In just 103 trading days from the bear market low in March, we are already making new highs in the S&P 500. This 55% return equates to a gain of 0.5% every single day. A truly amazing feat. Even more impressive, the tech-heavy Nasdaq started making new all-time highs back in June. That index is nearly 20% above its pre-Covid highs. Market-cap-weighted indices mask some of the underlying trends as the more diversified Dow Jones is still 6% away from breaking its record peak, and small cap indices need another 10%. Participation continues to weaken as more and more stocks lag the overall averages. Not all rallies are equal.
Breadth has to improve or we risk creating a bubble in the mega caps. New highs are usually a buy signal, not a time to sell. Lower Covid case counts and further progress on a possible vaccine are positive factors. Yields remain low. Even though negotiations on the next stimulus bill seem to have broken down, something will get done. The ever important housing market is back in full growth mode. Theatres and gyms are opening back up. Restaurants are allowing more indoor patrons. Retail store hours are creeping back to normal times. This is all good for employment over the coming months. No stores are operating anywhere near full capacity but you have to start somewhere. Rising home prices and a rebounding stock market are putting consumer net worth above pre-pandemic levels. If one feels rich, they are more apt to spend.
Unlike most recessions, the consumer is flush with cash today, thanks to the above factors and extra payments to those unemployed. Given the opportunity to safely do it, walk around your local mall. I have been amazed at the number of people out shopping. The US savings rate is elevated at 19%. This is normally near 8%. That means billions of dollars are sitting there, creating pent-up demand for goods and services. Some is earmarked for bills, but we’re Americans. We spend money like there’s no tomorrow. This is fuel ready to be deployed.
Industry pundits have calculated over $1T in normal spending that is being held back. Zoom meetings have replaced flying and staying in a hotel. Cooking for yourself as an alternative to ordering a $50 steak at a restaurant. Working from home instead of filling up the gas tank and paying tolls. Smaller vacations that are drivable instead of a cruise or trip to Europe. Netflix over a movie theatre, even though I miss the $15 bowl of popcorn with my son. Checking accounts are higher than normal. The list goes on and on.
Let’s add to that $1 trillion in excess capital not being spent in normal fashion. Millions of us have refinanced our mortgages. Some took cash out while others lowered their monthly bill. Millions also received a stimulus check. Millions more received enhanced unemployment payments that doubled or tripled what they used to make. This all adds up and is kindling for the next bull market (or the current bull market?). Post-Covid winners and losers could be quite different than today but we’re not there yet. There is plenty of money to be spent next year in those industries shuttered today.
Total retail sales in dollar terms are also back to new highs. That sector has taken share in 2020 from traditional spending habits with a V-shaped recovery.
However, it has not been an even split by any stretch as ~20% of small businesses have closed. Some of the biggest retailers in the country reported earnings this week. One can guess that home improvement and eat-at-home providers took a larger share of the spending pie. It was even more impressive than many hoped. The big got bigger and many competitors will never come back.
A refresher on retailers. Companies rely upon increasing sales every year for existing stores. The terminology is Same Store Sales comparisons (SSS). Typically, SSS has to increase at least 2% to keep the same level of profitability. Rent, wages, and other inflationary inputs create a rising cost structure. Anything above 2% means the business is performing well, give or take a percent.
This week we heard from Home Depot#, Lowes#, Target and Walmart#. Same store sales comparisons ranged from Walmart’s 9% to Lowe’s 34%. These are staggering numbers, rarely seen for such large companies. Walmart’s SSS metric points to over $25B in new annualized revenue. That is higher than all of Target’s sales last year. All four exceeded expectation for online sales with massive growth again in the triple digit range. Omni-channel investments over the past several years are paying off today.
Great numbers to say the least. However, only Target’s stock is higher on the week. The market knew much of this and what happened last quarter may not be reflective of a “normal” environment. The question now is how much of this new business is sticky. Are consumers working from home every day again next year? Will we start to take real vacations, taking away spending on home improvements? Did they spend the cash infusion from the Government already? Will interest rates still be at 0% in 2021? How long does the shift from cities to suburbs last?
Looking at history, sudden pops in SSS trends precede a stock price peak by 1-2 quarters. This is anything but a typical environment though. We have never seen 2.5% 15-year mortgage rates. Nor have we been afraid to leave our homes for health reasons. Until those two trends change, winners are going to win. When we get answers to the above questions, then we can alter the investment landscape. However, prudence remains the mantra. Trimming stocks that have doubled from their lows is hardly a bad idea even if there is more upside. We are long overdue for a correction but overbought markets can keep making new highs.
Apple’s stock went from a $1T market cap valuation to $2T, faster than Usain Bolt’s 100- yard dash. He turns 34 today.
James Vogt, 610-260-2214