The Odds Are Good That The Odds Are Bad
The Good news:
Federal Reserve Vice Chair Clarida says QE through 2021
President-elect Biden is delivering his stimulus proposal tonight
The Bad News:
NBER recession factors stalled in 4Q2020
The latest economic data on payrolls employment are distinctly negative
The Covid vaccine rollout is going slowly and deaths rates are high
Markets are exhibiting overly exuberant signs
Here Is The Good News…
The stock market continues to respond positively to the promise of quantitative easing (QE) through 2021. On January 7th, Philadelphia Fed President Harker said the Fed may begin winding down QE in 2021, depending on the course of the economy. This was followed on January 8th by comments from Federal Reserve Board Vice Chair Clarida that QE will continue until substantial economic improvement is evident and also that interest rates will not rise until inflation is above 2%. This promise of future liquidity is music to the ears of stock market investors, especially if the economy really does improve.
The problem of course, is that if the economy doesn’t improve, the basis for current stock levels is questionable. Even the expectation of future Fed stimulus is not enough to prevent a sell-off similar to March of 2020 or the bear market of 2008. In both cases, the Fed was stimulating like crazy, but the desire for safety drove investors to sell everything except US Treasuries or hold cash.
Tonight, President-elect Biden will deliver his proposal for stimulus. In doing so, he will be signaling to Congress what he is willing to sign, with estimates ranging from $1 trillion to $2 trillion in stimulus. That compares roughly to the same size as the $2.2 trillion CARES Act in March 2020 and the $900 billion stimulus bill from December 2020. While this may be a short term positive for the markets, the reason Washington is even considering it is that things are still pretty bad.
Here Is The Bad News…
The National Bureau of Economic Research (NBER) is the country’s official arbiter to define the beginning and ending dates of US recessions. We can look at the monthly factors they consider to see if things are getting better or worse. In the Figure 1, each of their 4 factors is indexed to 100 in February of 2020. As you can see, except for retail spending, all are still well below peak levels and are starting to nose down a bit.
Figure 2 shows GDP levels; the 4Q2020 consensus forecast is estimated to be a whopping 1% higher than 3Q2020. That 2Q2020 pullback was the worst recession since the Great Depression.
Employment continues to weaken. The monthly payrolls and the weekly new-claims for unemployment reports both indicate a significant weakening in the jobs situation. These are not good data points for the economy as we start 2021. Figure 3 shows the latest weekly new-claims data point from 1/14/2021.
We see some progress with Covid vaccines. Here are some statistics from the US Centers For Disease Control (CDC) on vaccination rates.
Figure 4's death rate history is quite sobering. There is talk of it peaking and turning down, but I don't see it in the data, yet.
Finally, here is visual example of our stretched markets. These three charts in Figure 5 are weekly, daily and hourly snapshots of the Russell 2000 ETF. If “buy low, sell high” is how to make money, the rational investor must question the market narrative saying that we are at the beginning of a new bull market. Personally, I think that "new bull market" market narrative is a different kind of bull.
We would love to discuss the implications of this research on your personal situation.
Robert Lloyds, CFA®
Chief Investment Officer
Lloyds Intrepid Wealth Management
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