The Handoff

361 Capital Market Commentary | January 19th, 2021

It would be a tough position to be short the U.S. markets going into this new Administration. The Federal Reserve, U.S. Treasury, and now a more unified Congress have the economy’s back. While rotations inside the market may pause the major market indexes as cyclical sectors take the batons from defensive and growth sectors, it is difficult to make a case for a significant correction right now.

COVID is still the major issue, but increased restrictions, lockdowns and the distribution of the vaccine is having a positive impact on declining hospitalizations. We just need more vaccine approvals and a ramp up of the juice going into arms. Enough of the stories about unused doses being tossed at night’s end. Pharmacists and nurses need to get on twitter and let us all know so that we can form a line at closing time. Israel has plans in place to be fully vaccinated by the end of March. Spring break in Tel-Aviv anyone?

Next to ’46’ and the vaccines, corporate earnings are the most important thing to the market right now. The good news is that earnings continue to bury expectations at a level not seen in decades. As we discussed on the call last week, part of this is due to the very low expectations and uncertainty going into year end. But as important, is that consumer and corporate spending activity has come in at a better-than-expected pace. And this is occurring across a multitude of industries that touch many end markets from tech to healthcare to consumer to transportation. The earnings beats and higher guidance will lead to rising earnings estimates, which will put upward pressure on stock prices.

Enjoy the markets now because they won’t always be so favorable. As we discussed on the call last week, at some point the U.S. will need to put the genie back in the bottle. This will mean removing stimulus from the markets, shrinking the Fed’s balance sheets, increasing the Fed Fund’s rate, raising corporate and personal income taxes, and other moves to save for that next rainy day. While the Government has made it fairly clear that this will not occur until a later date (likely 2022-2023), at some point the anticipated worrying by investors will lead to more challenging markets. There is nothing wrong with taking chips off of asset and stock prices that get extended this year, especially if you can take big gains under a lower tax rate in 2021, and it is not something that you want to own forever. Enjoy the very busy short week.

The details on the first part of Biden’s stimulus plan are very targeted to helping those in need, especially families with children…

o Direct payments of $1,400 to most Americans, bringing the total relief to $2,000 including December’s $600 payments
o Increasing the federal, per-week unemployment benefit to $400 and extend it through the end of September
o Increasing the federal minimum wage to $15 per hour
o Extending the eviction and foreclosure moratoriums until the end of September
o $350 billion in state and local government aid
o $170 billion for K-12 schools and institutions of higher education
o $50 billion toward Covid-19 testing
o $20 billion toward a national vaccine program in partnership with states, localities and tribes
o Make the Child Tax Credit fully refundable for the year and increase the credit to $3,000 per child ($3,600 for a child under age 6)

(JPMorgan)

How the relief will get to families…

Proposed Relief Rebates
(@TaxFoundation)

Renaissance Macro Research details Biden’s busy first four days…

Day 1: Biden will rescind the travel ban on several majority-Muslim countries, rejoin the Paris climate accords, extend limits on student loan payments and evictions instituted during the pandemic and issue a mask mandate on federal properties and for interstate travel.

Day 2: Biden will sign executive actions focused on addressing the Covid-19 pandemic, including ways to help schools and business reopen safely, expand testing, protect workers and establish clearer public health standards.

Day 3: Biden will direct his Cabinet to work on delivering economic relief to families most affected by the crisis.

Day 4: Biden will expand “Buy America provisions,” take action to advance “equity and support communities of color,” begin to reform the criminal justice, expand access to healthcare and work toward reuniting families separated at the border.

(@RenMacLLC)

The Treasury Secretary-elect urges Congress to “Act Big”…

No messing around by Janet Yellen today as she lets the lawmakers know that you don’t want to be behind this 8-ball. Better to act early, and big, than have bigger problems to deal with down the road.

Janet Yellen told lawmakers Tuesday she would make the needs of America’s workers her core focus if confirmed as the next U.S. Treasury secretary and ensure the U.S. has a competitive economy that offers good jobs and wages workers in cities and rural areas.

“I will be focused on day one on providing support to America’s workers and to small businesses, putting into effect as quickly and efficiently as I can, the relief in the bill that was recently passed, and then over time working for a second package that I think we need to get through these dark times,” she told the Senate Finance Committee at her confirmation hearing before a vote on her nomination.

Ms. Yellen said that additional spending that provides relief for struggling families and businesses could provide the most “bang for the buck” for the economy as a whole, including extended jobless benefits and nutrition assistance…

“Economists don’t always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now—and long-term scarring of the economy later,” Ms. Yellen said.

(WSJ)

Real GDP estimates now moving above a 7% growth rate…

Tweet from @greg_ip

Plenty of Fed speak last week indicates that the Fed’s remains on hold…

Fed Chairman Powell…
We will communicate very clearly to the public and we’ll do so well in advance before actively considering any tapering of asset purchases.
When the time comes to raise interest rates, we’ll certainly do that. And that time, by the way, is no time soon.

Fed’s Bullard…
We want to get through the pandemic and sort of see where the dust settles, then we will be able to think about where to go with balance-sheet policy…We are not close to that yet.

Fed’s George…
Clearly, in the current environment where the economy continues to heal, an accommodative policy stance is appropriate. It is too soon to speculate about the timing of any change in this stance.

(Goldman Sachs)

Vaccine datapoints on the rise…

@megtirrell: Helpful breakdown of US vaccine administration + dose allocation, via Evercore ISI:

Cumulative Vaccine Doses Administered in U.S.

Increased vaccine deployment is having an impact on the decline in hospitalizations…

We expected a continued rise in COVID hospitalizations post the holiday gathering period, but clearly another major factor has stopped its ascent. That big new factor would be 15M vaccine injections into U.S. arms.

US Hospitalizations
(Goldman Sachs)

I was just joking in last week’s Weekly Research Briefing about getting Starbucks to help deploy vaccines…

Starbucks
(Starbucks)

The losers in this race do not get a summer vacation…

@StatistaCharts: According to @OurWorldInData Israel is leading the race to mass vaccination against #Covid-19 to reach the 60-70 % threshold needed to suppress the spread of the virus among the general population. https://bit.ly/38UEE1R

The Covid-19 Vaccination Race

Earnings guidance is off the charts…

If 56 is the final number of S&P 500 companies issuing positive EPS guidance for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this data in 2006. The current record for the highest number of S&P 500 companies issuing positive EPS guidance for a quarter is 51, which occurred in Q1 2018.

S&P 500: Positive EPS Guidance

Technology and semiconductor companies are leading the better-than-expected guidance…

In the Information Technology sector, 29 companies have issued positive EPS guidance for the fourth quarter. This number is well above the five-year average for the sector (16). If 29 is the final number for the quarter, it will mark the highest number of companies issuing positive EPS guidance for this sector since FactSet began tracking EPS guidance in 2006. Eleven of these 29 companies are in the Semiconductor & Semiconductor Equipment industry.

S&P 500: Sector-Level Positive EPS Guidance

(Factset)

The pre-announcement ratio hasn’t been this good in this century…

Negative to positive preannouncements in the US
(JPMorgan)

Here is who’s on deck to report earnings this week…

Most Anticipated Earnings Releases
(@eWhispers)

Looking at the major leading/lagging ETFs year to date…

Definitely a pro-cyclical/economic theme with energy, small caps and China leading, while long U.S. Treasuries are lagging. The communications sector is being held back by its social media holdings, and silver is just confused and wishing it were a key material in the cooling coils of Bitcoin mining hardware.

Leading Lagging ETFs

Portfolio managers are beginning to move into banks while cutting their technology holdings…

Global Banks
(@BofAML)

And stock buyback activity looks like it could easily double to get back to normalized levels…

@TimmerFidelity: Don’t look now, but share buybacks are on the rise. Total for the year, announced or executed, reached $527 billion. As you can see, that’s nothing like the extremes of 2018-19, but it’s much stronger than last summer, when buybacks flatlined.

Announced Share Buybacks

The cyclical trade has a very long way to run…

Cyclical Value vs Cyclical Growth Sector Mean Reversion
(@NDR_Research)

Bubble watch…

@carlquintanilla: Deutsche asked 627 global investors where they think the bubbles are.

Bubble watch

NYC apartment prices are near a bottom…

Manhattan apartment leases almost doubled last month, a sign that sliding rents and landlord freebies are drawing tenants to New York’s costliest borough.

The number of new deals jumped 94% from a year earlier to 5,459, the biggest annual increase since April 2011, appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate said in a report Thursday.

About 54% of those leases came with move-in incentives such as free months or payment of broker fees. With the value of those perks factored in, the median rent tumbled 17% to $2,800, the firms said.

(Bloomberg)

Tenant's Market

And maybe Manhattan millionaire residences…

Manhattan’s housing market just logged its strongest week for $10 million-plus deals since Covid-19 first gripped the city last spring.

Of the 16 contracts signed on homes asking $4 million or more in the week ending Sunday, seven were for trophy homes with eight-digit price tags, according to a luxury market roundup from Olshan Realty on Monday. It marked the most $10 million-plus deals in a single week since early March, shortly before the city entered an intense three-month lockdown.

Big price cuts continued to lure in buyers. The average luxury home last week was discounted 18% before going into contract. The median price was $7.25 million, according to Olshan.

(MansionGlobal)

For the rest of us outside of NYC, residential housing prices are only moving higher in the future…

@mikesimonsen: On the inventory watch, we’re down to just 389,000 single family homes on the market. Many new listings are getting offers so quickly they’re bypassing our active market data and just going straight to pending-contract.

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