Markets Climbing the Wall of Worry?

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Fred Imbert of CNBC reports the Dow closes 160 points higher, posts best week since August as investors monitor stimulus talks:

Stocks rose on Friday to end their best week in months as President Donald Trump signaled support for a bigger coronavirus aid package. 

The Dow Jones Industrial Average closed 161 points higher, or 0.6%. The S&P 500 and Nasdaq Composite gained 0.9% and 1.4%, respectively.

Microsoft and Salesforce led the Dow higher, rising 2.5% and 2.2%, respectively. Consumer discretionary and tech were the best-performing S&P 500 sectors, advancing more than 1% each. 

For the week, the Dow jumped 3.3% and posted its biggest one-week gain since August. The S&P 500 and Nasdaq were up 3.8% and 4.6%, respectively, for the week. Both benchmarks were headed for their biggest one-week gain since early July. 

Trump tweeted on Friday that “Covid Relief Negotiations are moving along. Go Big!”

CNBC’s Ylan Mui also reported the administration has raised its offer for a new aid package to $1.8 trillion from $1.6 trillion. Trump later said he “would like to see a bigger stimulus package frankly than either the Democrats or Republicans are offering.”

To be sure, Senate Majority Leader Mitch McConnell said it is “unlikely” that a new aid package would be passed in the three weeks prior to the Nov. 3 election.

Trump’s comments came a day after the administration and Democrats sent mixed messages regarding future aid.

House Speaker Nancy Pelosi, D-Calif., told reporters on Thursday she would not back aid to U.S. airlines without a broader stimulus package, something Trump hinted earlier in the week he’d support. Meanwhile, Trump told Fox Business on Thursday morning that the administration and Democrats were “starting to have some very productive talks.”

“Stimulus talks are really dictating the market action on a day-to-day basis,” said Keith Buchanan, portfolio manager at GLOBALT. Buchanan noted that the recent rhetoric indicates some progress in the negotiations, but added it is key for Washington to move “quickly” on the matter to “relieve the pressure that the economy is under.”

The Federal Reserve and U.S. lawmakers have spent trillions of dollars on various measures to keep the economy afloat during the pandemic. Earlier this year, the Fed launched an open-ended bond-buying program and Trump signed a $2.2 trillion package that included enhanced unemployment benefits and direct payments to Americans. However, economic experts — as well as the Fed — have urged the government to push through more aid as it would sustain the recent economic recovery. 

Carl Icahn, billionaire investor and chairman of Icahn Enterprises, said Thursday night these measures have been “very effective” for the economy and the market. 

“If you look at stock prices, I think some of them are ridiculously high but going short on them proves to be a very, very expensive operation,” Icahn said at the 13D Monitor Active-Passive Investor Summit. “A lot of those stocks you believe are tremendously overpriced just keep going up. So basically, I think the stimulus is doing the trick.”

“At this juncture, I’m net long because I believe that this stimulus is coming and it’s going to continue, especially after the election,” he said.

Alright, Friday afternoon, time to cover markets to end the week and go into Canadian Thanksgiving weekend (long weekend for us).

First, a mea culpa, last week I openly stated I expected an October stimulus surprise and was convinced they'd pass it on Sunday to juice up markets on Monday.

Well, I was wrong, it didn't happen and I underestimated the petty politics going on in Washington as Republicans and Democrats fight to claim victory on the stimulus package.

I actually thought last Friday's US jobs report would be enough to convince everyone to come together and pass a stimulus package but this is Washington and Trump is adding to the angst, or at least that's what top Democrats claim:

As millions of jobless and financially struggling Americans await a stimulus deal from Washington, the White House put out a new $1.8 trillion proposal on the table on Friday.

This comes after President Trump called off stimulus negotiations, and then pushed for standalone bills to provide funds for the airline industry and distribute another round of checks to individuals. Top Democrats rejected that proposal.

With three weeks left until the election, Trump wants to make a deal – and Democrats are waiting.

“What we’re saying as a House of Representatives, all we want to do is get a package done. We don’t want a piecemeal package,” Rep. Bennie Thompson (D-Miss.), chairman of the House Committee on Homeland Security, told Yahoo Finance. “Now the $2.2 [trillion] stimulus package we passed last week, it’s on the table. All the president needs to do is step up and be the adult in the room for once in his life and do the right thing.”

Although Democrats know a standalone bill for stimulus checks would be a big boost for many Americans facing financial devastation, they’re not budging. “[Stimulus checks] would help, but look, in my district, which is one of the poor districts in America, the people know about struggle. This is nothing new,” said Thompson.

The unemployment rate in Mississippi was 7.9% in August, compared to 8.4% for the U.S. Thompson’s Congressional district had a pre-pandemic median household income of $37,372 in 2019, well below the national average of $68,703 that same year, according to the U.S. Census Bureau.

“I’m convinced that the people in my district who are having a difficult time, they’ll make it,” Thompson said. “But I know one thing, they are absolutely committed on November 3 to go to the polls and vote Donald Trump out.”

House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin will be speaking Friday about the latest offer. The two sides still remain divided over a handful of issues, including how much money to provide state and local governments.

Senate Majority Leader Mitch McConnell has thrown in the towel, telling reporters during a campaign event in Kentucky on Friday that he doesn’t expect a stimulus deal before Election Day.

“I think the murkiness is a result of the proximity to the election, and everybody kind of trying to elbow for political advantage" he said. “I’d like to see us rise above that like we did back in March and April, but I think that’s unlikely in the next three weeks.”

So Mitch McConnell is alright rushing to vote in Judge Amy Coney Barrett ro replace Justice Ginsberg at the Supreme Court but he can't rush to pass a stimulus bill that millions of Americans are restlessly waiting for?

I don't know, as a Canadian watching the Washington political machine, I get disgusted with all the theatrics and temper tantrums as millions are living on the edge.

Now I know how this guy feels about Washington politicians:

Anyways, back to markets, it was a good week for the S&P 500 as all the major sectors posted gains, led by Materials (XME) and Energy (XLE), both of which gained 5% this week:


Recall last week, I discussed how Canacord Genuity's Martin Roberge thought there was a synchronized global recovery going on and that deep cyclicals were a buy here:


Earlier this week, Martin hosted a conference call going over his market thoughts and while I can't share all the slides with you, I will share two important ones:

 

Is there a major recovery going on in China? Well, if you look at the iShares MSCI China ETF (MCHI), there's definitely a recovery in Chinese shares like Alibaba (BABA) and Tencent which make up 32% of this ETF:

And this has propelled the iShares Emerging Markets ETF (EEM) higher:

However, I must warn you, both these weekly charts look toppish to me and they're vulnerable to a pullback in the near term, especially now that a second wave of COVID-19 is emerging all over the world, including in Europe:

This is why I'm very careful here, there are a lot of unknowns which can throw these markets off: US elections, second wave of COVID and God knows what else.

Typically, markets climb the wall of worry and there's still plenty of liquidity to propel all risk assets (not just stocks) higher.

But when I look at the 5-year weekly chart of the S&P 500 ETF (SPY), it's at an important level where it can easily experience a sharp pullback:


Let me be more blunt, when I look at that chart above, I fear that traders will use any passage of the stimulus bill to sell the news hard. And if the stimulus doesn't pass, they will sell stocks even harder. 

That's my worry here but who knows, we might get a big breakout going into year-end (don't count on it).

And if you look at the Nasdaq-100 Index (NDX), it looks even more vulnerable to a major pullback:


I know, buy the dip on tech stocks, any dip, they can only go up. I'd be very wary of buying any big dip on tech shares here.

Also, a lot of talk this week on the backup in long bond yields and that shows a strong economic recovery is on its way, the curve is 'steepening' which is good for Financials (XLF) and small caps (IWM).

Take all this talk with a shaker (not a grain) of salt!  

It's nonsense, the backup in long bond yields seems like a big deal but it's nothing to worry about and I wouldn't be surprised if bond prices firm up and long bond yields decline again. Also, I'd be shorting Financials and small caps here on any pop:


Again, a second wave of COVID-19 doesn't portend well for small-caps or economic growth. A lot of small caps have done very well since bottoming in March, take your profits here.

Maybe that's why Abby Joseph Cohen is warning of 'considerable' market downside:

Lastly, Jim Bianco is warning the coming surge in inflation will be a game-changer:

I think very highly of Bianco, he's a great market researcher and agree with him on the stock mania coming to an end. 

But please repeat after me: "The only inflation the Fed can create is asset inflation and housing inflation. Its policies and that of other central banks are only cementing a long bout of deflation ahead."

I think a lot of investors are not getting this deflation vs. inflation call right and it's going to cost them dearly over the long run.

PIMCO is right, investors need to prepare for lower returns and higher volatility over the next five years:

Alright, let me wrap it up by showing you the top performing large cap stocks this week:

I noticed shares of Crispr Therapeutics (CRSP) popped 23% and wondered if it had to do with the fact that these two ladies won the Nobel Prize in chemistry for developing the CRISPR gene editing tool:

A well deserved honor. Hopefully, this will push more young ladies into sciences so they can earn their own Nobel Prize one day. 

Below, CNBC's MacKenzie Sigalos and Seema Mody break down corporate America's massive wave of layoffs, and explain why more could be coming as large industries and small businesses alike wait for a relief package from Washington.

Next, CNBC's "Halftime Report" team discusses investment strategies.

Third, stocks have another good week, but what's next for the markets? With CNBC's Dominic Chu and the Fast Money traders, Steve Grasso, Brian Kelly, Jeff Mills and Bonawyn Eison.

Fourth, Dr. Scott Gottlieb, former FDA commissioner, joins 'Closing Bell' to discuss the race to find an coronavirus treatment, how the failure to create a national market capacity strategy will limit the accessibility of an antibody treatment and more.

Lastly, remebering Eddie Van Halen, the guitar virtuoso whose blinding speed, control and innovation propelled his band Van Halen into one of hard rock’s biggest groups, fueled the unmistakable fiery solo in Michael Jackson’s hit “Beat It” and became elevated to the status of rock god, has died. He was 65. RIP Eddie, you rocked!!

On that note, wish all my fellow Canadians a very Happy Thanksgiving Weekend! Enjoy the long weekend, I'll be back on Tuesday.

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