The View from 5th Avenue

Only a Matter of Time… That’s how NYC Mayor de Blasio described the inevitable rollback of indoor dining in the city that he said this morning is likely coming in the next 2-3 weeks. At this point in the Covid resurgence investors know that more restrictions on the way, yet the fact that it’s also only a matter of time before an approved vaccine is distributed is keeping stocks seesawing near all-time highs. Today’s action has seen the lockdown fears weigh slightly heavier than vaccine hope, with futures mostly in the red even before weekly jobless claims rose for the first time in 5 weeks. Still the damage was limited and the S&P has just now broken into the green even as investors grapple with what to do next. The tech-heavy Nasdaq has been positive for most of the day as the scales tip slightly back in favor of pandemic winners (Software/Semis outperforming). Oddly though Energy is also near the top of the sector table despite crude prices trading lower amid the virus outlook (the again the space is -38% ytd). With earnings winding down it feels like this lockdown / vaccine debate is going to carry us through the end of the year (as the stimulus front remains quiet). That could mean more relatively dull days like this one, which some may welcome the way 2020 has played out…

More the new same –  Another vaccine update (from Pfizer) has kept the rotation into underperformers moving.  But while value once again is leading (-10bps vs Growth -31bps), and getting a lift from Energy (XOP +2.1%) and Banks (BKX +44bps), the differential between the Value and Growth groups is not as extreme.  The S&P is currently testing the 3600 level, but better support is down at the 3500 area. 

Back to Reality… A second consecutive “Vaccine Monday” made the proverbial “light at the end of the tunnel” that much brighter for 2021, but investors are following up another Rotation burst with a more wary assessment of the more immediate obstacles blocking that tunnel exit. In addition to the daily list of states announcing new virus curbs, and an October Retail Sales print that showed slowing growth, Republican senators reminded last night they remain opposed to any large scale stimulus. That caused enough concern to spark a bit of an unwind to yesterday’s rotation, and the usual 3 Value suspects Banks, Energy, and Autos were the worst performers shortly after the open. However, sentiment has evened out as the day’s progressed (VLUE was underperforming MTUM by 1.9% at 10am, but is now only -0.6% relative) and indices are attempting to fight their way back to their unchanged marks. Now Healthcare is at the bottom of the pile, with CVS (-8.9%) and other pharmacy names (WBA -9%, RAD -16%, GDRX -20%) feeling sick about Amazon’s (AMZN +0.7%) foray into the space, and Boston Scientific (BSX -8.9%) falling after initiating a recall of one of its heart valves. Retail and Food Retail are also red following a poor reception for earnings beats from Home Depot (HD -3.0%) and Walmart (WMT -0.6%) [another sign winners may be topped out?]. More defensives sectors like Household Goods and Real Estate are faring best today, along with Apparel stocks which are benefitting from broker upgrades.

I’ll See Your 90%… – And raise you to 94.5%. Keep giving us Mondays like this and the Sunday scaries will be a thing of the past! We felt the Moderna news might be imminent and indeed it was, following up Pfizer’s announcement 7 days ago with a trial result that has even greater efficacy. (The timing was good too as further vaccine/treatments may be on hold for awhile and COVID figures are going the wrong way in the short-term and foreseeable future.) The reaction was as predictable as it was familiar, although last week’s bookend performances were so robust for the value/rotation trade that it’s stunted some of today’s still impressive move. The stay at home names that got hammered on Pfizer’s announcement weathered today’s news quite well; the when/if we’ve got a handle on this virus will not result in a binary work outcome. But travel and leisure will be and airliners took flight on vaccine part two. Those jets are going to need some fuel and crude/energy names followed suit. Banks, already buoyed by the morning news, got another boost when PNC paid $11.6bn for BBVa’s US unit, increasing hopes for further consolidation in the space.

Within distance – It’s been a great week for stocks and the broader indexes are getting close to hitting new highs.  If markets get a late push (anything can happen in the last 15 minutes), both the Russell and SPX could eclipse their previous bests.  All sectors are in the green, with Energy (shrugging off Oil weakness) in the top spot.  Banks are also trading well today, with the BKX up 2.16%.  Retail is the laggard, held back by Etsy (-1.3%) and Amazon (-52bps).  The WFH beneficiaries (including mega tech) are actually trading lower (Zoom -10%, Peloton -6.7%, Wayfair -5.2%), but that impact is not making it to the indexes.  If indexes close at current levels, the S&P will finish +1.7% for the week, Nasdaq -1.07%, and Russell 2K +5.3%.  A new trend forming there?

Deep Breaths… If yesterday was a “pause for breath” after a whirlwind start to the week, today feels like the first exhale of some of the vaccine cheer that’s been a boost to equities. With virus cases quickly heading in the wrong direction, shutdowns (partial at least) looking inevitable this winter, and any vaccine distribution plan lacking medical and logistical finality, there are plenty of near-term clouds obscuring investors’ view of a sunnier 2021. What began as a mild pullback this morning has become a bit more exaggerated, with Powell failing to save the day with anything new in his comments at the ECB forum, only reminding that the next months will be “challenging.” The ball is still in Congress’s court in terms of stimulus, but the only movement on that front was the White House announcing it will leave the House / Senate to get negotiations going again (apparently the WH is busy with “other things”…). All the above has led stocks to continue to fade into the afternoon. Defensive sectors Healthcare and Food Retail have been the best of the worst for most of the day but now Media has taken over the top spot as the usual winners get some of their mojo back (relatively speaking). Consequently Banks, Autos, and Energy are back in their usual place in the basement of the sector table. It was fun while it lasted? The debate continues…

They Can’t All Be Like Yesterday… The way the week started off, you half expected to come in today and hear that a Brexit trade deal had been negotiated and that Congress passed a stimulus package… But alas, US equities are once again subject to gravity after flying higher on Monday. Still that hasn’t stopped rotation game from being played (VLUE +1.3%, MTUM -1.2%), just not nearly to the same extent as yesterday’s frenzy. Tech/Semis are the laggards again, with an extra drag from Amazon (AMZN -3.0%) staring down EU antitrust investigations. Joining them in the red today is Banks (+13% yday), bringing into question how far any “Great Rotation” will carry the battered sector. Monday’s other big sector winner, Energy (+14% yday) is also cooled off a bit but remains in positive territory. Industrials are leading, namely Autos and Cap Goods (Boeing +5% as it reportedly nears 737 MAX approval). Transports are also outperforming, but that’s thanks to freight names (CSX +3.7%, KSU +2.3%) carrying the load as airlines come down from their vaccine high (AAL -4.1% after being first to pull the trigger on a stock offering). With the S&P pretty much unchanged and the 10-year Treasury yield still hovering around yesterday’s highs, the market can’t be accused over letting too much of yesterday’s jubilance slip away yet, but the big question is whether the party will last or start to fade into year-end…

Resolution Reaction – We do have a winner, but this feels far from over. No doubt there will continue to be a slew of headlines over the next few weeks, calling the results of the election into question as President Trump has offered little indication he is prepared to concede defeat. Further, Trump has also refused to commit to a peaceful transfer of power. Both moves would be historical firsts, but most likely not all that surprising to market participants. Whatever your political alliances, the markets are behaving in a way that suggests investors are quite happy that at least the bulk of uncertainty is behind us. However, the election results pale in comparison to the market’s reaction to Pfizer (+11.2%) and BioNTech’s (+14.6%) vaccine progress announcement this morning. The headlines gave the markets quite a jolt, reversing the fortunes of pandemic losers such as travel companies (Carnival +37%), retailers (Kohl’s +17%) and banks (JP Morgan Chase +13.5%). On the other hand, virus related beneficiaries are seeing a decent pullback. See: Zoom (-13%), Peloton (-15%), and of course, Netflix (-6.2%). Value is outperforming Growth by 4%+ and the Russell, with its broader contingency of US economic sensitive names, is making new YTD highs. Also, JNK is loving it. second best day in 10 yrs for JNK US. (New total return high last week already.) Further, the 10y has jumped to 0.954% from 0.821%, crude is up more than 8.5%, and the safety trades – Yen, Gold, and Bunds are all enduring the opposite of risk assets. Ain’t no stopping the bull run now…..except maybe a hefty dose of reality…

Let’s Never Do This Again… Well it appears that investors ready for the weekend… After a looong week that saw the S&P notch 4 consecutive gains of over +1% (first time since 1982), today’s session feels like a bit of a pause for breath as investors as investors regather their bearings. At the moment, Biden looks all but certain to lock up the presidency, while the fate of the Senate may need to be decided by two runoff elections in Georgia in January (but still looks good for Republicans). While indices are little changed on the day, trading has still been choppy (vols +20% vs 20-day avg) as political headlines are still managing to keep jumpy traders on edge despite a conclusion nearing. Semis have also refused to calm down, with SOX making a new all-time price and 12-month relative as Microchip (MCHP +5.2%) earnings impressed last night. Telcos are also enjoying an earnings glow with T-Mobile (TMUS +6.0%) dialing up a beat and smashing expectations for costs savings from its merger with Sprint. Value sectors are dragging once again after their joining the party yesterday: Energy, Banks, and Autos are all among the worst performers. While there’s no doubt the election litigation will drag on for weeks, hopefully by Monday the market’s focus can return to the prospect of stimulus…

Everyone into the pool – Votes are still being counted, and lawsuits are flying, but markets are still reacting as if a quick outcome will occur.  What is known though is that no Blue Wave is coming.  That realization yesterday forced a quick move away from those perceived winners (Industrials/ Banks/ Material), and back into the YTD leaders (mega tech/ Semis). The approach today is more all-encompassing, with yesterday’s losers leading.  Materials/ Metals are +5%, Banks +4.1% and Transportation +3.3%.  Homebuilders are lagging (ITB +16bps), but they were up 5% Wednesday.  As the Value guys play a little catch up, mega teach and Semis are also performing.  Earnings from Qualcomm (+13.4%) and Qorvo (+7.7%) reminded the market again why the sector is +34% this year.  If the major equity indexes were testing their technical levels Monday, they are above them now, and even the Russell 2000 is at an 8 month high.