5 minute read
Let’s assume for a moment I was able to time travel and you and I spoke on December 31, 2019 at 11:59 pm.
At that time I told you I was from the future and that on Friday, November 13, 2020, the S&P 500 would be up 10.97% for the year, hitting a new all-time high while its cousin, the Nasdaq, would have gained an astounding 31.84% for the year as well.(1)
But I would then convey all the 2020 domestic and world events that were going to occur leading to that November 13 date and these returns. Had I done that, you would likely have thought I either had a little too much of my adult beverage to drink or that I time traveled using Hector J. Peabody’s the Wayback Machine from Peabody's Improbable History (Millennials – Google it).
Think about the returns we have experienced in the backdrop of everything that has occurred this year. The trade war with China, a Pandemic leading to an economic shut down of the country, historic drops in GDP, historic increase in unemployment, serious racial issues leading to civil rights protest across the nation, an intensely emotional presidential election, a divided country, a contested election, increased nuclear capabilities of Iran and North Korea, and now a third wave of COVID-19 (sorry if I missed any of your personal favorites).
Explaining to clients why the market increased back in spring and summer in the midst of tremendous uncertainty about virtually everything or why it is increasing to new highs today in the midst of all the perplexities we are facing is difficult.
Much has been written about those stocks that do well in COVID and have been driving the market. This includes recovery stocks and the always popular technology stocks. Let me give you a slightly different point of view that I have learned through experience and many years of involvement with the market.
In my view, the two keys to understand is that long term, markets generally move on earnings and not individual events or presidents and the market tends to move six months or so ahead of economic news.
Let’s look at the S&P 500’s rise from the bottom on March 23 through the market high on November 13.
Keep in mind all of the social, domestic, and world events going on at this time as we marched to the November 13 S&P 500 high.
- The second quarter Gross Domestic Product(GDP) was down a record 31.4% but up 33.1% in the third quarter.(2)
- Unemployment rose to an unnerving 14.7% in April but has dropped to 6.9% in October.(3)Unemployment at 4% is considered full recovery in employment.
- ISM Manufacturing Index (Old Purchasing Managers Index) dropped to 41.5 in April. To understand this number consider that 50 is viewed as neutral, above 50 implies expansion and below 50 points is considered a contraction of manufacturing. This was an extremely bearish number.
o However, the ISM Manufacturing Index soared by October, with the index notching its highest reading in more than two years with the October mark of 59.3 deep in growth territory and with fifteen of eighteen industries reporting expansion.(4)
- The customers' inventories index, where a reading below 50 signals inventory levels are too low, hit the lowest reading in more than a decade at 36.7 in October.(5) This is an extremely bullish sign.
- At the same time the backlog of orders index, which shows orders rising faster than production can fill them, hit a multi-year high at 55.7.(6)
- All of this suggests that manufacturing should remain robust for the foreseeable future
- Inflation is in check and interest rates remain low. I refinanced at a 2.49% 30 year fixed with $800 a month in savings. I assure you that I and my family will find a way to put a good portion of that $800 back into the economy.
- Retail sales are also important because our economy is 70% consumer driven. In April, retail sales were down 19.9% from a year ago. In September, retail sales were actually up 5.4% from September 2019 which I view as simply incredible.(8)
- Existing home sales continued to post strong results. In September, it rose for a fourth consecutive month and is hitting the highest pace since 2006.(9)
o From February (pre-pandemic) to the bottom in May, sales collapsed 32.1%. Since then sales have blown past the previous February high and are up 13.5% from pre-pandemic levels
o The purchase of a new existing home typically means lots of trips to Home Depot – good for economy and retail sales
Just to be clear, I do not believe that COVID and its related impacts are gone. However, what I do believe is that companies in the U.S. have done what we in the US do best – we adapt. We see companies and suppliers continue to operate in reconfigured COVID conscious factories and they are becoming more proficient at expanding output.
Of course all of this is mute if vaccines are on the horizon.
The political landscape is certainly a concern, but I believe our great country will work our way through this and, in my view, as I discussed in a prior blog, it is the economy that will drive the market more so than the person in the white house.
While news of all sorts seem to dominate our lives today, creating a bewildered sense concerning the market increasing in the face of these headlines, keep an eye on earnings and look past the events happening today. My experience is that the market is looking six months or so into the future.
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Sources:
(1) CNBC:
(4) ISM World
(5) Ycharts
(6) Ycharts
(7) MarketPlace.org
(8) Census
(9) Nar.realtor