Small Decline On Thursday
The stock market was experiencing euphoria on Wednesday. This pandemic that is ravaging the country has been ignored. That wouldn’t necessarily say the 1% decline in the S&P 500 on Thursday signaled the market is now taking it seriously. It’s easy for the headlines to claim that’s why stocks fell, but it has more to do with the market being overbought.
We had the market rise over 9% while the pandemic exploded. Then the market falls 1% while the pandemic is still going and suddenly the market is said to care about the exact news it ignored a few days earlier.
Yes, the pandemic seems worse than yesterday, but that was a given. If cases stopped rising, people would be shocked. Most everyone knows hospitalizations will continue to rise in the next few weeks. That’s the extent of our visibility. Either better habits to stop the virus, Eli Lilly’s therapeutic, or Pfizer’s vaccine could turn this around in early 2021. The market is very patient with this because there is a strong possibility the virus is mostly gone within 6 months.
A difference between now and 7 months ago is that we know the vaccine works and we are closer to getting it administered. You’d need to be very negative on humanity’s problem-solving abilities to bet on software stocks. That's because no one should buy the stock of a company that will do well in the next quarter, but fall off a cliff afterwards.
We also got the CPI and jobless claims reports on Thursday which could have impacted markets. Frankly, many were impressed with the jobless claims data. Even in the heart of the 3rd wave, the labor market still improved.
Either December or January will be the worst of this wave. Obviously, that’s the holiday shopping season. Say goodbye to holiday retail sales growth in the mid-single digits. Anything above the low single digits is virtually impossible.
Goldman Sachs Probably Too Optimistic
Goldman Sachs is what many would call extremely optimistic about the stock market. It’s laughable how high their price target is. As you can see from the chart below, because of its 6% real global GDP growth estimate for next year, the firm is bullish on all markets.
It sees a massive 21% return in U.S. dollars from the European stock market and a 23% return from the S&P 500. Goldman is making a huge error. It assumes what is good for growth is good for stocks. If that was the case, why have stocks done so well this year?
An acceleration in GDP growth would help small cap value stocks. But hurt large cap growth stocks which are the firms that power the S&P 500. We could see the S&P 500 falling next year, the Nasdaq having a major swoon, and the Russell 2000 up high single digits. It's a good idea to wait until the end of the year to make any final predictions. And it’s fair to throw out last year’s estimates because we didn’t know a global pandemic was coming when we made them in late December.
The chart below supports my point. Quality and growth stocks like Facebook, MSCI, and Moody’s benefit from low rates. This is an extreme moment where rates have hit a record low. Cyclical value stocks like ExxonMobil and Huntington Bancshares do well when rates rise. People think these are bad companies, but the truth is the macro environment is too tough for them to operate in.
Massive Decline In 10-Year Yield (Nio Spikes)
Prior to the past few days, the 10 year yield had been very flat for a few months. That has changed as the yield spiked from 77 to 96.4 basis points in 3 days and has since fallen to 87.1 basis points in the past two. It’s in a wild uptrend. Unless it breaks below 77 basis points, it appears to be heading to 1.5%. Banks would fell sharply on Wednesday before bond yields fell because the bond market was closed. Small bank index fell 2.24%. It’s down 5.19%.
Downside is mostly over for the banks which isn’t what most would say because COVID-19 is creating a disaster for the next few weeks. Buying Zoom is likely a trap here. Everyone knows Zoom usage will fall once this pandemic is over in a few months. Just because the pandemic will be very bad for a few more months doesn’t mean you should buy it. The stock rose 3.7% on Thursday.
Nio continued its amazing run. Some have never seen a stock do as well as this. It was up 12.1% on Thursday, putting it up 123% on the month and 1,198% year to date. Its market cap is $65.8 billion which is over double Ford’s even though Nio has only sold a few thousand cars. It’s worth noting the NAAIM exposure index rose from 69.2 to 96.3.
That’s fairly high, but not its high on the year. It’s certainly not at its multi-year high like the number of bulls in the AAII survey is.
Disney+ On Fire
Disney reported very strong earnings in relation to what the street expected which sent its stock up 3.3% after hours. Its loss per share was 20 cents which destroyed estimates for a 71 cent loss. Sales were $14.71 billion which beat estimates by $510 million. As you can see from the chart below, Disney+ is on fire. It has 73.7 million subs which is much better than what was projected at its launch.
When it started the firm projected 60 to 90 million subs by 2024. They are about 3 years ahead of schedule. When you add in Hulu and ESPN+, the firm has 120 million subscribers which is nearly as much as Netflix. Personally, I don’t think Disney+ is limiting Netflix, but that the firm has reached saturation. Disney probably has 2-3 more years of growth before it faces that issue.