Spring Has Sprung
The signs are everywhere. The weather is simply warmer here in the Northeast. Some of the birds are different. Some of the small game that roam these parts have not yet woken, but the bees are back. Always nice to see the bees. We have seen the return of baseball as well. Not necessarily my Mets, who will open tonight, nor the Nationals of Washington who were supposed to oppose the New York Mets last week until a number of their players tested positive for the SARS-Cov-2 virus. The Mets will (likely) finally open tonight against Philadelphia, while the Nationals are supposed to take the field against Atlanta but probably will not. That's just the thing.
The weather is better, even here in northern climes. Yet even businesses with far more resources than most remain unable to prevent this virus from impacting operations. This, despite a robustly successful rollout nationwide of the program to get as many Americans as possible vaccinated. It seems almost an enigma that as roughly one-third of U.S. adults now have been "jabbed" at least once, and nearly one-fifth of U.S. adults are fully vaccinated, that instances of new infection continue to rise nationally on a rolling seven-day average, as well as in 27 of the 50 states individually. We know through Israel's example that we can get there. I have heard many cynics point toward these statistics as proof that the vaccines are one part of some elaborate hoax, and that we have all had the wool pulled over our eyes.
These are the same folks who in many cases do not believe in masks and think those of us who do are mere sheep. Should I point out that I myself fell victim to this virus and that I know other "long-haulers" who have even worse cases of the post-viral syndrome, or should I name the dozen or so folks I knew who perished too soon thanks to this awful scourge? The cynics usually pipe down, for about a week, if I do. Then they are right back at it. Hard to stay friends with folks who disrespect not facts, but my facts, or the facts of friends lost, just to cling to some ridiculous narrative. That's us, though. That's America in 2021.
Sides? Offsides
Why must we as a people choose a side and then swallow all of that side's talking points as if they were religion? Politics are not creed, nor can politics ever become a suitable replacement. I have always thought of myself as conservative, I still do, but I am by today's standards quite the moderate conservative. I have a friend who is quite the opposite, politically. She is a proud "liberal" of many decades, but I would call her a "common-sense" liberal. I think two of us, though in disagreement on many policy issues of the day, but always willing to talk them out, usually find that we both have the nation's best interests at heart and usually gain some new perspective after our discussions.
Perhaps a nation on a grander scale can find out why the other side thinks what they think without vilifying that other side just for being. Liberals may be surprised to learn that there are almost no fascists on the right, and conservatives might come to realize that the left is not just a bunch of commies. My friend and I are probably representative of a third group, probably much larger in size than our elected officials on either side would be comfortable with, because they do better pandering to the extremes. We are the middle. We see good and bad, maybe a lot of bad, on both sides. There is plenty of room for everyone here in the middle. Just imagine how much a nation could accomplish, how much "we the people" could crank up the positivity, if the politicians of the day could just compromise on the issues. Compromise equals maturity. Pragmatism beats idealism all day every day. Now, imagine.
Markets
Readers will recall that U.S. markets rallied yet again on Thursday. Then equity index futures rallied further on Friday morning as the Bureau of Labor Statistics showed that in March a burst in job creation across the leisure and hospitality industries in particular, took Non-Farm Payrolls to well above consensus numbers.
All good? Well, yes, but with renewed demand for leisure and hospitality comes renewed risk as human beings re-engage in social activity. Wouldn't that be nice? My sister's family, now fully vaccinated, will soon head down to see my parents who live in Florida, also fully vaccinated. Neither my sister nor I have seen my parents in well more than a year. Living in the state of New York, my family is about six weeks behind my sister's state in getting this done. She was smart enough to get out of Dodge for good at a much younger age. Admittedly, jealous am I.
Back to what you came here for. The Unemployment Rate dropped to 6.0% from 6.2%, the Underemployment Rate dropped to 10.7% to 11.1%, while the average workweek expanded from 34.6 hours to 34.9 hours, indicating a dramatic boost in demand for labor. Average hourly earnings missed badly, whether measured either year over year or month over month, indicating that the vast majority of this sudden need for help had come at the lower bounds of the income distribution curve. That in turn reflects the boost of hiring that we had just discussed across an industry that includes bars, restaurants and hotels.
Two things I think we need to focus on. One, job creation for the month of March was fantastic. Keep it up, America. Just 10 more like it and by February 2022 we may be back where we were in February 2020. Not back on trend, mind you, just back where we were.
Two, the fact that the vast majority of job creation is coming at the lower bound of income distribution is likely to continue as positions requiring social contact were the ones hurt most by economic lockdowns. While the return of service industries is certainly a positive, where these folks lie on the curve makes them particularly susceptible to being hurt by rising consumer inflation, not to mention that many of their small business employers who may have been brought to the brink of extinction themselves might be poorly positioned to weather potentially higher interest rates. Just food for thought.
As to our marketplace, equity indices were strong across the board last week. Every major domestic equity index moved higher regardless of focus on market cap. None appear to be technically overbought just yet, though more than one index seems to be closing in.
All 11 S&P sector select ETFs closed in the green for the shortened week, led by Technology XLK as well as several sectors one would refer to as cyclical in nature, such as Consumer Discretionary (XLY) names, Energy (XLE) and Materials (XLB) , the last two in part thanks to OPEC and a U.S. dollar that paused what had been a month-long rise in value versus its reserve currency peers, at least for a week.
Bells in the Distance
Though it would appear that equities and equity index futures markets reacted well to part one of President Biden's plans for future fiscal policy as well as Friday morning's jobs numbers, investors must bear in mind that trading volumes dwindled as the week wore on due to the holiday and that the light volume will continue on Monday as many European nations close for Easter Monday, as some Asian markets are also closed for the Qingming festival.
Investors will also need to watch the Treasury yield curve. The good news forced some bond traders to take action in an illiquid market on Friday morning, putting upward pressure on the long end but even more upward pressure on the middle of the curve. The five-year note/30-year bond yield spread actually contracted to less than 142 basis points on Friday, and I see that spread trading at slightly more than 140 basis points here on Monday morning, indicating increased selling in the middle of the curve. Why does this matter? You're right, economists who understand policy and policy impact usually focus on the 90-day /10-year curve first and the two-year/10-year spread second; the five-year/30-year is a fairly close third place.
This flattening of the back half of the curve might be seen as troubling, statistically speaking. This behavior could be seen as an expression of doubt regarding the economy's ability to grow beyond the federal government's ability to spend. This would be extremely dangerous beyond the short to medium term. I am sorry, honestly, but should this flattening not reverse, this is what markets are telling us. It may not be bad for equities long term, as potentially there could be a return to TINA (there is no alternative) at some point. Though early, one must at least consider the possibility that after the reopening is complete and the newly created money is spent, that even if the economy can regain pre-2020 trend it would appear unlikely to sustain trajectory, at least not organically.
Fun With Math
Gross Domestic Product for fiscal 2020 landed at $20.9 trillion, really not bad, all things considered, a contraction of 2.3%. Assuming at least 6% growth for 2021, which would appear to be a cinch unless we really screw this up, it would put GDP for the year up over $22.1 trillion, worst case. U.S. federal debt now stands at $28.1 trillion, ahead of an explosion on planned new borrowing. This puts the debt to GDP ratio at 134% when only considering the federal government. However, GDP contains all economic activity. Therefore, honest economists must use total debt here to include the debt of states, municipalities, businesses, financial institutions and households. Now, total debt stands at a terrifying $85.7 trillion, placing the real debt to GDP ratio at 409%.
Need more fun? Total unfunded U.S. liabilities, including Social Security and Medicare, now come to $162.7 trillion. Remember, we're still working with a $22 trillion economy here on a good day, so we are in more than a bit of a jam. Going further out on a limb, prices at both the producer and consumer levels will need to go higher as scarcities persist. We know that raising the federal corporate tax rate from 21% to 28% will slash S&P 500 earnings by between 7% and 9%. This does not include average state corporate tax rates now at 5%, but probably going higher. Even if the states hold their fire, a 33% average corporate tax rate would make the United States the least business-friendly nation in the OECD (Organization for Economic Cooperation and Development). I have not even gone into the likelihood of an increased regulatory environment yet to impact many industries. You all understand that this not only will slow economic growth, but slow demand for labor as well, correct? This ain't rocket science, kids.
For now, we'll have pent-up demand for services on our side as well as planned government spending. Down the road, however, even if there are penalties for offshoring existing businesses in order to avoid high taxes, just where do you think new businesses will open? Hmm? Think any foreign nations will try to take advantage of our grand lack of cogent ability to mix economic expertise with business expertise? Think monetary conditions tighten? Hmm.
OK, so the bond market takes back the middle and long end of the curve. What if the bond market takes back the short end of the curve? A nation where the servicing of debt becomes more of a focus than all other government expenditures combined? Oh, in case I forgot to mention it, spring has sprung. Yet to see my first rabbit.
Breaking Out?
Readers will note that on-again, off-again Sarge fave KLA Corp. (KLAC) completed a stand-alone cup pattern on Friday while leaving unfilled gaps on successive days. Stocks can take off of a cup pattern set up all by itself; here, the pivot would be around $342. What I would prefer to see, with the Relative Strength Index (RSI) approaching a technically overbought condition and the daily moving average convergence divergence (MACD) seemingly lifting off, would be the development of a handle that fills both of last week's gaps. This would put the setup, in my opinion, on much firmer ground. This would also place the pivot at the apex of the right side of the cup, currently $347, but potentially still developing. Keep your eyes on this one, gang.
Economics (All Times Eastern)
09:45 - Markit Services PMI (Mar-F): Flashed 60.0.
10:00 - ISM Non-Manufacturing Index (March): Expecting 58.5, Last 55.3.
10:00 - Factory Orders (February): Expecting -0.5% m/m, Last 2.6% m/m.
The Fed (All Times Eastern)
No Public Appearances Scheduled.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (DCT) (-.03)
