Weekly Perspective: Fresh Start?

See below for your Monday Morning Update from the Fieldpoint CIO Office.  Here are the contents so you can focus on what is most relevant to you:

• Weekly Perspective: Fresh Start?
• Last Week Market Summary: Record Highs, Rates Little Changed
• Last Week Data Summary: Jobs, Housing, Imports/Exports
• This Week Data: OPEC+, Georgia Run-Off, Jobs Friday
• International Focus: Euro closes at 2020 High, Booming South Korea Exports, China Near 2015 Bubble Peak

We finally made it to 2021. 2020 is in books and as tempting as it is to not look back on a tumultuous year, and as much as the roaring stock market rallies embolden us not to even glance in the rearview mirror, there are many changes in markets that occurred in 2020 that will likely have lasting effects. Next week we will be publishing our 2021 outlook that intends to provide a comprehensive assessment of the setup into 2021 and how investors should position in this unique environment. In the meantime, here are a few points to keep in mind as we start the new year:

• 70% of the time, the performance of January accurately predicts the yearly performance of the market (if January is up the market is up for the year, if January is down the market is down for the year… 70% of the time)
• Since 1928 there have only been 5 times that the S&P 500 has had 3 consecutive years of 10% returns.  With 2019 +31% and 2020 +16.3%, will 2021 make for another rare hat trick?
• In 2020, 69% of the S&P 500’s return was generated by the Technology sector alone (which was up +44% for the year), despite the broadening out that happened in the second half of the year
• In 2020, just three stocks (the A, A, and M of FAANGM) generated 53% of the S&P 500’s return
• The five largest stocks in the S&P 500 added $2.6T of market cap in 2020
• Despite the dividend cuts starting in March/April, 2020 was still a record year for S&P 500 dividend outlays, growing +0.07%; this was the 9th consecutive year of record dividends
• GDP for 2020 is expected to be much better than initially feared (the Fed expected 2020 GDP to be less than -2% vs. the June estimate for -6.5%)
• 2021 will have to square junk bond (high yield) yields at record lows (see here and see here) while stress within issuers remains high due to the 2020 disruptions:
• S&P Global expects a 9% default rate in 2021
• HY yields hit a record low despite record issuance (see here) even for the weakest companies (see here); issuance is expected to slow in 2021
• There were heightened bankruptcies in 2020 (see here for a great visual look at the more than 340 large companies that declared bankruptcy in 2020)
• Relatedly, there have been thousands of small firms that went out of business in 2020 (see here)
• This is a result of Fed intervention with its ability/action to purchase HY bonds (which effectively opened markets up to even the weakest borrowers), as well as the suppression of higher quality interest rates/returns, which effectively pushes investors out on the risk curve (meaning they will accept a lower return for taking on higher risk because there are few alternatives)
• Bubble watch: with valuations at highs not seen since the last equity bubble in 2000 and speculative assets booming (IPOs outperform by ~ 100%, SPAC boom, Bitcoin quadrupled in 2020 and was up 50% in December alone), we remain on bubble watch (continuing to note that valuations are a poor market timing tool, with dislocations persisting and amplifying)
• As described in our December 21, 2020 Monday update, there is great debate as to whether valuations should be assessed on an absolute basis (very expensive vs. history) or relative to bonds (average vs. history thanks to the Fed suppressing bond yields)
• For a great look at what analysts were thinking leading up to the 2000 equity bubble, see this great Twitter thread that shows it wasn’t just speculative tech stocks that were expensive, it was large cap growth stocks that were trading at incredibly high multiples.
• Lastly, we wouldn’t be surprised to see some delayed profit taking/rebalancing and volatility to start 2021 (remember we have the Georgia run-off election on Tuesday, polling remains tight)

Last Week in Markets: Record Highs, Rates Little Changed

Large cap U.S. equity markets hit records highs in the last week of 2020 on light volume (S&P +1.79%, Nasdaq +0.92%, Dow Jones Industrial Average +1.58%).  Smaller cap indices closed lower for the week (Russell 2000 Small Cap -1.61%, S&P 400 Mid Cap -0.38%), but still logged impressive rallies in the fourth quarter: the Russell 2000 Small Cap index was up +31% in 4Q20.  Last week Growth (+1.26%) slightly underperformed Value (+1.47%).  There was a slight defensive bias to trading, but the Cyclical vs. Defensive signal was murky, with cyclical Semiconductors (+2.64%) outperforming defensive Software (+0.34%) but cyclical Transport (+0.14%) underperforming defensive Utilities (+3.21%).  This Utilities performance was the sector leader for the week, with other defensive areas also outperforming (Real Estate +2.63%, Healthcare +2.1%, Communication Service +2.1%).  The sector laggards were Energy (-1.06%, the only negative sector for the week) and Industrials (+0.8%).  2020 high flyers did see some profit taking in the last week, with underperformance in areas like IPOs (IPO ETF -1.1%), Innovative Tech (ARKK ETF -4.1%), Biotech (XBI ETF -3.9%).

Rates were little changed last week, with the 10 Year Treasury declining just 1 bps and the 2 Year Treasury flat.  Both rates remain in notably tight ranges with very low volatility, displaying the Fed’s elevated intervention into these markets.  The USD declined again for the week (DXY -0.53% to 89.42) and remains near 2018 lows/support (~88.5).  Precious metals outperformed Industrial metals last week, with Gold (+1.92%) and Silver (+1.85%) higher, while Copper (-0.83%) and Iron Ore (-2.09%) down, adding to the mixed Cyclical vs. Defensive signal.  Agricultural commodities, as highlighted last week, continue to stage an impressive rally with Corn (+8.2%) and Corn (+4.3%) both notably higher on the week (this is driven by the weaker dollar, drought conditions in some geographies, higher demand from the rebuilding of the Chinese hog herd following the decimation of its herd due to African Swine Flu, and higher demand as countries continue to stockpile grains during the pandemic).  Energy prices rose last week with Natural Gas (+4.7%), WTI (+0.29%, at $48.74 remains below the all-important $50/barrel) and Brent (+0.74%).

Last Week Economic Data: Jobs, Housing, Imports/Exports

Jobs

Weekly initial jobless claims came in at 787k last week, the lowest level in a month and lower increase than expected (800k cons and 806k the prior week).  Better, but still elevated.  See Chart 1 for historical perspective.  The current level of jobless claims remains above the highs ever reached during the 2008/09 GFC (~655k) and well above the pre-pandemic level of the low-200k’s which was maintained for multiple years prior to 2020.

Chart 1: Weekly Initial Jobless Claims Moderating but Remain Above GFC High and Pre-Pandemic Levels

Housing

The Case Shiller Home Price Index of YoY growth in a composite of 20 cities came in above expectations (7.95% vs. 6.95% cons, see Chart 2) as cheap mortgage rates, strong consumer balance sheets, pandemic-induced suburb attractiveness, and demographic trends continue to support demand for housing.  Interestingly, growth of pending home sales came in below estimates, but this is expected to be caused by a lack of supply in the market (16% vs. 21% cons, see Chart 3).

Chart 2 : Case Shiller Home Price Index YoY Growth (20 City Composite)

Chart 3 : U.S. Pending Home Sales YoY Growth

Imports/Exports

The world continues to experience shipping disruptions due to the pandemic and lockdowns  (see WSJ article here).  Surging demand in the developed world for goods (as opposed to collapsing services demand), combined with disruptions to shipping operations due to the pandemic (safety procedures and lasting reverberations from the early days of shutdown that put shippers on the back foot as demand came roaring back) have resulted in long wait times at ports and surging transportation costs.  For example, container rates from Asia to Europe hit a ten year high in December and have doubled since August (see WSJ article here).  Chart 4 shows the skyrocketing costs of shipping from Shanghai to other parts of the world.   These delays are one reason why companies are noting that inventories remain too tight, such as in the recent PMI manufacturing surveys, as needed inventory is stuck floating around in the ocean.  Further, higher shipping costs will eventually make their way into higher product prices for consumers as manufacturers try to pass on this added costs in order to preserve margins.  In the US, there is such a disruption to shipping lanes with the massive demand for imports from China that shipping containers are expediently being sent back to China empty instead of waiting to be filled by U.S. exports back to China (see WSJ article here).  This is one reason why the U.S. Trade in Goods Balance hit a record negative $84.8B (imports greater than exports, see Chart 5).  The weaker USD is expected to support export values and volumes going forward.

Chart 4  : Shanghai Containerized Freight Index (Average Cost of Shipping from Shanghai to Rest of World)

Chart 5 : U.S. Trade Goods Balance

This Week Data: OPEC+ Monday, Georgia Run-Off Tuesday, Jobs Friday

Back from holidays to a busy week of data, meetings, and potential market moving events.

• Monday: Construction Spending US; OPEC+ holds monthly virtual gathering to determine if it will add 500k barrels/day to production; China Caixan manufacturing PMI
• Tuesday: Vehicle Sales; Georgia run-off election (polls remain tight)
• Wednesday:  Minutes from the December U.S. Federal Reserve Board meeting, ADP National Employment Report; Factory Orders; U.S. Congress meets to count electoral votes and declare the winner of the 2020 election
• Thursday: Weekly unemployment claims; trade balance
• Friday: Jobs and unemployment; wholesale inventories; consumer credit

International Focus: Euro Closes at 2020 High, South Korea Exports Boom, China Nears 2015 Bubble Peak

International markets joined the rally to varying degrees, with Emerging Markets (EEM +2.62%) outperforming developed markets (EAFE +0.87%) led by strength in Asia’s emerging markets.  For 2020, emerging (+18.7%) also outperformed developed (+8.3%).

Europe

The STOXX 600 rose +0.9% for the week, led by Germany (+3.57%) again, while the UK (+0.11%) continued to lag.  The Euro closed 2020 at its highest level of the year at $1.23.

For all of 2020, the UK was the big laggard (-10.4%, the weakest performance since 2008), while Germany (+12.3%) led.  France (+4.7%) and Italy (+2.4%) had more middling returns but were able to turn positive thanks to the 4Q20 rally.

Asia

Japan’s Nikkei rose +3.47% on the week, hitting a 30 year closing high on Tuesday of last week.  The Nikkei was +16% for 2020.  Despite the strong market, economic data remains more mixed, leading to support for further fiscal stimulus to support the economy, even by traditional budget hawks (fiscal conservatives showed a willingness to push out balanced budget goals by 2025 in an effort to provide support to the economy in the near term).   Industrial output growth stalled in November (flat vs. 1.2% cons), stopping a 5 month string of gains.  Retail sales also contracted in November, while consumer prices declined in Tokyo at the fastest pace in a decade.

In South Korea, the KOSPI outperformed for the week (+5.1%), bringing the 2020 rally to an impressive +45%.  South Korean exports are booming, with YoY growth coming in much higher than expectations for December (+12.6% vs. +6.3% cons; see Chart 6).  We watch South Korea exports growth closely as it is usually a good early indicator of the direction of global growth and cyclical markets.  For example, South Korean exports growth YoY hit its high in late 2017 and started decelerating through 2018 (as can be seen in Chart 6), even the assessments of market participants that we were in a period of strong, “synchronized global growth”.  Despite the strong headline growth numbers, cyclical stocks, such as industrials, underperformed materially in 2018, capturing that the pace of growth was starting to slow around the world.

Chart 6: South Korea Exports Growth YoY

In China, the Shanghai Composite rallied +3.27%, and at +14% for 2020, it hit its highest level since the 2018.  The blue chip component of the Shanghai Composite, CSI 300, rose +27% in 2020.  This index is now less than 5% away from eclipsing the 2015 bubble high (see Chart 7).  Equities proved impervious to increased geopolitical tensions between the U.S. and China.  The NYSE delisted three of China’s largest telecom companies due to ties to the Chinese military, with expectations that another round of de-listings, this time focused on energy companies, is to come (see article here).

Chart 7: CSI 300 (Shanghai Blue Chip Stocks) Near the 2015 Bubble Peak 

 

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