2 Weeks of Stock Gains: Are we entering “the period of cyclicals”? 

(11/14/2020)

Saturday

S& P 500 𝚫 T^week to a new record as investor optimism perhaps over a 90% effective Covid-19 vaccine led to a perception of ↑ hope of an economic recovery in 2021.

$ 𝚫 T^week:  outflow from cash and bonds ⓦ inflows to cyclicals, small caps, and high yield bonds.

Those investors who were on the sidelines this week

These investors rationalize that if Covid infection levels ↑over the next few weeks – which statistically I believe is highly likely – then not investing in these asset markets is smart since the facts on the ground will show ↑’d volatility reflecting investor perceptions of ↑’d short-term systematic financial risk in these markets.

Does this herald a change in investor stock exposure to: ↓ tech, and  ↑cyclicals (economically sensitive stocks)

Cyclical movement reflects a future hope or despair of a  categorical idea; certain stocks will reliably move ↑ or ↓ depending on ↑ or ↓ of GDP. 

Interest Rates / Inflation Outlook

10-year Treasury notes  Yield 𝚫 T^week  ↑’d from .83% to 0.89%.  .69% @ T ^{end of Sep} and .88% @ T ^{end of Oct}

The trend is up, suggesting that in the short-term a hedge  may possible 

Aspirational Equity Trend 

Period 1 (Past to Present): 2020 Mar: T⁻¹ to 2020 Nov: T° ↑tech

Period 2 (Present to Future): 2020 Nov: T° to Q2 2021 T¹ ↑cyclicals

This is a technical backcasting of the market trend beginning from 2020's stock market recovery point in 2020 Mar. Forecasting is a hoped-for trend for ↑ of equity prices in certain assets coincident with a post-Covid GDP recovery.

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Performance for the Week

Dow ↑ 4.1% 𝚫 T^week close @ 29479.81.

S& P 500 ↑ 2.2% 𝚫 T^week close @ 3585.15, first record close since 2020 Sep. ↑in all 11 sectors of the S& P, best-performing assets were in energy and industrials

Nasdaq ↓0.6% 𝚫 T^week close @ 11829.29 (↑tech weighting)

Dow to Nasdaq 𝚫 T^week highest since 2002

𝚫 T^week biggest loss 

2020 stay-at home stocks that have ↑’d during lockdowns: Zoom Video Communications ↓ 19%.

Tech: Amazon. com and Facebook ↓ > 5% 

𝚫 T^week biggest gain

Chevron ↑17%, best week since 2008

Walgreens Boots Alliance (pharmacy chain) ↑14%.

Russell 2000 (small caps) ↑13% 𝚫 T ^{current month}.  𝚫 T ^Nov (close of the current month was first record close in more than two years).

Part I: Financial Speculations on the Fed, Stimulus, and in Part II – the pricing-in of Post-Election Markets

(11/6/2020)

Friday

Financial Doing, Boulder, CO – Robert Winer, M.D.

↓ = less, decreasing

↑= more, increasing

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Fed supportive monetary policy 

It has remained status quo and the Fed still calls for Congressional stimulus ASAP.  This week Fed’s policy-setting committee didn’t change its tune. The relevant current policies are:

1 keeping overnight interest rates about zero% with change based on thresholds metrics that show: 

a] tight labor markets to the point where factories and service can't get employees that they easily could accommodate into their workforce 

b] inflation => 2%. 

2 keeping their weekly purchase of Treasurys and mortgage-backed securities at their current duration average of about 6 years.

Election update and its possible economic consequences.

1 Fiscal Policy: Stimulus in Congress

77 year-old Senate Majority Leader Mitch McConnell, re-elected in Nov. 2020 for a new 6 year term gave a “should” shout-out: Congress should pass a relief package this year. He’ll negotiate it behind closed doors with returning House Majority Leader – Speaker Nancy Pelosi.

It’s likely that McConnell will get unanimous support from his own Senate caucus members. A symbolically pertinent enough ↓’d amount stimulus package will be passed. It will be a small amount higher than what the Republicans were will to give before election but significantly below what the Democrats wanted. Nevertheless to keep people happy, there will be another round of stimulus checks to households.

The political cost to Democrats will be such that they won’t go to the mat to wait for the Jan 2021 Georgia Senate runoffs which possibly could help them regain a Senate majority, but if it does go to a runoff, it could push Republicans’ to a $↑from where they are now. 

2 Monetary Policy: Fed future action

The Fed hasn’t but could pledge to keep buying bonds until certain criteria are met. This is its policy for short-term near-zero rate markets..

The Fed hasn’t but could pledge to change its bond portfolio duration by purchasing longer-duration securities. The disadvantage would be that it could keep long-term interest rates ↓for longer period and prevent inflation targets from being met.