Sit, Stop and Read…

361 Capital Market Commentary | January 11th, 2021

Never in my life had I read that much news, research, and content in one week. Probably not even during college. So much processing of information on Georgia election results, the events in Washington D.C., a string of much better earnings pre-announcements, and the financial markets’ digestion and recalibration of everything as it occurred. I thank my eyeballs for being able to keep up.

The most important news for investors is that the markets will now get their blue wave in Washington D.C., which will have many impacts. First off, $2,000 checks, additional unemployment insurance, some state and local aid, and the $2+ trillion-dollar infrastructure plan that most members of Congress have been waiting for. Negotiations and action for the stimulus will happen immediately so that the recovery can accelerate along with an expedited vaccine rollout program. Tax hikes to pay for everything will not happen until next year, and you already know how it will be paid for.

Earnings begin in full this week, led off by the big banks. But we are already seeing a plethora of positive early releases as companies are looking into their closed books and seeing better numbers. Last week we saw good numbers from Samsung, Micron, Sensata, STMicro, Union Pacific and even WD-40. Today alone, we had positive comments from Thermo Electron, Ultra Clean, Boot Barn, Crox, Avantor, Lululemon, and Exact Sciences. And just off the top of my head, I think the positives are swarming the negatives by 10:1. If this keeps up, it could be a really fun earnings season.

That said, the markets have noticed, and prices continue to run. I hope that the earnings period will bring many datapoints that will continue to allow market participation to broaden. Any hints of operating leverage and potential for future revenue upside could send many stock charts up and to the right. Post-COVID recovery comments will be key as investors size up where to make their next big bets.

Have a good week. I am hosting a webcast outlook webcast on Wednesday. Click here to register.. Also, feel free to send me a question, and I will try and get to it, or answer back after the webcast.

Friday’s jobs numbers weren’t that bad…

Especially when you assume that few are traveling or dining out. These jobs are highly dependent on the vaccine rollout, which will ramp up significantly this week. Good to see job gains across almost all other industries.

December Diffusion

Unfortunately, the jobs data looks less well if you zoom in on small businesses…

Paychex’s survey of 350,000 small businesses showed a new low in payrolls. There are likely many restaurants and leisure-related companies in this number, which could also recover quickly if capital is available to hire, pay rent, and use for working capital. Investors will eventually help once the vaccine is moving through the population. In the meantime, the Government has to help these firms.

Small Business Jobs Index

Janet Yellen gets it…

And it will be interesting to see what new ideas she implements once she gets the keys to the U.S. Treasury.

Tweet from @JanetYellen

Joe Biden also gets it…

His gift of a dual victory in Georgia and a now Democratic Congress, will make it easier to increase spending for COVID aid and accelerate a significant infrastructure package of $2-3 trillion to get everyone a job.

Biden’s initial plan was for a bill under $1 trillion but he said on Friday that “economic research confirms that with conditions like the crisis today, especially with such low interest rates, taking immediate action – even with deficit financing – is going to help the economy.”

Speaking to reporters as he announced his nominees to head the Commerce and Labor departments, the president-elect said action was needed to help Americans get to the other side of the health and economic crisis, and to “avoid a broader economic cost that exists out there, that will happen due to long term unemployment, hunger, homelessness and business failings.”

Markets have reacted quickly to expectations that government spending will rise since Democrats won the Georgia elections, with stock indexes rising and the interest investors demand on 10-year U.S. Treasury bonds climbing to their highest levels since March.


Biden Pumps Up Fiscal Policy

The new administration is also going to accelerate the vaccine rollout which will further aid the economic recovery…

President-elect Joe Biden will aim to release nearly every available dose of the coronavirus vaccine when he takes office, a break with the Trump administration’s strategy of holding back half of US vaccine production to ensure second doses are available.

Releasing nearly all vaccine doses on hand could quickly ratchet up the availability of coronavirus vaccines by allowing more people access to a first dose. It could also be a risky strategy as both Pfizer/BioNTech and Moderna’s vaccines require two doses, administered at specific intervals, and vaccine manufacturing has not ramped up as rapidly as many experts had hoped…

A transition official said the Biden team believes that vaccine manufacturers will be able to produce enough second doses in a timely fashion while administering first doses to more Americans. Biden’s team plans to use the Defense Production Act to produce vaccine materials and other supplies in order to ensure there’s enough vaccine for both doses.


The accelerating vax rollout will ramp the U.S. economy which will lead to faster job growth…

Economists expect hiring to start slowly and gain momentum later in 2021, as the Covid-19 vaccine becomes widely available and consumers resume activities such as dining out and travel. The $900 billion in enhanced unemployment benefits, aid to businesses and other relief enacted late last month is also projected to boost the economy.

The speed of the recovery would be far faster than after the two previous recessions this century, which mostly reflects the severe and sudden nature of last year’s downturn and the unusual factors at work now in confronting a simultaneous health and economic crisis.

“We have fiscal stimulus in place and we have the assumption of a successful inoculation campaign that will rescue us from Covid and unlock consumer demand,” said Joel Prakken, chief U.S. economist at IHS Markit. That will result in economic growth accelerating to above a 5% annual growth pace late this year, roughly double the average growth in the decade before the pandemic, he said. “That’s fast enough to put considerable downward pressure on the unemployment rate and give hiring a really good boost.”


Jobless Rate

Goldman Sachs took up their GDP forecasts last week…

Following the double Democratic wins in the Georgia run-offs, our US Economics team lifted their full-year GDP growth forecasts to +6.4% (from +5.9%) for 2021 and +4.0% (from +3.7%) for 2022. After January 20th, the Democrats will control the Senate by the thinnest of margins (50-50, with Vice President Kamala Harris breaking the tie). We expect more fiscal stimulus (in addition to the recently passed $900 billion package) totaling roughly $750 billion, including $300 billion in stimulus checks, $250 billion in assistance to state and local governments, and $150 billion in extra unemployment benefits (see US Daily). 1Q4Q 2021 quarterly annualized GDP growth will equal +5%, +9%, +7.5%, and +5%.

(Goldman Sachs)

Our GDP Growth Forecasts Are Now Even Further About Consensus Expectations

With expectations for a recovery at hand, the stock market has responded…

Below are the year to date, 1-month, and 3-month sector ETF returns for the U.S. markets. It should be no surprise that the cyclical areas of Energy, Financials and Materials are outperforming over all three time frames. Meanwhile, the defensive areas of REITs, Consumer Staples, and Utilities are lagging. As long as the vaccine rollout, economic acceleration, and job growth continue to move onward and upward, I expect this relative performance to continue.

Year to date…

Year to Date


1 Month


3 Month

The market’s performance was very narrow last year…

If cyclical stock outperformance continues, the breadth of performance should expand, which typically is healthy for the overall market and something that often occurs after economic difficulty.

Stock Market Breadth Is Strenghtening

The recovery in the markets has taken the S&P 500 P/E above 22x…

History shows that multiples above this level tend to make for poor 5-year forward returns. But this considers only if one invests in the S&P 500.

P/E ratios and equity returns

The U.S. Price/Sales measure also continues to stretch higher…

S&P 500 Price-to-Sales Ratio

But, so does Global Market Cap to GDP…

@Schuldensuehner: Buffett indicator sounds the alarm. Global stock mkt cap has now topped 120% of global GDP, and thus the same level as before the crash in 2008.

Buffett Indicator

Looking at the dispersion of U.S. P/E multiples shows there could be the opportunity to sell high and buy low…

If the economy is accelerating and many more firms see their top and bottom lines grow faster, there must be a way to make some better returns out of lower valued stocks at the expense of past high-flying winners.

S&P 500 valuation dispersion

One way to do so would be in companies with higher operating leverage to the economy…

Think about companies with fixed cost bases where an acceleration in revenues from 5% to 10% could translate into bottom-line growth from 10% to 25%. Examples would be Ford, Disney, Sysco, Zimmer, FedEx, Hewlett Packard Enterprises. If these companies can show positive operating leverage, their stock performance might resemble a high-flying tech stock after they report earnings. The chart below shows that these stocks are outperforming in advance of the economy taking off.

High Operating Leverage firms have outperformed by 9 pp since Nov. 6

Speaking of better revenues translating into higher margins, Union Pacific might have given us a small taste last week…

UNP didn’t disclose the improved earnings source, but we do know from others that automobile and energy shipments have been stronger. The chart below shows the outperformance in UNP and the Rail/Trucking group since the March market lows.

UNP disclosed around $278 million impairment charges in 4Q20 and also guided 4Q revenue to be around $5.1 billion and adjusted operating ratio be 55.6% (ex-impairment), around 400 basis point improvement from 4Q19 and 300 basis point better than we previously estimated. Based on the new guidance, we update our 4Q20 EPS estimate to $2.30 vs. previously estimated $2.08.

(Goldman Sachs)


The cyclical banking sector also continues to lead the market as it should right now…

Big U.S. banks have gone from losers to leaders in the stock market, rebounding from a pandemic-induced pummeling as investors anticipate a surge in federal spending in 2021 and look ahead to this week’s earnings-season kickoff.

Whether they maintain that momentum depends on the success of President-elect Joe Biden’s agenda, Federal Reserve monetary policy and how quickly Covid-19 is brought to heel. Investors have been optimistic about economic growth, with banks enjoying a bump in interest rates as they increase lending, deal-making and trading. Last month’s reintroduction of bank stock buybacks and Biden’s selection of Janet Yellen as Treasury Secretary in November also helped.

The KBW Bank Index has jumped 8.4% in January, beating the S&P 500 Index’s 1.8% advance. Last year, the bank gauge tumbled 14% while the broader market rose 16%. Three of the nation’s largest lenders — JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. — release quarterly earnings on Friday. Bank of America Corp. and Goldman Sachs Group Inc. follow on Jan. 19. Morgan Stanley reports on Jan. 20.

Large and regional bank stocks staged a late-year comeback on vaccine optimism and a rotation into value stocks from growth stocks, Keefe Bruyette & Woods Inc. analyst Christopher McGratty wrote in a note last week. Heading into earnings season, “relative stock performance will be less about the quarter and more about the outlook” for credit, profits and capital management, he said.


Banks Outperform

Financials have not outperformed for over a decade…

Financials vs S&P 500

The steepening yield curve will only help the banks operating earnings going forward…

@jsblokland: The US #yieldcurve is the steepest since mid 2017!

US Yield Curve

Another big help to bank stocks going forward will be the restart of their sizable stock repurchases…

A strong end to 2020 has paved the way for America’s top banks to buy back more than $10bn of their shares in the first quarter, as the loan losses of the pandemic year recede and capital markets fire on all cylinders.

JPMorgan Chase is expected to lead the way with buybacks, spending about $3.2bn on its own shares by the end of March, based on analysts’ forecasts compiled by the FT. The remaining $7.4bn or so is spread across Bank of America, Citigroup, Goldman Sachs, Morgan Stanley and Wells Fargo.

Analysts expect the buybacks to come in close to the maximum permitted under a Federal Reserve decree in late December, which surprised investors by allowing banks to resume buybacks and return billions to shareholders while also flattering banks’ earnings per share.


Top US banks poised for multibillion-dollar buybacks

With high yield paper trading so strongly, Banks will also be able to easily deal with any problem issuer…

@lisaabramowicz1: Yields on US junk bonds fell to a new all-time low yesterday of 4.16%. Investors are now earning the least extra yield to own lower-rated corporate debt vs investment-grade bonds since January.

Bloomberg Barclays US Corporate High Yield

In fact, the Goldman Sachs Financial Conditions Index is at its healthiest level ever…

@LizAnnSonders: Financial conditions now easiest on record

GS US Financial Conditions Index

So, while there are bankruptcies and problem assets, they are easily dealt with…

@C_Barraud: There were 244 U.S. bankruptcy filings by companies with more than $50 million in liabilities in 2020, the most for a year since 2009, data compiled by Bloomberg show.


Looking for cyclical stock strength? Check out the Semis…

Semiconductor Index

Sure, Semis are Tech, but when autos have up to 50 chips per car, they become cyclical which is a good thing as the economy recovers…

US manufacturing growth strongest since 2010

STMicroelectronics had some good news last week as revenues are coming in significantly ahead of their forecast…

“We ended Q420 with net revenues above the outlook range due to significantly better than expected market dynamics throughout the quarter. Our engaged customer programs in Personal Electronics, as well as continuous acceleration in demand especially of Automotive products and microcontrollers, were the main factors that contributed to this result.”

(Jean-Marc Chery, STMicroelectronics’ President and CEO)

As did Sensata who also mentioned autos…

“We saw increased and sustained business activity during the fourth quarter, especially in our Automotive and Industrial businesses, which translated into higher orders and deliveries than initially anticipated. We now expect fourth quarter 2020 revenue to be in the range of $902 to $907 million as compared to our prior guidance of $810 to $850 million provided at the time of our third quarter earnings announcement.”

(Jeff Cote, CEO and President of Sensata)

Micron also said the forecast was improved for their memory chips…

Micron Technology Inc., the largest U.S. maker of memory chips, gave a bullish forecast for the current period indicating improving demand for its products used in phones and computers.

Revenue will be $5.8 billion, plus or minus $200 million, in the fiscal second quarter, the Boise, Idaho-based company said Thursday in a statement. That compares with an average analyst estimate of $5.48 billion. Earnings per share, except certain items, will be 75 cents, plus or minus 7 cents, Micron said.

Micron’s chips act as storage in smartphones and are also an important part of computers, where they help process data and form the base component of new types of hard drives. Its earnings, which are a key indicator of demand for all devices that compute, suggest increasing sales across the industry.


We even learned from Honda that there is now a semi shortage…

TOKYO — Honda Motor will reduce vehicle production due to a supply crunch in semiconductors, Nikkei has learned, a sign that a pandemic-spurred global shortage is threatening the auto industry.

The Japanese automaker will first shrink production by about 4,000 units this month. The change will mainly affect the Fit subcompact manufactured at a plant in Suzuka, a city in Japan’s Mie Prefecture.

There are warnings that the cuts could be worse later in the year. “The period starting in February may be grim,” said a source familiar with the matter. The shortage could “impact tens of thousands of vehicles during the January-March quarter on the domestic side alone,” the source added.

Honda has apparently run short on semiconductors used in vehicle control systems. As people stay mainly indoors and work from home, demand has surged for chips used in smartphones and computers. As chipmakers focus on meeting that demand, semiconductor supplies to auto parts manufacturers have stalled…

Because the process of procuring material and turning it into semiconductors takes more than three months, adjusting production volume quickly based on demand is a tall order. The coronavirus pandemic caused demand for cars to drop during the first half of 2020. At the time, automakers temporarily cut orders for semiconductors, and the chip suppliers modified production plans accordingly.

The auto market began staging a comeback last summer, especially in China. But semiconductor production capacity has been unable to keep pace.


Ford is even idling factories due to the lack of chips.

Ford Motor Co. is planning to idle a Louisville, Ky., factory for a week starting Monday, because of parts shortages stemming from limited supplies of semiconductors now vital to everything from display screens to transmissions. The move will lead to the temporary layoffs of about 3,900 workers at the plant, which builds two popular SUVs, the Ford Escape and Lincoln Corsair.

Honda Motor Co. , Fiat Chrysler Automobiles NV and others are also wrestling with the shortage, leading them to reduce output on everything from big pickup trucks to compact sedans…

Auto executives, lawyers and analysts said they were startled at how quickly the shortages cut into U.S. production, with several companies moving to revise production forecasts downward in the first working week of the new year.

“It’s incredible how quickly this just blew up,” said Jeff Schuster, president of global forecasting at industry firm LMC Automotive…

Most of today’s cars have at least 40 different chips, with higher-end models having up to 150, said Sam Abuelsamid, an analyst at Guidehouse Insights.

“If even one has a production disruption, you can’t ship the car,” he said.


Semi strength can even be seen in the stock markets or Korea and Taiwan which are very Semi/Tech heavy…

Korea and Taiwan

As global economies recover faster than the U.S., foreign equities have led U.S. for the last few months…

S&P 500 Large Cap Index

In fact, the Emerging Market ETF just had its highest close ever…

Emerging Markets

And looking around the globe, there are plenty of reasons to spread our equity bets. Strength in Japan…

Japan Leading Index

And in Germany which is getting help from 7% of its exports going to China…

Germany Manufacturing Orders YoY

In the U.S., the consumer is flush and ready to spend as soon as the lockdowns end…

Consumers have plenty of gas in the tank
(Renaissance Macro Research)

According to this survey, consumers will be ready to travel in Q2 and Q3…

Consumer Travel
This is the 11th edition of Fuel’s COVID-19 Consumer Sentiment Study. The survey was sent out on December 17, 2020, and received 2,100 responses.

I agree with Bill Miller. Put me in the ‘Roaring 20’s’ camp benefiting the cyclical laggards…

Where I think the consensus may be wrong is that 2021’s economic and profit growth could be considerably higher than is now priced into stocks and bonds, leading some groups that have trailed the market for years, such as banks and energy, to move from laggards to leaders. If growth is stronger than believed, the scarcity value of high growth companies will diminish and the rotation to value continue. This does not mean I think many of 2020’s market winners will become losers, rather that the market’s gains will be much more broadly distributed than in recent years.


Any rotation from growth to value could have legs…

Valuation extremes still remain between Value vs. Growth

David Rosenberg has a slug of cash on hand right now…

I am even more interested in seeing where he feels safe enough to take risk in the markets: Energy and Banks.

Energy stocks remain cheap and the Saudis have helped establish a price floor with these unexpected production cuts. I have been on top of this, and recommend that we all run screens on natural gas orientation, which we need to generate electricity (you know, for those electrical vehicles). U.S. president-elect Joe Biden is a centrist, has filled his cabinet with centrists and is not going to ban fracking that is away from federal lands. And not just the equity in energy stocks, but also the sector’s debt, where eight-per-cent yields are abundant…

The rise in market rates and steepening yield curve is a big plus for financials, especially for the regional banks which will not face any regulatory risk. There has been some noise over commercial real estate exposure, but that is really a problem that commercial mortgage-backed securities and structured finance players have to confront.

The benefit of the banks here is that they are a well-diversified way to play the recovery that the Democrats are going to try much harder to ensure takes place than would be the case if Mitch McConnell was still at the helm at the Senate.


Put a stack of chips for me on the Dogs in 2021…

The Dividend Dogs prosper after recessions

In the growth stock camp, we know that Alt. Energy will have a great road ahead and even better under Biden…

We expect state policies, improving economics and corporate PPA growth to drive more solar deployment and our top-down analysis points to a path toward a total installed base of 370GW of solar in the US by 2035, by which time we believe solar will represent 26% of total energy mix domestically, up from 6% in 2019 and representing an 11% overall volume CAGR for the technology.

(Goldman Sachs)

Coal and Natural gas

But the stocks have already responded…

MSCI World ESG Leaders Index

Speaking of operating leverage, there could be some attractive plays in the mining, refining and producing the metals for all of those EVs…

Electric Cars Boost Metal Demand

There might even be an opportunity to make money in a 100-year old automobile manufacturer…

J.P. Morgan got to drive the new Mustang Mach-E crossover last week. Looks pretty good to me. What if Tesla didn’t have the monopoly on cool EVs?

We see three negative implications for Tesla valuation: (1) a growing number of compelling offerings will increasingly compete with Tesla for battery electric sales and share (of course while also growing the overall pie); (2) the sales of these offerings will place downward pressure on the demand from other automakers for Tesla’s valuable Zero Emission Vehicle credits; and — most importantly — (3) as single-digit P/E automakers increasingly roll out similarly attractive battery electric models, we believe it will call into question the perceived paradigm shifting nature of Tesla’s vehicles and business model and, in turn, its industry unique valuation.


Ford cars

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