Please find below the weekly market snapshot from GLC Asset Management.
Risk asset prices continue their relentless climb higher. They first climbed a wall of worry, now they’re moving even higher as worries retreat. The positive news on vaccines continued with the announcement from AstraZeneca that their vaccine can be stored at normal temperature for six months – a key benefit compared to Pfizer and Moderna vaccines (however, AstraZeneca’s vaccine is headed for additional global trials due to the uncertainty surrounding the results of its initial study). Clouds are parting on the U.S. election outcome: President Trump unlocked the transition process for President-elect Biden’s team and signalled he would respect the Electoral College decision. Markets cheered the nomination of Janet Yellen for U.S. Treasury Secretary, comforted by her experience and dovish tilt. U.S. consumer confidence softened, but that isn’t dampening household consumption (yet). Commodity prices (outside of gold) rose, and bond yields stabilized. All these market-friendly developments sent the S&P 500 to an all-time high. The Dow Jones Industrial briefly surpassed 30,000 for the first time while the S&P/TSX turned positive for the year and is only 3% away from its pre-pandemic (Feb. 20) peak. The market advance is broadening out as most sectors posted gains, setting aside worries over the fate of fiscal stimulus and the balance of power in the U.S. legislature. Shares of companies that benefit most from re-opening were strong, but not at the expense of growth stocks: the NASDAQ posted a strong week and another all-time high. What’s there to worry about? Every index we track is up double digits for the month. Near-term indicators of U.S. equity market sentiment are beginning to look a little frothy. The AAII “Bulls less Bears” Sentiment Index is at a YTD high – a cautious, contrarian sign.
While equities are soothed by the prospect that Janet Yellen will be the next U.S. Treasury Secretary, capitalists should take pause. An uber-dovish, overly involved Treasury department, aided and abetted by a money-printing U.S. Federal Reserve, has the potential for negative consequences. Inflation would be amongst them, but if the Japanese experience is any guide, inflation isn’t the only worry. Excessive intervention by governments in capital markets (by definition) distorts the important price discovery mechanisms that equity and bond markets provide. These price signals (interest rates, credit spreads, equity valuations) are direct inputs into the efficient allocation of capital. Distort these signals and the important process of creative destruction becomes less potent. A Bloomberg analysis shows that a record one in five of the 3,000 largest publicly traded U.S. companies are currently zombies. Zombie companies are so named because they limp along, unable to earn enough to dig out from under their obligations, but still have sufficient access to credit markets (thanks to policymakers) to roll over their debts. They’re a drag on the economy because they keep resources tied up in companies that can’t afford to invest into building their businesses. Zombie companies have less incentive to adapt to a post-pandemic world, face a constant risk of failure, underperform peers and drag down sector-wide investment and employment. This, in turn, can spur a low productivity, low growth cycle that’s difficult to exit and tends to be deflationary. Three decades of stagnant Japanese equity market performance stands as a testament that low growth, low productivity and deflation are kryptonite for the stock market. The pandemic warranted aggressive central bank and government supports; a return to normal for Wall Street should be as much of a goal as it is for Main Street.
Chart of the Week: Gold and Oil – Physical Distancing
No two assets are more representative of the shifting narrative in capital markets since the U.S. election and vaccine announcements than the prices for oil and gold. Month-to-date, the price for WTI oil has risen 27%, while bullion has fallen ~5%. The ‘re-opening’ trade, much of which requires oil to fuel it, (commuting back to work, airlines, cruise ships) has taken off. The latest leg up for oil is the rumour that OPEC and Russia will delay tapering production cuts until March. Gold, on the other hand, appeared to simply be consolidating its parabolic spring/summer move as the worst of the ‘fear trade’ unwound. But the week saw the yellow metal break down sharply and it now faces a test of its 200-day moving average – a level it needs to hold or further weakness is likely. The ‘gold bugs’ continue to point to ample money printing and deep deficits (due to some fiscal stimulus), coupled with a weak U.S. dollar, as positives for bullion and these narratives still exist. But longer term, the true savior for gold has more in common with rising oil prices – as in rising prices generally (i.e., it will take inflation fears to drive gold to new highs). While inflation is a worry of ours, it’s one that likely remains at least a year away.
For more charts and a PDF version click here,
The week in review
- U.S. durable goods orders (Oct.) rose 1.3% m/m (versus +0.8% expected), decelerating from an upwardly revised 2.1% in the prior month. Core orders (non-defense capital goods orders, excluding aircraft) rose 0.7% m/m.
- U.S. weekly initial jobless claims (as at Nov. 21) climbed for the second straight week, up 30,000 to 778,000, while weekly continuing claims (as at Nov. 14) fell 299,000 to 6.1 million.
- U.S. personal spending (Oct.) decelerated to 0.5% m/m (versus 0.4% expected) from last month’s downwardly revised 1.2% gain. Personal incomes fell 0.7% m/m (versus -0.1% expected). American consumers continue to spend at a high clip while simultaneously saving at an elevated rate of 13.6% of monthly disposable income.
- U.S. Conference Board Consumer Confidence (Nov.) deteriorated 5.3 pts to a 3-month low of 96.1 (versus 98.0 expected).
- Eurozone consumer confidence (Nov.) held steady at its initial estimate of -17.6 pts. However, consumer sentiment in the two largest economies is weakening amid renewed lockdown measures. Germany’s GfK consumer confidence survey fell 6.7 pts to -3.2, while the French consumer confidence index clocked in worse than expected, down 4 pts to 90.0.
- Purchasing Managers Index (PMI) recap (Nov.): U.S. Markit Manufacturing jumped 3.3 pts to 56.7, Services edged up 0.8 pts to 57.7; Eurozone Markit Manufacturing slipped 0.8 pts to 53.6, Services plunged 5.6 pts to 41.3; and, U.K. Markit Manufacturing rose 1.5 pts to 55.2, Services plummeted 5.6 pts to 45.8. All series sit above 50, indicating business activity is growing month over month; however, it’s evidence that recent government restrictions in the Eurozone have weighed heavily. This contrasts with the U.S., where activity has steamrolled ahead at its fastest pace since March 2015.
The week ahead
- Canadian GDP and trade data
- Canadian federal government fiscal policy update
- Canadian, U.S., Eurozone and Japanese employment data
- U.S. Federal Reserve and Treasury testify on Pandemic Response
- Eurozone inflation data
- Japanese retail sales, industrial production and consumer confidence data
- Global Purchasing Manager Indices
- 9 S&P 500 and 10 S&P/TSX companies report earnings, including the Canadian banks