S&P 500 Weekly Update: A Buying Stampede That Left The Majority Of Analysts Behind

Summary

• There is no debate, plenty of analysts and stock market pundits got the 2020 “stock market story” horribly wrong.
• Despite the concerns and ongoing issues, the stock market is following the "V" shaped economic recovery by making new highs.
• Unless there is a change in tax structure, corporate earnings will rebound sharply in 2021, and GDP estimates may be too low.
• Looking for a helping hand in the market? Members of The Savvy Investor get exclusive ideas and guidance to navigate any climate. Get started today »

"Things are not always what they seem; the first appearance deceives many; the intelligence of a few perceives what has been carefully hidden." - Phaedrus

If you were expecting a bit of a pullback to start December following November's big gains, it didn't come last week. While November's performance for the U.S. and global equities was, in many cases, the equivalent of a good year, December's MTD returns already would be considered a great month.

Major U.S. equity indices are all up around 2% already, and the small-cap Russell 2000 is up close to 4%. Every sector except for Utilities is also up on the month, but Energy is by far the biggest winner with a gain of over 10%. Even after that gain, though, it is still down nearly 30% on the year.

In many ways, this bull market has behaved just like many others before it. However, that's not how it is perceived by some. There are a few "catchphrases" that have been associated with this market, but lately, there is one that stands out. The "market doesn't care" is now a popular comment, and it's worthy of discussion.

Really? That depends on how an individual perceives what is taking place in front of their eyes. There is a contingent that believes that every headline is being dismissed. Of course, they are talking about the negative headlines. "The market doesn't seem to care that COVID cases are exploding"; "more localized lockdowns are being ordered due to this "Health" event"; "No one seems to care that there are still so many unemployed," and the list goes on and on. Their view is that no matter how dire things really are stock prices rise no matter what.

Stocks have persistently defied the skeptics, despite this wild ride that the market has taken us on this isn't anything new. Far too many analysts and pundits have pointed to all of the negatives that can be conjured up. The problem is what they refer to as news is just an extension of the myopic view that has been around equity markets since trading started.

How can it be that this market is going up with so many controversial headlines on what has been a very troubling year across the globe? 2020 is truly a year like no other. It was one of my biggest challenges since this secular Bull market started. As it is turning out it also was one of the most satisfying years since I have been in this business. For many, the S&P 500 is like Teflon, no event seems to stick and so the conclusion is that all are complacent and the market doesn't care.

Nonsense. The stock market and the individuals that are moving billions around each day definitely care, and they care about what really matters. So those making statements that the market doesn't care are doing a great disservice to investors that are listening to that rhetoric. It paints a picture that is based on a narrative having one believe that no matter what comes up the market will keep rising, and there is little behind the market upswing. A deceptive message that couldn't be further from the truth.

The S&P 500 and now the other major U.S. indices are setting records in this latest rally, and there are reasons for that. Reasons that many have yet to uncover. For anyone that hasn't noticed, there has also been a ton of good news to fuel the rally. The global economy has rebounded far quicker than anyone forecasted. The global "V' shaped recovery caught many by surprise and as shown last week the U.S. has been leading the rebound.

Source: Bespoke

Earnings growth has been surprising to the upside. Many sectors of the economy not only survived, but they also thrived. The last earnings season saw a record number of companies raising guidance, yet there was little to no mention of that fact from the financial media or the analyst community. The army of people that wanted to discuss COVID numbers instead of the numbers of companies raising forward guidance was left behind.

Now we will sit back and listen to the commentary switch to valuation and IPO mania. "Stimulus" watchers are still calling for the same economic debacle and market crash they called for earlier when the entire stimulus issue came to the forefront. Vaccine watchers will now tell us it will be a difficult task and take a long time to get the vaccine distributed. The top callers are out again, and while they may finally get one of their calls correct, more than likely they will join the crowd that made all sorts of mistakes in 2020. More miscues that align with the horrible forecasts that misled investors for most of this year.

So while all of this will weigh on the short term and be the reasons given for price weakness in the equity markets, the truth is the market will experience a pause. A pause that is needed and will be a sign of a healthy stock market.

I'll finish this segment by making the observation that every major U.S. Index has recently made a new ALL time high and shows the same Bullish chart pattern now. That should leave the guessing out of the equation, but it won't be enough to stop the naysayers from questioning it. They continue to select the wrong issues to "care" about.

The Week on Wall Street

After major U.S. indices closed at record highs on Friday and the dollar finished at multi-year lows, equities took a bit of a breather as the trading week began. Another day with a narrow trading range as the session neither eclipsed Friday's high nor its low. Technology bucked the weaker trend on Monday as the NASDAQ posted its 48th new high. Since breaking out of its consolidation pattern on November 25th the index has recorded 6 new highs in the last 8 trading days. The other major indices posted minor losses on the day.

In a perfect example of the market not caring, stocks rebounded despite the news that Republican Senate majority leader Mitch McConnel took a page out of Ms. Pelosi's negotiating handbook, and decided to stall stimulus talks. The stock market yawned and perhaps it continues to take on the attitude that the economic data isn't supporting what the analysts believe is needed to keep the economy afloat.

The slow melt-up in price continued as the S&P 500 set another new high for this year (#30), and has been "overbought" since the first week in November. The market likes to teach market participants that guessing when a rally might end usually results in financial discomfort. The Nasdaq (new high #49) and the Russell 2000 joined the all-time high party as the broad market strength is still ongoing. The Russell led the charge up another 1.4%, and the record shows that it was up 5.3% in the first 6 trading days of December. While the Nasdaq extended its winning streak to 11 days.

All of that came to an end when the S&P traded up to a new intraday high on Wednesday but reversed sharply indicating some buyer's exhaustion has entered the picture. All of the major indices traded lower with the selling more concentrated on momentum names in technology. The Nasdaq ended its winning streak at ten days long as the Tech heavy index fell 1.9%. Breadth leaned negative with underperformance from Tech and Communication Services while Energy, Materials, and Industrials (all old economy) were the only sectors higher.

The selling never gained much traction and after finding support the back and forth action didn't yield much in any one direction. The major indices traded flat as the week ended. All except the Russell small caps closed with a loss for the week. Of note, the Russell did toss in another new high in its recent run making it nine in 2020.

Economy

In aggregate, the consumer's balance sheet remains in good shape. For the seventh time in the past eight months, revolving (mostly credit card) debt outstanding fell sequentially. The pace of growth for the non-revolving debt has also slowed to the weakest pace since the start of the 2010s on a YoY basis.

In general, COVID has led to an almost unbelievable slowdown in credit-based spending, driving up savings rates dramatically. That data point has been overlooked by many analysts who have predicted dire consequences that lie ahead for the recovery.

Q3 household net worth rose $3.82 trillion vs. $8.29 trillion in the prior quarter. So far, a full "V" for the level of net worth, which has hit a fresh record of $123.5 trillion.

Chart courtesy of Liz Ann Sonders

All of that has left the average consumer feeling pretty good.

The preliminary Michigan sentiment figures beat estimates with a big 4.5 point December rise to 81.4 from 76.9 in November and a 7-month high of 81.8 in October. The upside Michigan sentiment surprise counters yesterday's initial jobless claims pop to leave mixed signals from early December readings on the degree to which new coronavirus restrictions are impacting economic activity and optimism. The current conditions component rose to a 9-month high of 91.8 from 87.0, while expectations rose to 74.7 from 70.5, versus a 7-month high of 79.2 in October.

NFIB Small Business Optimism Index declined 2.6 to 101.4 but still well above the historic average of 98. Six of the 10 Index components declined and four increased. The NFIB Uncertainty Index decreased 8 points to 90, still a historically high reading. Owners expecting better business conditions over the next 6 months declined 19 points to a net 8%. It's pretty clear what is causing the angst today.

NFIB Chief Economist Bill Dunkelberg;

"Small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election, which is shaping how they're viewing future business conditions. The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses."

A data point that continues to go unnoticed, especially by those that are concerned over the "jobs" picture.

As reported in NFIB's November jobs report, finding qualified employees remains a problem for small business owners with 89% of those hiring or trying to hire reporting few or no "qualified" applicants for the positions they were trying to fill. Twenty-seven percent of owners reported few qualified applicants for their open positions and 20% reported none.

The change in Washington is also of concern. Government red tape and taxes are back in the spotlight of "issues'. In the wake of Biden's victory, the share of companies reporting taxes as their biggest issue rose by 3 percentage points to 20%. That is the highest share of respondents reporting this as their biggest problem since the end of 2017; right around the time of the Trump tax cuts.

Including the share of respondents that report government red tape and requirements, which was unchanged at 14% in November, more than a third of small businesses now report government-related issues to be their biggest problems.

CPI rose 0.2% in November on both the headline and core, with the former a little hotter than expected, and follow unchanged readings for both in October. On a 12-month basis, the headline price index was steady at 1.2% y/y from October, while the core gauge was unchanged at the 1.6% y/y pace.

Producer Price Index for final demand in the US edged up 0.1 percent from a month earlier in November 2020, following a 0.3 percent increase in October and slightly missing market consensus of a 0.2 percent gain. Goods prices rose 0.4 percent, the seventh consecutive advance, mainly boosted by a 1.2 percent increase in energy cost.

October JOLTS: job openings increased 158k to 6,652k after bouncing 142k to 6,494k in September. Openings collapsed to 4719k in April and crashed in the prior recession to a record nadir of 2,264k in July 2009. Openings were at an all-time high of 7,520 in January 2019. The JOLTS rate rose to 4.5% from 4.4%. Hirings declined -74k to 5,812k following the -66k drop to 5,886k. The hirings data also showed huge swings on the pandemic, falling to 4,047k in April and surging 3,152k to 7,199k in May. The hiring rate slipped to 4.1% from 4.2%. Quitters edged up 18k to 3,092k after September's 235k jump to 3,074k. The rate was 2.2%, unchanged from September.

More localized shutdowns impacted Initial Jobless Claims as they jumped 137k to 853k in the week ended December 5 after dropping -71k to 716k in the last week of November. That brought the 4-week moving average to 776.0k from 740.5k.

Source: Bespoke

Global Economy

The European Central Bank kept its key interest rates unchanged and increased its pandemic emergency purchase program by €500B to €1.85B to support favorable financing conditions and economic growth as the pandemic drags on.

Sentix reported investor sentiment for December was pretty impressive. As shown below, investors' growth expectations are just below the 2014 peak in the Eurozone, and the assessment of current economic conditions is rising rapidly as well despite an onslaught of bad data related to new restrictions fighting the COVID second wave. Vaccine news no doubt weighs heavily in investors' minds here; this is the first release since the wave of positive vaccine data from Pfizer, BioNTech, Moderna, and AstraZeneca started a month ago.

Similar to the Sentix investor sentiment surveys, the ZEW surveys were also positive. yesterday. While the current assessment remains dire, analysts are very positive about the outlook, and of course, the dire current assessment is still improving. All things considered with all of the new restrictions being put in place, this is a better sign than it could have been.

China reported November 2020 trade data, and the results were pretty spectacular. We like to seasonally adjust these numbers though in some years that leads to some strange results in Q1 thanks to differences in the timing of the Chinese New Year. As shown in the chart at right, since the middle of the year exports from China to the rest of the world has been booming. Given the country's status as basically COVID-free and the booming consumer demand numbers globally, this isn't too much of a surprise, but the 15.5% increase in exports over that period is still pretty incredible. By far the largest driver of increased export demand has been purchased from the US, which is up a staggering 30% in five months and 50% YTD. As a result, the US trade deficit with China is at a record barring months distorted by seasonal adjustment issues discussed above. It's worth noting that Chinese imports from the US have actually been in great shape recently too, up 40% since June, but the bilateral imbalance is still widening persistently.

Revisions to Japanese GDP showed slightly better-than-expected growth. Japan's economy grew an annualized 22.9% in July-September, better than the initial estimate of a 21.4% expansion. Upgrades in fixed investment and consumer spending were seen as the biggest contributors to the outcome.

Political dysfunction is not unique to the U.S. The Brexit saga continues. Reports that talks over a Brexit deal are on the verge of collapsing as the two sides are still arguing over fishing rights and business competition rules. There is a lot of trade between the EU and the UK, which won't change overnight. If there is no trade deal, it could mean higher prices in UK shops. There could also be delays as trucks bringing products would need even more border checks.

As of Friday negotiators in the UK and EU have been at a stalemate and European Commission President Von Der Leyden says no deal is the most likely outcome of current talks.

The Political Scene

With President Trump's challenges falling by the wayside thus far, Joe Biden is expected to be officially declared President-elect by the Electoral College next week. The Senate majority (currently 50 Republicans, 48 Democrats) hinges on the January 5 Georgia run-off elections, and if a Democratic candidate wins each seat, control of the Senate will shift.

Over the past month, the probability of a Republican Senate has declined from 83% to 70% (according to PredictIt), and although a Democratic majority would be narrow, tax reform and regulatory shifts would remain Democratic Party priorities. Whether they can gain any traction is another story.

As mentioned previously, tax hikes, particularly on corporate tax rates, would be a big headwind for equities, especially given the fact that the major indices are "stretched". It could decrease the analyst's 2021 earnings forecast by ~10%.

The House passed a one-week extension to government funding taking the "fiscal cliff" off the table for another week to buy more time for combined funding/fiscal stimulus negotiations. On Friday the U.S. Senate cleared a one-week stopgap funding bill to avert a shutdown.

The Fed

While investors remain focused on a Stimulus Bill, yields on the 10- and 30-year Treasury rose this week, putting rates back at their highest levels since March, before the economy was hit with a lockdown. The 10-year note rallied to close at 0.90%, falling 0.07% for the week.

Source: U.S. Dept. Of The Treasury

The 2-10 spread was 30 basis points at the start of 2020; it continues to widen standing at 79 basis points today.

Perhaps the new global restrictions that have been established due to COVID have now impacted demand for crude. WTI inventories surged building by over 15 million barrels; the third-largest build on record this year. Domestic production was unchanged at 11.1 million barrels/day. Imports increased by 6.5 million barrels/day last week. That was the largest increase since July. Exports collapsed coming in at just 11.8 million versus 3.4 million last week.

These are huge moves relative to what we have seen recently, imports are still below the norm of the past five years and exports are above the five-year average.

The commodity continues to show stability closing at $46.56 on Friday, gaining $0.44.

Sentiment

Three weeks in a row where the weekly AAII sentiment survey reported bullish investors at 48-49%. This reading is still lower than the high of 55.8% from November 12th. The Investor Intelligence survey of equity newsletter writers also saw bullish sentiment drop slightly, falling from 64.7% to 64.4%.

The Technical Picture

A review of the week shows that the buying stampede which is closing in on about 30 days saw some buyers exhaustion this week. Given the recent strength though it is not a huge concern at this point. While continuing to set new highs the S&P (other indices as well) have pretty much traded sideways for the better part of two weeks.

Chart courtesy of FreeStockCharts.com

The index has remained above the short term support trend line for 29 straight days. A break below would usher in a test of the next support trend line.

No need to guess what may occur; instead it will be important to concentrate on the short-term pivots that are meaningful. However, the Long Term view, the view from 30,000 feet, is the only way to make successful decisions. These details are available in my daily updates to subscribers.

Short term views are presented to give market participants a feel for the current situation. It should be noted that strategic investment decisions should NOT be based on any short term view. These views contain a lot of noise and will lead an investor into whipsaw action that tends to detract from the overall performance.

I wonder what some of the market analysts and pundits are going to write about when the stimulus issue finally disappears. Fear not. After reading the latest commentary and looking at the proposals being discussed by members of Congress it seems to be never-ending lunacy.

The negotiations are now down to the point where they can't agree to pass what they agree on.

Negotiations on both sides of the Atlantic are underway. The Brexit talks and the ongoing U.S. stimulus negotiation have gone nowhere.

This quote from Winston Churchill describes the situation perfectly: "Diplomacy is the art of telling people to go to hell in such a way that they ask for directions."

History tells us that the latter half of December is when the market posts its gain for the month. The gains we have seen so far have definitely pushed the market to short-term overbought levels and some are now saying the typical Santa rally has already occurred. Be that as it may the 4th quarter push to highs has been quite impressive.

With ALL of the major indices making new highs in unison, the broad participation tells us despite any short-term issues, the long-term view is telling a much different story. We have been here before. Selectivity is key as many solid fundamental growth stocks have sold off and the non-stop debate over Growth versus Value rages on. Rotation between sectors and sub-sectors is bullish price action. The same people that were warning me that mega-cap FAANG+ stocks were carrying this market are now telling me that broad participation leading to an extended market is also a warning.

The naysayers have been out in full force lately with their scare tactics to show how extended the market is right now. What they conveniently leave out, however, is that typically an overbought market is a sign of broad market strength and such strength can continue for a long time and doesn't necessarily mean that the move is coming to an end. Of course, these same geniuses will continue to try and call the intermediate top once again. They will tell you to go out and raise a huge amount of cash, but they also said that all during this rally off the lows. This wrong-footed approach is never-ending for the crowd that simply doesn't get it. If you want to raise cash now it means you have built your fortune, calling it a career, and moving to your own island.

Money rotation causing rolling corrective activity is positive for the overall health of the market. It stops all excesses in their tracks and offers solid opportunities along the way. I'm not saying it's time to push in all the chips here. There is no reason to if one has been following the message of the market and followed the yellow brick road advice that has been part of these weekly updates.

As the rolling corrections continue while the indices consolidate, there is an abundance of opportunities that can be found. That has been the case since it was determined that the Bull market was back in force in April.

An investor now has to determine if this backdrop is more like 2009 or is it more like 2000 or 2007. Is it the beginning of a new cycle or is it wild speculation? A question each investor has to come to terms with.

I'll also leave everyone to ponder the ONE issue that remains at the top of my list of concerns. It is a situation where risk management may be brought back to the forefront of any investment strategy. A potential change in the corporate tax structure will bring enormous negative ramifications for corporate earnings. At present, I view the 2021 earnings forecasts as too low. So there is the potential for a huge swing in the profit picture in the upcoming year as increased taxes will impair earnings significantly.

Also, CAPEX and the regulatory environment will be impacted. In other words, it becomes a botched economic recovery.

Stay tuned.

Please allow me to take a moment and remind all of the readers of an important issue. I provide investment advice to clients and members of my marketplace service. Each week I strive to provide an investment backdrop that helps investors make their own decisions. In these types of forums, readers bring a host of situations and variables to the table when visiting these articles. Therefore it is impossible to pinpoint what may be right for each situation.

In different circumstances, I can determine each client's personal situation/requirements and discuss issues with them when needed. That is impossible with readers of these articles. Therefore I will attempt to help form an opinion without crossing the line into specific advice. Please keep that in mind when forming your investment strategy.

to all of the readers that contribute to this forum to make these articles a better experience for everyone.

Best of Luck to Everyone!

Analyst’s Disclosure: I am/we are long EVERY STOCK/ETF IN THE SAVVY PLAYBOOK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This article contains my views of the equity market, it reflects the strategy and positioning that is comfortable for me. IT IS NOT A BUY AND HOLD STRATEGY. Of course, it is not suited for everyone, as each individual situation is unique. Hopefully, it sparks ideas, adds some common sense to the intricate investing process, and makes investors feel calmer, putting them in control. The opinions rendered here, are just that – opinions – and along with positions can change at any time. As always I encourage readers to use common sense when it comes to managing any ideas that I decide to share with the community. Nowhere is it implied that any stock should be bought and put away until you die. Periodic reviews are mandatory to adjust to changes in the macro backdrop that will take place over time. The goal of this article is to help you with your thought process based on the lessons I have learned over the last 35+ years. Although it would be nice, we can't expect to capture each and every short-term move.