The Nothing Matters Market?

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Fred Imbert and Yun Li of CNBC report the Dow jumps more than 200 points to a record even after a big US jobs report miss:

Stocks rose to record levels on Friday, notching another weekly advance, as traders shook off a disappointing U.S. jobs report.

The Dow Jones Industrial Average closed higher by 248.74 points, or 0.8%, at 30,218.26. The S&P 500 gained 0.9% to end the day at 3,699.12, and the Nasdaq Composite advanced 0.7% to 12,464.23. All three of major indexes posted intraday and closing record highs.

Chevron and Caterpillar rose 3.9% and 4.3%, respectively, to lead the Dow higher. Energy was the best-performing S&P 500 sector, gaining 5.4%.

Friday’s jump led major averages to for their fourth weekly gain in five weeks. The Dow rose 1% this week. The S&P 500 gained 1.7% over that time period. The Nasdaq Composite rallied 2.2% this week.

The U.S. economy added 245,000 jobs in November. That’s well below a Dow Jones consensus estimate of 440,000. The unemployment rate, however, matched expectations by falling to 6.7% from 6.9%.


However, some traders saw the weaker-than-expected number as a positive because it could pressure lawmakers to mover forward with additional fiscal stimulus.

Friday’s jobs report data “is beckoning lawmakers to act on additional fiscal stimulus measures in order to bridge the output gap in the economy until a vaccine is deployed and the longer they hold out the wider the gap may become,” said Charlie Ripley, senior investment strategist at Allianz Investment Management.

Senate Minority Leader Chuck Schumer tweeted the report “report shows the need for strong, urgent emergency relief is more important than ever.”

President-elect Joe Biden also called for more stimulus, noting Friday’s report foreshadows a “dark winter.”

JJ Kinahan, chief market strategist at TD Ameritrade, noted the report “was not as bad as it seems” in part because a chunk of the lost jobs came from the U.S. government as the 2020 Census count wrapped up.

Kinahan also noted “it’s really hard to estimate what these numbers are going to be when states are going from being completely shut down to being completely open. I think you’re seeing that in the market’s reaction.”

Brad McMillan, CIO for Commonwealth Financial Network, also pointed out that average hours worked “remained strong” last month, “suggesting that overall labor demand remains healthy, and the drop in the unemployment rates suggests the labor market continues to tighten.”

Friday’s report comes as the number of coronavirus cases has been rising sharply. The U.S. reported record numbers on Thursday of new infections, single-day deaths and hospitalizations.

Alright, it's been a long week and there is a lot to cover in markets.

The first week of trading this month was very much like the last month of trading, very bullish price action across all sectors, especially in the energy sector (XLE) which led all other sectors this week:

Over the past month, Energy (XLE), Financials (XLF), Industrials (XLI) and Materials (XME) -- ie, cyclical sectors -- have outperformed the broad market considerably and Tech (XLK) has been holding on which is why we are seeing record close in the Dow:


And while Exxon (XOM) and Chevron (CVX) are leading the energy ETF (XLE) higher (they make up 50% of this ETF), the real big gains have been coming from Occidental Petroleum (OXY), Devon Energy (DVN) and Apache (APA), all up 70% or more over the past month.

So what is going on? We are in the midst of a dark COVID winter and cyclical stocks are rallying, especially early cyclicals like energy and materials. Why?

Well, a few things are going on but let me post some charts to help you visualize:






What do these charts tell us? A few things:

  • The US dollar (UUP, the first chart, is the USD ETF) has been weak all year and is getting weaker. Some market pundits think it's headed back to 2018 levels or lower. A weaker US dollar is generally very supportive of higher commodity prices which is why Energy (XLE) and Materials (XME) have been rallying.
  • A weaker US dollar has also spurred growth outside the United States which is why you see emerging markets shares (EEM) rallying hard this year led by Chinese shares (MCHI). 
  • But it's not only emerging markets, European shares are rallying now which is why the iShares MSCI EAFE ETF (EFA) is making a new high 5-year high. 
  • A lower US dollar and growth outside the US is what's driving Industrials (XLI) to a new 5-year high in the US led by companies like Boeing (BA), Caterpillar (CAT) and General Electric (GE), all of which have performed well over the past month.
  • All this has renewed hopes of a global synchronized recovery in 2021 which is why US long bond yields are backing up and prices falling (TLT is US long bond price ETF), spurring Financials (XLF) higher.
  • But it's Energy (XLE) and Materials (XME) shares which have rallied the most over the last month because they got clobbered the most earlier this year when the pandemic hit. Again, a weak US dollar and global economic recovery bodes very well for Energy (XLE), Materials (XME) and Industrials (XLI) so we shouldn't be surprised by this price action.

What else? A couple of more things to keep in mind:

  • By the looks of it, the market is sniffing out another stimulus package before Christmas. President Trump announced this week he is looking to run again in four years and I'm betting he's cooking up a big fat stimulus package for Christmas and I think traders are positioning for this. Today's US jobs report spurred the Democrats to call for a bigger package and both Republicans and Democrats will find a middle ground.
  • The Federal Reserve is meeting in a couple of weeks and if there's no stimulus announcement, it might announce more QE, or at least that's what the market is hoping for. More QE is dollar bearish and commodity bullish.

On commodities, earlier today, Canaccord Genuity's Martin Roberge sent me his weekly market wrap-up going over his Outlook 2021 themes:

Another week, another closing high for most US indexes. Despite concerns that lockdowns have begun to dent economic growth, there has been little progress on the coronavirus relief plan, and there are potentially supply/deliverability issues with vaccines. The S&P/TSX is only ~500 points away from its all-time high of 17,944 reached on February 20, while the speculative S&P/CDNX is already marking new highs. These two resource-heavy indexes continue to benefit from firming commodity prices, fueled by strong Chinese economic data and marked US$ weakness with the DXY breaking below the 92 support level this week. The next support is the 2018 low of 88, our 2021 year-end target. Undoubtedly, investors’ bullishness is rampant. On a scale of 1 to 5, our sentiment and positioning indicators are at 4. Historically, strong Novembers have been followed by positive Decembers, and investors seem willing to look beyond potential pullbacks and stick around for the typical Santa Claus rally. The price to pay could eventually be that the market is stealing returns from 2021. 

After hunkering down for most of November, we published our Outlook 2021 report this Tuesday. For those who could not attend our conference call Wednesday, the replay is available here. As our Chart of the Week shows, there are four themes that we believe will play out in 2021: commodities > stocks > bonds; small caps > large caps; non-US > US stocks; and value cyclicals > value defensives. The macroeconomic backdrop fueling these rotations is one where global growth accelerates. But contrary to past recoveries, the particularities of the 2021 recovery are that: China is the main growth engine, consumption spending is geared toward goods rather than from services, the inventory re-stocking cycle is global and occurring earlier than usual, and the US$ is in a well-entrenched bear market. On the latter, this is much different than the post-GFC recovery in 2010 when the Greek and European sovereign debt crisis kept the US$ well bid. Tack on the fact that China is in the driver's seat, and this business cycle may look like the one that ran from 2003 to 2008, the last super-cycle for commodities: hence our three annual contrarian calls on NA oil integrateds, gold miners and fertilizers.

I urge all my readers to take the time to listen to Martin's conference call here and to read his Outlook 2021 report here.

In an email exchange, I asked Martin a few questions:

Would you say 2021 is another synchronized global growth story?

Yes but with different tilts or tailwinds than the post-GFC recovery as you read my note well. This one will look more like 2003-2008 as my note explains, a very bullish backdrop for commodity prices.

Also, what are your thoughts on the big rally of re-opening stocks and hyper-growth stocks like Zoom (ZM), DocuSign (DOCU), Zscaler (ZS), Snowflake (SNOW), etc.?

I am in the Growth = Value camp. You have to have both styles because the global economic rebound of ~5% in 2021 is not the same late-cycle growth rate of 5% seen in 2000 when the output gap was closed. So I am certainly not in the 2000 growth-to-value camp. Also, the consumption geared towards goods and the flatter-than-normal yield curve will cap the profitability rebound of certain value stocks, hence their valuation rebound as well. For example, with the recent rally, Canadian banks are already trading ~12x forward EPS. How much higher can they go?

As for hyper-growth stocks, the reciprocal of a 1% US 10Y treasury yield is 100x. Or let’s take investment grades with a yield at 3.2%, the reciprocal is 31x which is exactly where the US technology sector trades at. My point is that you need a strong back up in bond yields to crimp multiples. I believe this could start if US 10Y Treasury yields climb above the previous support of 1.3%. But I am not there and still believe we will finish the year around 1%. Thus I would leave hyper-growth stocks alone and focus not on the value > growth tilt but on the rotation within value, that is, the value cyclicals > value defensive tilt.

I can't thank Martin Roberge enough for sharing this with my readers and urge all my institutional readers to subscribe to his research and support him (great guy, he has been doing this for a very long time and really knows his stuff, just email him at mroberge@cgf.com).

Alright, I'm going to wrap it up there, but before I do, take a look at the performance of some value stocks over the past month:


I thank the CNBC Halftime Report show for posting these and I took pics as I was watching the show earlier today, just keep in mind Martin's comments above and realize we have a long way to go before this pandemic is over (and it will be a rocky road and a lot of these stocks will be very volatile).

Below, Yahoo Finance's Julia LaRoche spoke with Paul Tudor Jones hedge fund manager and founder of Tudor Investment Corporation. The legendary macro hedge fund manager expects "an explosion" of economic growth next year as a coronavirus vaccine becomes more widely available.

Next, Liz Ann Sonders shares her perspective on the US markets and economy as we head into 2021.

Lastly, watch yesterday's CNBC Halftime Report to understand why some people are calling it the Nothing Matters Market. 

I'd say a lot of things matter, chief among them, more stimulus and more QE. Without that, this market is dead and along with it, the global economic recovery everyone seems to be betting on.

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