberg Economics forecasts the Japanese unemployment rate to rise 3.2% in the fourth quarter, from 3% in the third quarter. The NIKKEI 225 was up 4.38% last week.
Bank of Korea Governor Lee Ju-Yeol, said the Central Bank revised its GDP forecast for the year to account for the strength of the economy. He said, “the negative impact from the resurgence of the virus is still very big, but exports will likely outweigh that”. Bank of Korea estimates that the economy will shrink 1.1% this year and grow 3% in 2021. The KOSPI Index was up 3.13% last week, led by materials, up 7.79%. Textile and apparel lagged the index, down 2.77%.
India entered its first recession since quarterly GDP records started in 1996. According to the latest data from Central Statistics Office, the Indian GDP fell 7.5% year on year in the third quarter. The Oxford stringency index, which measures the strictness of government policies, shows that India implemented one of the strictest lockdowns in the world in March. Hotels, transport, and communications dropped 15.6% last quarter, while financial and real estate services 8.1% decline overshadowed the 3.4% expansion in agriculture. The Nifty 50 Index was up 0.85% last week.
The information provided, including any tools, services, strategies, methodologies and opinions, is expressed as of the date hereof and is subject to change. Level Four Capital Management (“LFCM”) assumes no obligation to update or otherwise revise these materials. The information presented in this document has been obtained from or based upon sources believed by the trader or sales personnel or product specialist to be reliable, but LFCM does not represent or warrant its accuracy or completeness and is not responsible for losses or damages arising out of errors, omissions or changes or from the use of information presented in this document. This material does not purport to contain all of the information that an interested party may desire and, in fact, provides only a limited view. Any headings are for convenience of reference only and shall not be deemed to modify or influence the interpretation of the information contained.
This material has been prepared by personnel of LFCM and is not investment research or a research recommendation, as it does not constitute substantive research or analysis. This document is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject LFCM to any registration or licensing requirement within such jurisdiction. It is provided for informational purposes, is intended for your use only, and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned, and must not be forwarded or shared with retail customers or the public. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of certain LFCM personnel. Observations and views expressed herein may be changed by the personnel at any time without notice.
Nothing in this document constitutes investment, legal, accounting or tax advice or a representation that any investment strategy or service is suitable or appropriate to your individual circumstances. This document is not to be relied upon in substitution for the exercise of independent judgment. This document is not to be reproduced, in whole or part, without the written consent of LFCM.
Asset management services offered through Level Four Capital Management, LLC an SEC-registered investment adviser.