Will the US Recovery Kill the Market?
U.S. stocks rallied to record levels on Friday after the October jobs report came in better than expected, boosting optimism about the economic recovery.
A major development from Pfizer regarding its easy-to-administer Covid-19 pill fueled hope for a smooth reopening further, sending shares of airlines and cruise line operators soaring.
The Dow Jones Industrial Average rose 203.72 points, or nearly 0.6%, to 36,327.95. The S&P 500 gained 0.4% to 4,697.53 for its seventh straight positive day. The tech-heavy Nasdaq Composite edged up 0.2% to 15,971.59. All three major averages reached their respective record closing highs.
The move for stocks came as data showed job gains for the month of October totaled 531,000. Consensus estimates called for 450,000 jobs added, according to Dow Jones. The report also revised September’s disappointing number up to 312,000 job gains from 194,000 previously, and increased its August number by a similar amount.
“Markets are cheering a much better than expected jobs report this morning as nonfarm payrolls smashed expectations,” said Cliff Hodge, chief investment officer at Cornerstone Wealth. “Gains were broad-based across industries, and manufacturing was a real bright spot.”
All three major averages notched a winning week. The S&P 500 gained 2% this week, pushing its 2021 gains to 25%. The Dow rose 1.4% this week, while the Nasdaq rallied nearly 3.1% for its best weekly performance since early April.
Pfizer shares surged nearly 11% after the company said its Covid-19 drug, used with an HIV drug, cut the risk of hospitalization by 89%. Pfizer board member Dr. Scott Gottlieb said Friday that the pandemic could be over in the U.S. by the time President Biden’s workplace vaccine mandates take effect in early January.
The news boosted classic reopening plays. United Airlines shares jumped more than 7%, while American Airlines popped 5.7%. Carnival and Royal Caribbean rallied more than 8% each, while Norwegian Cruise Line advanced 7.8%.
Recovery stock Expedia saw its shares roar higher by 15.6% a day after the company said renewed travel demand boosted its top and bottom lines higher than analysts had expected.
“The labor market recovery is back on track, but it will still take several months to get to maximum employment,” said Edward Moya, senior market analyst at Oanda. “Alongside the Pfizer COVID pill news, this strong [jobs] report should ease some of the supply chain problems and that will make some investors embrace the reopening trade.”
Peloton shares cratered more than 35% after the fitness platform and maker of interactive treadmills and exercise bikes reported a much larger loss than expected and cut its full-year outlook as fitness buffs headed back to the gym and away from at-home workouts.
The company also cited ongoing supply chain challenges for its “challenged visibility” over the near term that CEO John Foley said is causing the company to lower its expectations.
Earlier this week, investor digested the Federal Reserve’s plan to begin tapering its pandemic aid by the end of November, putting the central bank on track to end its asset purchase program by the middle of next year.
The big news this Friday was the US nonfarm payroll numbers which came in stronger than expected.
As shown below, job gains were strong in all sectors, especially leisure and hospitality and professional and business services:
The public sector was the biggest laggard on the month as government payrolls declined by a net 73,000. Decreases in state and local education made up the vast majority of those losses, down 21,500 and 43,400, respectively.
Importantly, revisions to the two prior months were up, signalling employment growth is picking up:
Equally important and encouraging, more than half the October job gains went to women:
More than half of October’s job gains went to women https://t.co/FSqieR8Lu0— Leo Kolivakis (@PensionPulse) November 5, 2021
Why is this important? Because the pandemic has been especially hard on working women, many of whom work in low wage jobs in leisure and hospitality.
So a recovery in female employment is unambiguously a strong recovery sign for the overall US economy.
Add to this that drugmaker Pfizer said Friday its experimental pill designed to fight coronavirus reduced the risk of hospitalization or death from Covid-19 by 89% if patients got it soon enough, and you start seeing why recovery stocks jumped big today.
More jobs, less risk of severe illness from Covid-19, it's really a good news Friday all around.
In fact, you'd expect US long bond yields to jump after this news but long bonds actually rallied hard today and the yield on the 10-year Treasury note now stands at a 2-month low of 1.45%:
I called a buddy of mine who trades currencies in Toronto to discuss and he told me that the strong revisions and the overall growth in employment along with the data should have sent bond yields higher today but he thinks "positioning" and "the Fed" played a role in today's move on the long end.
"There was some rebalancing going on and even though the Fed announced tapering earlier this week, it's incremental and we still don't know if they are reinvesting the interest in US Treasuries."
Interestingly, while he thinks there are limits to what the ECB can do with QE, he doesn't think the same limits apply to the Fed. "Honestly, they can ramp up their balance sheet indefinitely and if needed, they will buy stocks just like the BoJ did."
He also told me the jobs numbers aren't telling the whole story: "You have a lot of young people at home trading stocks, that's why they can't fill a lot of jobs, nobody wants to do them, they'd rather be at home trading."
He told me inflation is sticky and real rates remain negative so "something has to give."
If you look at the fundamentals improving, something definitely has to improve but the bond market doesn't seem to care, for now:
Good luck trying to come up with a fundamental narrative for bond yields right now. The October jobs report was better than expected, with the labor market showing real signs of momentum. And yields fell. US 2-year yields are 10bps lower than they were just days ago. pic.twitter.com/wH4vgG18Er— Lisa Abramowicz (@lisaabramowicz1) November 5, 2021
There's also that nagging question of inflation.
Earlier this week, Bill Ackman tweeted that central bankers have not considered how inflationary ESG initiatives are:
Central bankers have not considered how inflationary ESG initiatives are. ESG is not transitory, but rather persistent and growing. Stakeholder capitalism will drive much needed increases in wages, but also higher energy costs, among other inflationary factors.— Bill Ackman (@BillAckman) November 4, 2021
I'm far from convinced that ESG is inflationary even if I see his point on higher energy prices, less so on on how stakeholder capitalism will drive wages up (nominal wages are increasing but real wages are declining and that's deflationary).
And like I said last week, beware of hedge fund gurus warning of rising rates.
I asked Pierre-Philippe Ste-Marie, Co-CIO of Optimum Asset Management, if he thinks of ESG is inflationary and here's what he responded:
We might have for the first time in modern history recourse to a less efficient energy source. That, coupled with footprint reduction efforts is bound to cause inflation as goods and services cost more to produce and become more scarce.
This narrative is following Harari Sapiens evolution theory. I find it logical but it might not be the main immediate driver of inflation.
I am particularly concerned with the strength of the recovery, particularly how the service industry recovers and what will the new normal post-pandemic looks like.
Every crisis has natural consequences. Those, in my experience, tend to dominate the economic landscape for years after a crisis is over. I think this crisis will be no different.
Perhaps the next crisis will be environmental and perhaps it will come sooner rather than later, but for now I think we will need to deal with the outcome of this crisis first.
The environmental debate is interesting but not at the forefront of my analysis canvas.
I thank Pierre-Philippe for sharing his wise insights and I agree, the strength of the recovery is something that should worry us because if it continues, the Fed will have no choice but to react, perhaps forcibly.
And that won't be good for stocks, especially if the Fed is forced to jack up rates.
Maybe that's why Jeremy Grantham is still warning investors that stocks are in a "magnificent bubble" even crazier than in 1929:
Legendary investor Jeremy Grantham says US stocks are in a 'magnificent bubble' even crazier than in 1929 — here are 3 of his safe haven selections https://t.co/VU5KJjeyDe— Leo Kolivakis (@PensionPulse) November 4, 2021
I don't know if stocks are in a "magnificent bubble" or it’s bonds that are backstopped by global central banks but there's so much government and central bank interventionism in everything that maybe capitalism itself is in a "magnificent bubble".
In his weekly market wrap-up, "November 1999 Vibes?", Martin Roberge of Canaccord Genuity, notes this:
After Tesla’s parabolic price move in 2021, huge erratic moves in companies such as Bed Bath & Beyond (BBBY) and Avis (CAR) make us wonder if we are not re-living the pre-bubble days of the tech mania in 1999-2000. After all, the current monetary and fiscal backdrop is even more conducive than back then, and the ongoing surge in equity inflows reminds us of the same craziness we saw with Janus funds, whose assets went from ~$1B early in the 90s to ~$300B near the peak of the tech bubble. True, we are not seeing the same fund concentration but as our Chart of the Week shows, not only are inflows into Canadian equity mutual funds coming in way above the historical norm, but Fall is usually a period of net redemptions. How big will inflows get through the January-March 2022 RRSP season if markets remain on a tear? How will we know if a mania truly gets underway? We think the equity risk premium (EY-BY) of the US technology sector is a starting point since at 2.1%, it is nearing the critical level of 2% seen in April. A break below on rising bond yields would be telling since it could also push the value/growth price ratio to all-time lows while value exhibits relative EPS strength.
How long can this bubble go on for? Longer thank you think.
Keynes once remarked: "Markets can stay irrational longer than you can stay solvent."
He's right but there are imbalances building up that we need to pay attention to.
In his latest weekly comment, Francois Trahan of Trahan Macro Research explains why Dr. Housing is far more important than Dr. Copper right now:
I cannot share more but it's phenomenal research and you really need to pay attention to housing affordability and any slowdown in housing as it's an ominous warning, much like in 2007.
I am going to wrap it up there, but before I do some charts that caught my attention this week:
Looks like the Peleton bubble burst. As far as Lightspeed, ignore that short seller, he's going to be proven wrong just like he was proven wrong on Dollarama (still, Dollarama's stock took a beating before it recovered). Pfizer shot up on good news, hammering Moderna but the selloff in the latter is a bit overdone if you ask me (let it stabilize).
Below, Dr. Scott Gottlieb, former FDA commissioner, joins 'Squawk Box' to react to Pfizer's Covid-19 antiviral pill, which the company says was highly effective in clinical trials.
Also, Bryn Talkington and Richard Saperstein join the 'Halftime Report' with predictions for the markets and where they're investing as markets hit record highs.
Lastly, legendary investor Jeremy Grantham discusses the magnificent bubble and climate problems in the world. Great insights here, take the time to listen to him.