Uncertainty Rises

361 Capital Market Commentary | September 21st, 2020

The stock market is going to have a tough time dodging this newly thrown wrench. With the early passing of Ruth Bader Ginsburg, Washington’s attention will be completely absorbed by the empty seat in the Supreme Court. This means there will be less talking about the new COVID aid stimulus package, as well as a more difficult negotiation to put in place a stop-gap funding package to keep the Government running through year end. While I am expecting that the Government will not shutdown again, I am quick to remember the 20% pullback in stock prices in December of 2018 when it last happened. It’s difficult to see where Congress is going to work together on the stimulus and the funding, while at the same time battling over the process to fill the Supreme Court position. Thus, it’s easy to see how U.S. political risk for the market just increased.

Senator McConnell holds all the cards in how the Supreme Court seat will be decided. If his number one priority is to keep the Senate in GOP control in 2021, then he will likely wait until after November 3rd to put the seat to a vote. There’s no incentive for him to rush the SCOTUS candidate through confirmation if he thinks that it could get more conservatives to be interested in voting this election—and also not upset potential liberal voters in going to the polls.

Once he has the election results, and if the Senate keeps its majority, he will put the SCOTUS candidate through to a Senate vote. If he does lose the Senate GOP majority after the election, then he’ll need to decide if he has the votes to put the candidate through to a vote. If there aren’t enough votes, then the Senate in 2021 will fill the seat. Jamming a candidate through the Senate without control of the Presidency and Senate does little but guarantee a larger Supreme Court bench in 2021.

While politics is now a big, new disruption to the markets, the virus is also creating increased angst. Cases in some countries and U.S. cities are now moving in the wrong direction as the weather cools and schools have returned to the classroom. The U.K. has increased its virus alert status and London will be implementing new social distancing measures. Madrid is also moving toward more strict quarantining until case counts cool again. And the local, big university up in Boulder today announced a move to full student quarantine and 100% remote learning as the cities cases are rising exponentially due to the student body. And, also disappointing news this weekend as the Astra Zeneca/Oxford vaccine hit a second adverse reaction in its high-profile trial.

On the positive side of the ledger, last week the Federal Reserve made their case for keeping the Fed Funds rate lower for longer. Although, Powell also strongly suggested that more aid was needed from Congress to help the one million plus unemployed get past the virus. Without a new round of aid, consumer spending and financial payments will likely come under pressure in the fourth quarter and become a more important part of the November 3rd vote.

Through Friday, growth stocks continued to make lower lows and lower highs while cyclical stocks were doing the opposite. Of course, now with the new politics in Washington, this could reverse. Or maybe the increased risks across the whole economy and credit markets will just weigh on all stocks until we get past the election. Given the lack of new positive catalysts, I would expect most of the major indexes to look for some supportive levels which would probably be around the 200-day moving averages. That would imply another 5% move lower in the S&P 500 until we see how market psychology holds. We are also only 2-3 weeks away from the third quarter corporate earnings season. Companies will be pulling back their stock repurchase programs from the market starting this week and many portfolio managers will be more interested in looking at the Q3 numbers and hearing the company outlooks rather than buying the stocks ahead of time. So, it feels like a right time for a rest in stocks. September and October have proven to be uncertain months for the stock market. Maybe with everything that has gone wrong in 2020, this year is no different.

Watch what they say or what they do?

Portfolio managers continue to believe that U.S. Tech is the most crowded trade and at the same time, have the highest overweight position in the sector.

Most Crowded Trade
(BofAML)

Meanwhile, a sector no one cares about is beginning to act like a tech stock…

Materials Select Sector
(@HumbleStudent)

A reminder that U.S. stocks are nearing two-decade highs in the share of world stocks…

@C_Barraud: The market capitalization of the MSCI USA Index as a percentage of the MSCI All Country World Index reached its highest in nearly two decades earlier this month and now sits just below that at about 58% – Bloomberg

World Domination

And China stocks now make up 40% of the emerging market stock index…

Tweet from @jsblokland

Bonds remain a return-free risk investment…

Little yield but lots of duration.

Government Bonds
(@jsblokland)

German economic expectations are now setting decade highs…

Germany Expectation of Economic Growth

And the U.S. housing builder confidence is also off the charts…

@calculatedrisk: NAHB: Builder Confidence Increased to 83 in September, Record High

NAHB Housing Market Index

Reflecting the fact that not everyone in the U.S. is doing well…

@SoberLook: US household income expectations are rolling over.

U. Michigan Expected Household Income in 1 Year

Federal Reserve Chair Jerome Powell last week reiterated that a new fiscal package should be passed…

“So far, the economy has proven resilient to the lapsing of the CARES Act unemployment –enhanced unemployment benefits. But there’s certainly a risk.”
“…my sense is that more fiscal support is likely to be needed. Of course, the details of that are for Congress, not for the Fed. But I would just say there are still roughly 11 million people still out of work due to the pandemic, and a good part of those people were working in industries that are likely to struggle.”

(TheTranscript)

COVID + Brexit = London exodus…

London firms are ditching their unwanted office space at an even faster rate than in the financial crisis.

More than 1 million square feet (92,900 square meters) has become available for sublet since June, the equivalent of two Gherkin skyscrapers, according to research by real-estate data company CoStar Group Inc. Businesses are offering up the excess space as the pandemic keeps large swathes of employees working from home.

(Bloomberg)

Surplus to Requirements

Even in the U.S., very few office workers are returning…

Six months after coronavirus lockdown orders closed workplaces across the country, most offices in the U.S. are still quiet.

Data from Brivo, a company that provides access-control systems for workplaces, shows that “unlocks” at offices—when someone uses their credentials to enter an office—in late August were down 51% from the end of February. By comparison, visits to manufacturing and warehouse locations, where fewer jobs can be done remotely, remained down by a third…

While more offices are reopening this fall, many businesses expect workers will work remotely at least part-time for the foreseeable future, suggesting that it could be years before offices return to pre-Covid-19 occupancy levels.

(WSJ)

Weekly U.S. office unlocks

Larry Fink — this will be the new normal…

As work from home stretches on, BlackRock CEO Larry Fink said he doesn’t ever foresee all employees returning to the office.

“I don’t believe BlackRock will be ever 100% back in office,” he said Thursday at the Morningstar Investment Conference. “I actually believe maybe 60% or 70%, and maybe that’s a rotation of people. But I don’t believe we’ll ever have a full, you know, cadre of people in office,” he said…

BlackRock is the world’s largest asset manager, with more than $7.4 trillion in assets under management.

“It’s going to be a new workforce. It’s going to be a new paradigm, but I do believe it will be a better paradigm for the firm,” he said.

(CNBC)

If you are flying long distances, it would be safest to just bring your own breathing apparatus until there is a vaccine…

The good news is that the air filtration system on the airplane worked extremely well as long as you weren’t sitting near the infected person.

Long-haul flights have the potential to cause widespread transmission of Covid-19, new research concludes.

A team led by Nguyen Cong Khanh, an epidemiologist and member of Vietnam’s National Steering Committee for Covid-19 Prevention and Control, analysed data from a Hanoi to London flight in March that created a cluster of cases.

“In-depth epidemiological investigations strongly suggest that a symptomatic passenger transmitted [Covid-19] during the flight to at least 12 other passengers in business class,” the researchers found.

“Seating proximity was strongly associated with increased infection risk,” the researchers concluded in the paper, published at the weekend by the US Centers for Disease Control and Prevention.

(FinancialTimes)

Airplane Seats
(CDC)

Always a good day when your marketing department causes your supply chain to run out of your main ingredients…

McDonald’s Travis Scott Meal is selling well. Too well, in some cases, as locations have started running out of key products to produce the burger at its centerpiece, including lettuce, onions, bacon and even beef for Quarter Pounders.

The company is taking control of its supply orders to ensure more balanced supplies across the system to get ingredients to restaurants in need while ensuring others do not have too much, according to a memo sent Tuesday to operators and obtained by Restaurant Business. Still, McDonald’s expects a “rolling disruption” of its supplies across the U.S. system…

“Some restaurants have had so many fans stop by, they’re temporarily running short of some key ingredients,” the memo said. “We’re working diligently with our suppliers and distributors to redirect supply to those restaurants, but some may deplete supply of several key ingredients, including Quarter Pounder beef, bacon, slivered onions or shredded lettuce.”

McDonald’s kicked off its Travis Scott partnership last week with a monthlong marketing campaign. At its center is the Travis Scott Meal, featuring a Quarter Pounder with Cheese topped with lettuce and bacon, medium fries with BBQ sauce and a Sprite. The meal costs $6.

(RestaurantBusiness)

The Travis Scott Meal

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