Big News Is Followed by Little Moves

Stimulus, Covid-19 and vaccines will continue to drive markets. But there's a caveat: Positioning has become heavily skewed to the bullish side. Let's review: Monday -- for the third Monday in a row -- stocks are getting a bounce from vaccine news. First it was Pfizer and BioNTech and Moderna , and now it's AstraZeneca . But it's less of a bounce than last Monday and even less of a bounce than the prior week. Last week, I wrote that we may have seen a Perfect Storm for selling the news. That incorporated Tesla being included in the S&P 500. We have seen more evidence that positioning has shifted to very bullish (dangerously so, as a contrarian). Not a lot has changed since then. In addition to Monday's vaccine news, there was a press conference after the close on Friday that was incredibly positive on the vaccine front, including the military's crucial involvement in the logistics of getting vaccines delivered. But, again, much of that seems to be already priced in. Markets reacted to news that Treasury Secretary Steven Mnuchin was not extending some programs beyond their originally scheduled expiration of Dec. 31. That should not impact markets significantly as we wrote in Forbes in detail. But a quick summary here is: Several factors will mitigate the impact of Mnuchin's actions, including that some programs will remain in place, markets are currently functioning so well that little impact should be felt, and that the Fed, if it wants, can manage its balance sheet through Treasury bond purchases and some other asset classes that don't require the Treasury Department's money (full disclosure, Academy Securities is a counterparty to some Fed transactions via programs like the Secondary Market Corporate Credit Facility). His actions open the path to some potentially very positive developments. This may, allow him or the president to distribute money directly, or bring House Speaker Nancy Pelosi and Senate Majority Leader McConnell back to the table for serious (and urgent) negotiations, which I think have been lacking since August. But, despite all of that, stocks barely moved on the week, with the S&P 500 and Nasdaq 100 marginally lower, and the Russell 2000 nudging higher. So, expect a pause in the Return to Normal -- as it has seen a move of epic proportions. The exception was, of course, Tesla, which at one point added almost $100 billion of market cap. Including a behemoth like Tesla in an index is pushing the limits of passive investing and will continue to impact markets in the coming weeks. The dollar continued its weakness, which we expect is structural in nature and is a long way from being over. China is prepared for -- and even wants -- a stronger currency and extremely negative real yields are big parts of that structural move. Also, note that the the 10-year Treasury yield dropped from 0.90% to 0.83%. So, despite some headlines, I'm pretty much in the same place as I was last week. The bottom line is Treasury yields should continue lower (0.75% target on 10-year). At the same time, stocks should drift lower, with work-from-home stocks leading the way. This is almost entirely about positioning right now, rather than a pessimistic outlook on news flow. Dollar weakness should continue, too. Credit should hang out reasonably well here, especially as the calendar slows into year-end, but high yield and leveraged loans could weaken a little. I am waiting to turn bullish on risk again, and bearish Treasuries. For the coming week or two, however, downside is far more likely that upside, especially from the work-from-home leaders. The exception is Tesla, which is its own animal, as investors figure out how the addition will play out. Thanksgiving 2020 will be like no Thanksgiving we've experienced in our lifetime, but I hope everyone will find a way to make it as best as possible for our friends and families. Happy Thanksgiving.

Big News Is Followed by Little Moves

A lot has happened over the past couple weeks, but little has changed. Let's dig in.

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