The economic calendar is packed with important reports. In normal times we would all be very interested, but the times are far from normal. Several of the reports emphasize April data, the first full impacts of the pandemic and shutdowns. Personal income and spending, ISM manufacturing, and consumer confidence will get special attention for that reason. Corporate earnings will provide an inside look at the shutdown effects and expected impact.
Most important will be the first steps at reopening the economy.
The background makes it a challenge for investors. They have more free time and many voices telling them what is “working.” No one is really helping much with the key question:
Should investors become traders?
Last Week Recap
In my last installment of WTWA, recognized the more upbeat sentiment shown by Mr. Market and suggested that investors might need to curb their enthusiasm. This was a popular theme for the week, usually stated as questions about why the market had rallied so much and what people could possibly be thinking.
The Story in One Chart
I always start my personal review of the week by looking at a great chart. This week I am featuring Jill Mislinski’s version, an excellent combination of the most important information.
As has been the case for several weeks, there are frequent opening gaps. This has been accompanied by much more active trading in the overnight futures markets (WSJ).
The market lost 1.3% on the week. The trading range was 5.2%, a continued reduction from a few weeks ago. You can monitor these along with historical comparisons in my weekly Indicator Snapshot (below).
Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!
New Deal Democrat’s high frequency indicators have always been a valuable part of my economic review. As we watch for signs of the eventual economic rebound, NDD’s three time frames will be especially helpful. The overall picture, terrible now and on short indicators and mildly positive on long indicators continues. How might this change?
The economy will be determined in the near future by the quality of political public health decisions as the federal and State levels, and by whether a “miracle cure” or treatment should suddenly appear. Strictly as an example, New York State has seen its new coronavirus diagnoses decrease by 45% on a three-day average basis from its peak two weeks ago. It is also testing far more, even per capita, than any other state. Cuomo just announced a “monumental” tracing partnership with a donation by Bloomberg. Should NY State be in a position to “open up” “with medical approval” in the next month sometime – vs. the condition of almost all other states – that would probably create a magnitude 7 political earthquake, with shockwaves spreading far and wide. Because – IF it were to happen – it would show that “crushing the curve” is possible, and that an economic recovery could be switched “on” almost as quickly as it was switched “off,” and would serve as both an example and as a shocking reproof. But “on” vs. “off” has vastly opposing economic implications.
Until we have more relevant data, I will just hit the highlights and provide some interpretation.
- Additional stimulus has been approved by the Federal government. The bill adds more funds and some tweaks to the Payroll Protection Program and funds for hospitals, health care providers, and more testing (WSJ). Since the program burn rate is $50 billion per day, estimates are that nearly $1 trillion is needed. (Politico).
The government response has been both much larger and much faster than in the case of the 2007 financial crisis.
- Mortgage applications dropped 0.3% but continues to track levels from some prior years.
- Michigan sentiment registered 71.8 for April, beating expectations of 66.5 and the prior 71.0.
- Home sales both existing and new were relatively close to expectations. That qualifies as good news these days. These were March reports, so we expect a big drop next month. (Calculated Risk). Months of supply, a function of the sales and construction rates, has increased.
Everything else declined significantly. Some of the March data still does not reflect the entire coronavirus effect.
- Durable goods orders declined 14.4% in March versus expectations of -10.0% and a February gain of 1.1%.
Initial jobless claims of 4.427M were worse than expectations of 4.0M although better than last week’s 5.237M.
Econofact highlights the growing disparity between UI claims and job postings along with timing of “stay at home” rules.
- Continuing jobless claims jumped to 15.976 M from the prior 11.921M. This series lags the initial claims data by a week, so we know there will be another big jump next week.
- Mortgages in forbearance increased by about 500K, bringing the total to more than 3.4 million (Housing Wire).
- Earnings declined -15.8% so far in the first quarter reports. This blend of actual and estimates is getting worse as the reporting season continues. (FactSet).
Hotel occupancy is down 69.8% year-over-year. Calculated Risk reports that this is an all-time record low of 21%. The average daily rate is also down 45.6%.
- Trucking demand continues to fall. Here are two interesting reads.
Negative oil prices. Briefly, oil futures buyers agree to take delivery at the time of contract expiration. Last week there was a combination of dropping demand, plenty of supply, and dwindling storage. If contract owners are unable or unwilling to take delivery, they are forced to sell their position, sometimes “rolling” into the next month as it becomes the “front month.” Bloomberg has more detail and a clear explanation. In another article Bloomberg describes how shorted shares in USO tripled.
Young investors rush into struggling oil ETF that isn’t even tracking the price of oil anymore. The USO ETF is a trading vehicle, not tracking the price of oil in the long term. There is no actual ownership of oil.
John Davi, founder & CIO at Astoria Portfolio Advisors, said the average retail investor was likely attracted by the discounted price, and didn’t realize this was a play to buy the futures market instead of spot oil.
“A low price handle is always a retail trap,” Davi told CNBC in a phone interview. “This ETF is something you want to buy with gloves on, and hold for a short period of time — it’s a trading vehicle, not a long-term investment.”
Terry Duffy, Chairman and CEO of the CME Group Inc. explained that “The futures market worked to perfection.” (MarketWatch) Individual investors do not understand the leverage involved or the extent of the possible losses.
And of course, Eddy Elfenbein has a clear explanation. Hint: technical glitch that will be remedied soon.
The Week Ahead
We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.
We have a heavy economic calendar, including many important reports. We will get the first look at the crisis impact on Personal Income and Spending, the ISM Manufacturing index, and the Conference Board report on Consumer Confidence. The advance estimate of Q1 GDP will make news, but it is even more seriously backward-looking than usual. Fed followers are unlikely to see any changes but will watch the commentary for any signs of wavering support for the economy. Pending home sales and construction spending are both March reports, but still expected to be weak.
Nothing is expected to produce good news, but I will be closely watching both initial and continuing unemployment claims.
Corporate earnings reports will provide continuing company-by-company descriptions of the shutdown effects and future prospects. The big story will once again be the pandemic and the prospects for reopening at least part of the economy. Brian Gilmartin previews the “Big 5” collectively representing 20% of the SP 500 market cap.
Briefing.com has a good U.S. economic calendar for the week. Here are the main U.S. releases.
Next Week’s Theme
Despite the appearance of some April data on the economic calendar, it will not attract much attention. Market strengths and weaknesses, the potential for economic reopening, and the hope for a rebound in stocks has many investors itching for some action. This raises an important question:
Is it time for investors to become traders? At least for a while?
Everyone knows that conditions are bad. Old news. What can lead to a change? Is it time to get more active?
What is working
Michael Batnick writes,
If it seems like tech stocks are the only thing working right now, trust your intuition.
The five largest stocks in the S&P 500, Microsoft, Amazon, Apple, Google and Facebook, collectively represent a piece of the pie that is larger than any other five stocks since the late 1970s.
Josh Brown discusses why investors regard real estate as a better investment than stocks. The entire analysis is interesting, but this explanation is especially persuasive:
Home prices in the United States have returned something like one percent over the long, long term on an inflation adjusted basis while stocks have returned something like seven times that. Of course, there are many regional differences over the decades. Homeowners may understand conceptually that the value of their home rises and falls through the years, but they don’t feel this “volatility” until they go to sell or buy. Additionally, the cost of owning a home is not just what you pay for it. Maintenance, taxes, remodeling, repairing damage, etc are rarely factored in when someone brags about how cheap their house was when they bought it 30 years prior.
And what is not
Financial and energy stocks are lagging.
New traders are joining in
Small options traders are buying lots of calls AND puts
Jason Goepfert shows the trend in this chart.
With plenty of time available and a possible need for funds, it is tempting to engage in some trading. You can see what is working. You have an opinion about reopening the economy and how long it will take.
You are comparing your portfolio with “the market” which reflects the tech and health care weighting shown above. Do you want to beat the market? If so, you need to do more of what is working and get rid of what is not.
What more do you need to be a big winner?
As usual, I’ll suggest some conclusions of my own in today’s Final Thought.
Quant Corner and Risk Analysis
I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.
For a description of these sources, check here.
Welcome to David Moenning and his Indicator Wall. His approach has many parts, but I will attempt to summarize two time periods on our five-point scale. The C-Score spiked. It is a dramatic change in underlying factors which normally provide important indications. This level is an outlier that cannot readily be interpreted. I’ll have more on this soon.
I am treating forward earnings and the resulting measures as not meaningful until we get more clarity.
I contine my rating of “Neutral” in the overall outlook for long-term investors. I am not trying to guess what will happen in the next week or two. As an investor, I would be neither a buyer nor a seller at this point, although I did a little selling of calls against existing positions last week.
Correction: Last week’s expected inflation reading was incorrect. Sorry for the error.
The Featured Sources:
Bob Dieli: Business cycle analysis via the “C Score”.
Brian Gilmartin: All things earnings, for the overall market as well as many individual companies. This week Brian suggests that one way of looking ahead might be to average 2020 and 2021 expected growth rates.
Doug Short and Jill Mislinski: Regular updating of an array of indicators.
David Moenning: Developer and “keeper” of the Indicator Wall. His most recent update summarizes the key elements.
James Picerno writes, Standard Asset Allocation Faces New Scrutiny And Suspicion. This is a good read for those concerned about their own asset allocation.
Insight for Investors
Investors should understand and embrace volatility. They should join my delight in a well-documented list of worries. As the worries are addressed or even resolved, the investor who looks beyond the obvious can collect handsomely.
Best of the Week
If I were to recommend a single must-read investment article this week, it would be Joe Wiggins’ What Lessons Should Investors Learn from the Coronavirus Bear Market? (Part One). He emphasizes that a painful bear market is very important for investors. It is a way to think about both investments and our own behavior in a time of stress. He describes a number of lessons, explaining the reasons behind each as well as providing good examples. Here are a few of my favorites.
Illiquidity is not diversification: Just because something doesn’t price, does not mean it is providing diversification to a portfolio. As I (and others) have mentioned before, the major advantage of illiquid assets is that the inability to trade limits our propensity to make bad short-term decisions. This is a behavioural premium created by structurally compelling us to be long-term investors (obviously with the caveat that a bad investment is still a bad investment). Ignore anyone saying that their private equity holdings have ‘held up well’ during a market sell-off.
People will want action! As uncertainty increases and markets fall there will be an inevitable clamour for activity. Things are happening – what are we doing about it? Whether or not what we are doing is likely to be beneficial in the long-term or is even part of our investment process is likely to fade into insignificance.
For the vast majority of investors sitting on our hands, or making very modest adjustments based on pre-existing plans is the right thing to do. The problem is nobody else thinks it is, and it might see you out of a job.
We are not epidemiologists. Even if we were, we still wouldn’t be able to time markets: Let’s be clear about short-term market calls in this environment. It means taking a view on the progression of the virus, the fiscal / monetary response, the economic impact of that response, the prospects for businesses, the reaction of individuals, and, crucially, the behaviour of other investors. Good luck.
There are many other great ideas. Highlight your own favorites in the comments.
Here are a very few ideas to consider, keeping in mind the companies and sectors that will be viable on “the other side.” Which of the three ideas do you find most promising, and least promising.
Food stocks. Lots of homemade meals, says Barron’s.
Health care has been a leading sector, but Marc Gerstein explains why investors need to pick and choose. Health care is not a monolith.
The Great Rotation – Now the Great Reset
Seeing what works currently involves looking at your charts. As he does so often, Dr. Brett Steenbarger does that. And then he moves to the next level.
Most of us look at a particular index, stock, or asset and try to figure out from charts whether it is weak or strong. In the current market, it is also helpful to look at relative performance: what is relatively strong to an overall market or asset class and what is relatively weak. Many good trades can come from picking out the winners and losers in the recent COVID outbreak. That is precisely what money managers I work with are doing: going long what benefits from the current environment and short what gets hurt.
Read the full post to see his examples. But the most important part is his conclusion:
It is in the shifting of these themes that we will see evolving opportunity in markets. If the experts I’m following are correct, periods of social distancing will be with us for a while. That is going to create new opportunity sets and shut down others. As I recently noted, that is likely to lead to a promising trading environment.
I welcome new members to my Great Reset project, where you can sign up here. You will be able to follow our progress, join in discussions, help my “wisdom of crowds” through some polling I will start soon, and get an early look at our conclusions. This is also the place where I am adding elements to my comprehensive pandemic model. This week’s update will share and explain one of our first ideas – a stock that will be great on the “other side.”
Watch out for
Muni Bonds. Will states be allowed to go bankrupt? (Barron’s).
Depending completely on dividends. Nine-Year Dividend Squeeze Coming for U.S. Investors
This is a dangerous time for investors. It is so easy to lose track of goals you have carefully developed and pursued for many years. Here are a few examples I am seeing:
- Investors who need income are discovering that some of their high-yield buys are not working. This may push them to seek even higher (and more dangerous) yields or to make unwise gambles in other assets.
- Investors who are meeting income goals are concerned that they are not “beating the market.” Wealth accumulation is an investor goal, of course, but few expect to beat the market in every climate. It is dangerous to attempt the impossible.
- Find the right stocks and sectors to buy
- Choose a good entry point
- Know when to exit — on both the upside and downside
- Unemotionally recognize when the underlying rationale for the trade was wrong
- Find new sectors early in a fresh move.
Active trading is a perilous challenge. Very few can make it work. There are many programs, systems, and formulas for sale. My advice is to limit your losses by not spending much on them!
Investing is much more promising. There are sound methods that have worked for decades. As long as you are willing to focus on the intrinsic value of your holdings, you can expect to be a winner in the long run. One key is a solid asset allocation. If you need income, that is the first goal. If you want to preserve wealth regardless of growth or income, that is the primary goal. Having a sound asset allocation begins with a careful examination of your priorities.
The right moves for an investor are much easier than learning to trade and watching a lot of financial news:
- Take some time to verify your goals and see where you stand; and
- Do not get active just because others are. Read a book. Watch some old movies. Start a new hobby. Spend some quality time with family.
Those two recommendations are worth more than a dozen stock tips.
I’m more worried about
- States jumping the gun on reopening.
- But many people are not ready to return to public places.
I’m less worried about
- Government debt. Yes, it is growing. Someday it will reach the top of our concerns. Meanwhile, I agree with Ben Carlson. He takes a good luck at many aspects of the problem, including low interest rates and the pace of growth in the overall debt. “One thing is for sure – now is NOT the time to worry about our country’s debt.”