On Friday, U.S. equities sold off just a bit on lighter trading volume. Some traders obviously took off some risk at a profit ahead of the weekend which, given the global situation, made sense. On Monday, these same equities largely came right back, closing at daily highs, but on even lighter volume. For the S&P 500, the last two trading days have been the lightest in terms of volume traded, month to date. Same for the Nasdaq Composite. Is that meaningful? In a way.
As the broader equity indices seem to post record high after record high, one could certainly make the case that a sellers' strike has come into vogue. Obviously, foreign money had come into U.S. markets. The Nasdaq Composite has set 11 record closes, the S&P 500, nine... in just calendar year 2020. All while the U.S. three month/ten year yield spread has inverted more than once. In fact, that spread closed negative on Monday, though it does appear to be trading at +1bp as this piece is being written at zero dark thirty on Tuesday morning. That foreign money? Some of that dough is clearly being invested at home as well at this point, hence the reduced volume. Almost all European equity indices are well off of late January or early February lows. The same can be said for many Asian markets, though those markets remain well below one month highs.
I'll Tell You What
It becomes too easy to point and say that this is tech rally, and all others have been left behind. I have heard actual talking heads spit this out in recent days. I always kind of think that maybe one of these guys doesn't really make decisions when I hear tech referred to as a single entity. Yes, okay... this latest rally is indeed led by tech. How far back would you like to go? Five days? Year to date? Three months? One year? Five or 10 years? More years? What has led? Tech. These geniuses tell you nothing when they point toward tech without further explanation.
This rally has been industry, not sector led, and it is all based on technology, whether or not market leaders reside within the Tech sector or not. We all know that software stocks are way out in front, and that semiconductor stocks have done well despite simply oozing with exposure to China. Outside of the sector, Defense leads. Aerospace leads. These are industrials. Still tech. Even the rails... why do you think they have become so efficient? Magic? No... Tech. Consumer Finance... running way ahead of the banks. Net interest margin not a factor here? Nope. Tech. Communication Services? Hmm. Just how much do internet stocks have in common with telecom anyway? You own the internet stocks because they are tech, they represent growth. You own telecom for the dividend, and so you already have them in inventory when 5G rips our faces off. If it rips our faces off.
Thinking about it in real-life yet? Truth is you might be starting to. Right? From that guy in the crowded subway car with a slight cough, to that oaf in the gym who does not wipe off the machine that he's been camping out on for 10 minutes... you notice. There is no panic, with just 13 confirmed cases in the U.S., but there is some apparent growth in the rate of infection in Singapore, as well as in pockets of Europe.
The growth of this viral infection appears to have slowed in Mainland China, unless of course China is just running out of tests. Unless of course, one just can't trust the numbers. No way to know. There are economists that now expect to see a reduction in Chinese Q1 GDP of up to one full percent. Evercore ISI Chairman Ed Hyman, on CNBC last week, said that China might see no first quarter economic growth at all. China's National Bureau of Statistics will let us know officially on April 16th, and could literally say anything between 0% and 5.5%. No way to know.
What I think we do know is this. If the trade war had not put a permanent dent in Chinese production, a virus that slows and deters human interaction just might. President Xi has referred to that nation's fight with this virus as "grim". At a minimum, shortages are already forcing spikes in consumer level inflation. We already know that production has been badly hampered by the most startling shortage of all. A shortage of available labor. What about when this shortage of labor runs into a scarcity of materials? Will that happen? Businesses will adjust. Supply lines will shift far more quickly than they did for a trade war that multinational business leaders consistently underestimated.
Once production starts moving toward Taiwan, Vietnam, Indonesia, India, Mexico, even Germany or the United States, it's not moving back. At least not overnight. Germany or the United States? Don't be ridiculous, Sarge. Labor will be too expensive? True, but in rebuilding corporate infrastructure, there will be increased reliance upon automation, reducing corporate headcounts in the process. At that point, do shorter supply chains make sense?
There would be higher necessary capital expenditure across the S&P 500 in order to secure these facilities as well as that new labor. Local economies will not only welcome this, they will extend fiscal accommodation. The temporarily (but not permanently) higher cost of doing business will impact more than one reporting season, but could result in what would be better re-balanced global production, or global economic growth. Not a silver lining. People are suffering. Just trying to anticipate the most logical path for those charged with making these decisions.
Your Central Banker
He understands. Right? Markets understand that the PBOC now appears more likely than not to continue to throw money around, despite the dangerous rise in consumer level inflation in that country, or debt levels that Beijing would rather cap and then reduce on a different day, or in a different dimension. The PBOC is now in crisis mode.
Even prior to this virus becoming such a global concern, there were doubts around the perception of improved macro-economic performance within the EU's Euro-Zone, or even in areas most related to the U.S. manufacturing base. ECB President Christine Lagarde initiated a review of monetary policy. Fed Chair Jerome Powell spoke of extracting the Fed from short-term repo markets as well as jawboning on a potential timeline for the "not QE" balance sheet expansion program.
What now? There is a perception among financial professionals that both Powell and Lagarde will now feel compelled to err on the side of accommodation. Even if inflation wakes up more violently than preferred. Did not Philadelphia Fed Pres. Patrick Harker prepare you for this yesterday (Monday) from the University of Delaware? Think consumer level inflation can not surprise? Too low, or too high, inflation has never done as it was told. Only Paul Volcker could command inflation and that was through painful trial and error, through rather Draconian means. Ask our last two Fed Chairs about consumer level inflation, or the Philips Curve for that matter.
If not anything else at all, we have learned over time that economics is art and not science. The artist tries to invoke human response through creation (as does the economist), but that emotional response to fine (or not so fine) artwork is appreciated quite differently in all whom it touches. Science is exact. Same results under the same circumstances. Every time. Economics can never be that. Never.
Fed Chair Jerome Powell will testify before the House Financial Services Committee this morning at 10 am ET, with the marketplace in the palm of his hand. Just a bit of a chance that the coronavirus might come up. Just maybe.
Selected Sarge Name Target Price/Panic Point Updates
Yes, I realize that the same guy that told you tech was hot, also told you that he likes utilities in a low interest rate environment, as if he cured cancer. Let's get a bit more specific, shall we?
AbbVie (ABBV) ... last sale $94.75
Condition: Breaking out of basing pattern.
Target Price: $112 (down from $125)
Panic Point: $85 (up from $66)
Adobe (ADBE) ... last sale $370.00
Condition: Reached Target.. sold small.
Target Price: $380 (up from $370)
Panic Point: $285 (up from $265)
CVS Health (CVS) ... last sale $73.25
Condition: Reports Tomorrow, needs $77 pivot.
Target Price: $93
Panic Point: $71
Advanced Micro Devices (AMD) ... last sale $52.26
Condition: Rebound off of 50 day SMA
Target Price: $65 (up from $53)
Panic Point: $45 (reiteration)
Home Depot (HD) ... last sale $240.61
Condition: Breaking out of Cup with Handle ($236 pivot)
Target Price: $284 (up from $275)
Panic Point: $221
Economics (All Times Eastern)
06:00 - NFIB Small Biz Optimism Index (Jan): Expecting 103.4, Last 102.7.
08:55 - Redbook (Weekly): Last 5.7% y/y.
10:00 - JOLTs Job Openings (Dec): Last 6.8M.
16:30 - API Oil Inventories (Weekly): Last +4.18M.
The Fed (All Times Eastern)
10:00 - Testimony: Federal Reserve Chair Jerome Powell.
12:15 - Speaker: Reserve Board Gov. Randal Quarles.
13:30 - Speaker: St. Louis Fed Pres. James Bullard.
14:15 - Speaker: Minneapolis Fed Pres. Neel Kashkari.
Today's Earnings Highlights (Consensus EPS Expectations)
After the Close: (LYFT) (-.53)