Joel’s Weekly Talking Points – 5/26/20
- Rally caps are on – for now: Last week, most stock markets rallied mainly on the optimism around the potential of having a COVID-19 vaccine sooner than most had anticipated. The Russell 1000 rallied 3.55% and most other indicies followed suite with the notable exception of Emerging Markets. For the first time in it seems like forever, Value stocks beat Growth with Value up 4.09% and Growth “only” up 3.15% (based on the Russell 100 Value and Growth respectively).
- Thesis: I still find it difficult to position the majority of client assets in the risk-on bucket right now. Week over week, according to Johns Hopkins, the US only saw a decline of 1,000 new COVID-19 cases week over week. That means that we still had slightly over 158,000 new cases during the week of May 22nd. The curve has flattened, and states are beginning to reopen, but what does that mean, exactly? We still don’t know – in fact there are some states that are already experiencing spikes in new cases. Let’s assume for second that we ignore the virus – I do not believe anyone has the stomach for a second round of nationwide lockdowns at this point so what the virus does, or does not do, may be irrelevant. That leaves us with just the economy to focus on…
- The Economy and High Frequency data: So much of the economic data that is released to the public is dated: JOLTs is 10-14 days “late”; the unemployment rate is a month late; durable goods orders are also a month late. It’s tough, in the current environment to “see” too much from these numbers because the news flow is so fast. There are other numbers however that are updated more frequently and often: jobless claims, mortgage applications, and consumer comfort to name a few. Unfortunately for us right now, we are seeing very little improvement here – granted, there is some improvement but these are off very, very low numbers. The most important one in my opinion continues to be the initial unemployment claims – last week another 2.4 million Americans claimed unemployment for the first time. This was heralded in some sectors as good news because it was fewer than the week before, however in any other environment this would be considered horrific news. For context – the previous record for weekly initial claims was 695 thousand – in 1982.
- To vaccine or not vaccine? As I mentioned in the first of this week’s points, we continue to see news reports, this week it was a different company, of potential vaccine candidates. Both last week, and this week, the “news” was about a Phase 1 trial. Vaccines must go through three phases to be approved and distributed for use – phase one is very much like a baby step. Phases 2 & 3 are the most arduous, plus there are (by most estimates) close to 100 vaccine trials going on around the world as I write this. We still have a long way to go before we can proclaim COVID-19 defeated, let alone under control.
- Fun information for the week: NEW NOTE – The US government auctioned off $20 billion of new 20-year Treasury notes last week on 5/20/20, its first sale of 20-year paper since 1986. Subsequent auctions of 20-year Treasury notes are scheduled each month going forward. In 1986, the auction of 20-year notes occurred quarterly (source: Treasury Department).
Bottom line: As I write this on the Tuesday after Labor Day, US markets are up about 2% on the day and treasury yields are slightly higher – definitely a “risk-on” feel at the moment. Also as of this writing, the S&P 500 is only down 6.7% YTD – this is astonishing given what’s happening to the economy. While I remain optimistic in the intermediate and long-run for the US economy, I am of the belief that a little too much optimism is being baked into asset prices and at least for the short-term, remain cautious.