Just where are we? Probably not where we expected to be a week ago, or a month ago. A year ago? Maybe. I think we all expected a strong equity market in 2021 just based on a unified feeling of optimism as we put the year 2020 to bed. Last week, equity markets, or more specifically, the large cap equity indexes roared back from what had been a tougher kind of week for the five days prior. It became very difficult to call that threat to financial markets presented that week over and done however, despite the rally across both the equity marketplace and the long end of the US Treasury security yield curve.
Sure, there seemed to be plenty of movement at the point or points of sale, but there just was not a ton of action there in aggregate. The Dow Industrials led the way last week, up 4.02% over five days, with the Nasdaq 100 hot in pursuit, up 3.95% for the week, and now up 26.72% year to date, The weaklings, though that is certainly not the right word, for the week came from areas most dependent upon economic growth. The Dow Transports and Russell 2000 though lagging broader markets, scored five day increases of 2.74% and 2.43%, respectively. One looking at those numbers does have to acknowledge that the Dow Transports are up 31.16% so far this year, which leads all commonly followed indices for 2021, while the Russell 2000 has gained just 12% over that time. That places the most widely watched equity index for small-cap stocks in last place for all large indexes not confined to one sector nor industry grouping.
The fact is that while composite trading volumes did contract for each and every day last week from the week prior for both Nasdaq-listed names and for subordinates of the Nasdaq Composite itself, that composite volume did finally increase ever so slightly on Friday from Thursday for NYSE-listed stocks as well as constituent names to the S&P 500. That said, the increase appears sideways on a chart, and remained well below 50 day volume-based simple moving averages. This can not confirm for us, a return to broad professional accumulation ahead of this week's plethora of central bank policy meetings.
Besides, breadth was really lousy on Friday in spite of positive headline index performance. Losers beat winners on Friday at both of New York's primary equity exchanges, while declining volume easily bested advancing volume for Nasdaq-domiciled names.
The week ahead will be dominated by central bankers. As we all know the Federal Reserve's FOMC will publish a new policy statement as well as new projections for economic performance and short-term interest rates this Wednesday, December 15th. Fed Chair Jerome Powell will also open himself up to the financial media in response to the occasion as he does eight times a year.
The next day, Thursday the 16th, will bring policy decisions from the European Central Bank, The Bank of England and the Bank of Japan. The Fed is expected to increase at least the pace of its tapering of asset purchases or to look at it another way, the Fed is expected to significantly slow its balance sheet expansion program in an attempt to be in a more flexible position sooner should the need to confront consumer level inflation directly persist well into the new year.
So, what are traders and investors watching right now?
Short-term? Probably the dot plot for 2022, and 2023, as well as all things Omicron. UK Prime Minister Boris Johnson warns of a "tidal wave" of new infection as as new study out of Israel (done by the Sheba Medical Center and the Ministry of Health's Central Virology Lab) shows that three doses of the Pfizer (PFE) /BioNTech (BNTX) does indeed bolster protection against the new variant.
Speaking of global central banks, the overnight talk that has equity index futures moving higher is that the PBOC (People's Bank of China) is likely with Beijing's approval to add liquidity and ease monetary policy perhaps with an assist on the fiscal side as Mainland China moves into 2022. This will be in stark contrast to a Federal Reserve and probably an ECB that at least jawbones on the removal of accommodation this Thursday. That said, whatever signal ECB President Christine Lagarde sends she will have to send alone. ECB Vice President Luis de Guindos who usually appears at Lagarde's side at public events, has apparently not been in contact with the president and has tested positive for Covid-19. The ECB is expected to start reducing asset purchases this April in an effort to also be in a more flexible place sooner, following the Fed's lead.
To wrap the above up into a neat little box and put a bow on it, traders and investors are of course watching the central banks, but to say that is to play checkers as opposed to playing chess. What we are watching as we move forward... this week and most probably well into 2022. Perhaps beyond.
1) Covid's impact on supply lines, labor markets, and ultimately... inflation.
2) Inflation's impact on monetary policy.
3) Covid and inflation's impact on fiscal policy.
4) Global geopolitical threat levels.
Having a Good Year?
Blame Cathie Wood (ARKK) and the success of her actively managed ETFs in 2020? The Wall Street Journal reported on Sunday night that 2021 year to date inflows into global exchange traded funds had exceeded $1T by the end of November. The number for all of 2020, was $735.7B, by the way. U.S. investors have supposedly placed $84B of this total into actively managed ETFs that try to outperform a benchmark, which is about 10% of domestic inflows, up from 8% a year earlier, according to Morningstar.
FactSet reports that more than 380 actively managed ETFs launched this year, bringing the total up to nearly 600. A rough 60% of those have less than $100M in assets, while more than 50% have less than $50M. Is this a warning? I don't know yet. Most of these funds are small, as BlackRock (BLK) and State Street (STT) dominate the ETF industry so I don't think a broad market correction necessarily causes a collapse at the index level. I think one does have to be fully cognizant of the breadth of what comprises market structure and asset allocation though. It would not take a decision made by too many managers to leave a visible mark.
On Friday, the Bureau of Labor Statistics released its November CPI data. There were no surprises. Headline level inflation printed red hot at 6.8% year over year, while core inflation grew 4.9% annually. Above trend growth both year over year as well as month over month (which is less of a focus) was clustered around Energy and energy based components. Prices for services (especially medical services) continued to increase well below trend. Prices remain below trend for shelter as well, which is the single largest component within the CPI print. Many senior economists are starting to doubt the validity of the 3.8% inflation being reported for that one entry.
Should the shelter component be revised or corrected later, this could change public perception of currently scorching inflation. Until then, there was absolutely nothing in Friday's CPI that would convince a serious economist that inflation, though accelerating far beyond anything expected, was to also become more permanent than previously expected. The threat here would be from expectations themselves. The more that inflation is sensationalized by an economically ignorant mainstream media, the more likely folks across many walks of life will come to expect to pay higher prices for goods.
On the other hand, as you know, there always is one... wages are growing (4.8%) far slower than is consumer level inflation even if average weekly hours (34.8) is displaying some increased demand for labor. The fact is that labor has not been able even in this environment to force the supply side of that market to drastically alter their approach. With that, the velocity of money as measured by a ratio of either M1 or M2, has only continued to slow, and according to the St. Louis Fed... that trend continued through the third quarter. It may just be opinion, but it is my opinion and not an uneducated one, that outside of the impacts of the pandemic which are unpredictable, rising consumer level inflation can not be sustained without a correlative increase in the pace of transaction. You see a lot of hand waving "economists" on television striving to be "noticed". Don't watch them, watch the data, and watch centralization, or decentralization of pertinent trends.
Expanding the monetary base, while expanding upon liquidity, has also served to slow velocity as illustrated through ratio. What would the opposite do? Mind you, that I am not a dove, not even close... but these are the questions that run through my head at 4 am. Oh, and watch the Treasury yield curve closely. I have not yet bought the idea of persistently high consumer level inflation and neither has the bond market.
On That Note...
.... Mr. President, this is Senator Joe Manchin of West Virginia. I think you two have met.
The most interesting equity market story continues to be that of the greatest consumer electronics company of all-time that has expanded into services and will certainly be a major player in whatever comes of the Metaverse, or as Nvidia's (NVDA) Jensen Huang puts it... the "Omniverse." I speak of Apple (AAPL) . The stock closed up 10.9% last week at $179.45, and at a market cap of $2.944T. Apple became the first public company in world history to hit a $1T market cap in 2018, and then hit $2T in 2020. The pace of cap growth is accelerating, despite the feeling at times that the stock moves sideways. Here we are, in mid-December 2021, and there stands a good chance that Apple hits $3T this week. (The share price needs to hit $182 and change),and the competition for the title of "largest publicly traded U.S. company" has thinned a bit. Only Microsoft (MSFT) is even kind of in the ballpark at this point at $2.57T. Alphabet (GOOGL) is very close to crossing the $2T threshold, which incredibly leaves that firm's cap size almost a full $1T smaller than Apple's. Basically, add the above mentioned Nvidia to Alphabet and they are still smaller than Apple.
The Apple story might be the most interesting, but perhaps the most "fun" story last week belonged to Taco Bell parent Yum! Brands (YUM) and Beyond Meat (BYND) . Taco Bell apparently told the purveyor of faux meats that the version of their product that had been presented did not meet the fast-food chain's rigorous standards. The two companies are still trying to find some kind of a fit, and two Beyond Meat employees that had worked on the project are no longer with the firm, but for me, that story ran with a high "wow" factor.
One Last Thought
Yes, volatility beckons. I hear it too. There may be a revaluation of equities across the board in 2022. Then again, as long as real rates remain negative and wage growth prints at substantial deficit to rising inflation, are not equities the most attractive place to be. It's when inflation falls below wage growth, and real rates approach "break-even" that the game becomes more challenging. That day may be out there, stalking. In fact, it might even be close, but that day is not today, my young friends.
Economics (All Times Eastern)
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