Stocks head into today’s session sporting the best November performance to date of any November since 1987. If you remember back that far, November 1987 was a rebound month from a 40% August-October drop, hardly the same situation that we face today with stocks spiking to new record highs last week and the Dow Jones Industrial Average topping 30,000 for the first time.
If you look at the stock market and you look at video of hundreds of cars lined up across the country at food banks, it is hard to put the two images together. GDP is still well below peak levels from before the pandemic, although it has rallied sharply since April when the nation began to reopen from a self-imposed quarantine. Even as the economy recovers, the visuals give a mixed picture. If you watch any of the news stations, you heard chatter of how a million travelers a day defied CDC guidelines and boarded planes over the Thanksgiving week. But if you look at the data, you will see that passenger boardings were down 65% year-over-year persistently through the Thanksgiving holiday period, hardly a sign of robust economic activity.
I can apply the same description to retail. Remember those Black Friday lines and traffic jams of only a few years ago. You didn’t see them Friday. Yes, TV caught some waiting at Game Stop for a PS5 video game machine, but that was about it. Stores were eerily quiet over the weekend compared to a normal Thanksgiving weekend. But online activity was robust. Of course, the pandemic played a role in this switch, but as I have noted often, pandemics accelerate change more than create change. Moreover, given warnings from shippers like Fedex# and UPS not to wait until the last minute, retailers have been offering pre-Christmas bargains since Halloween. Thus, while the weekend data is somewhat confusing, there are few signs that the pandemic is going to ruin Christmas, although it may stop a few mall visits to Santa and force the Salvation Army to use online marketing tools more and red kettles less.
But despite the shifts, all isn’t rosy. Virus counts continue to surge and play havoc with the economy and our everyday lives. The Denver Broncos lost all three quarterbacks to positive Covid-19 tests this past weekend. The practice squad replacement only proved he belongs on the practice squad. The Baltimore Ravens have had to postpose its game twice and will be without many of its key players tomorrow night if it can field a team at all. Now, football isn’t exactly a poster child for the economy, but infection rates and empty stands do remind us of the damage taking place. The fact that so many safety net provisions tied to the CARES Act signed last spring expire in another month has already led to several high profile economic forecast downgrades on Wall Street.
However, a weak Q4 or even Q1 of next year may not matter if the surge is over before spring arrives. Numbers in Europe have started to improve. Europe is about 3-4 weeks ahead of us on the virus and winter weather calendars. Hopefully, that is a positive sign. There will be a big meeting tomorrow in Washington to develop a more defined game plan for vaccine distribution. It still seems likely that six months from now, those wanting to be vaccinated will have an opportunity. That won’t end the pandemic per se, but it will dent it enough to let most aspects of our economy return on a path to normality. Concerts and Broadway may have to wait a bit longer.
As all this happens, President-elect Biden is rolling out his economic team. It certainly is on the liberal side of center with many nominees either having served in the Clinton and Obama administrations or in liberal think tanks. Some may be controversial enough that they will not receive Senate confirmation. The nominee expected to head the Office of Management and Budget, Neera Tanden, who now heads a very liberal think tank, may be at the top of the Republican hit list. But for the most part, historically the Senate lets the President choose his own advisors, and despite a bit of media turmoil over the next few months, most will get approved. One should remember that Congress, not a President’s advisors, approve spending matters. However, with that said, if White House proposals are too left leaning, nothing will get passed except continuing resolutions. No one should know this better than President-elect Biden.
Indeed, while we will see a steady flow of news relating to the new administration for several weeks, we are in the middle of a calendar quarter when the flow of real data is light. This week that will change a bit, but only a bit. While we will see a lot of November numbers, in the fourth quarter it is all about December. Also note that because the Christmas season will be more spread out this year for reasons given earlier in this letter, year-over-year comparisons will be difficult. For instance, on a comparative basis early November was pretty good this year while Thanksgiving weekend may have seemed a bit disappointing.
Speaking of disappointing, last week’s jobless claims numbers serve as a reminder that with the end of some CARES Act support programs, unemployment claims are rising again from levels that were already record breaking. And that brings us back to the dichotomy of images of suffering together with record stock prices. The stock market reflects what goes on with the biggest companies on earth. It is not a reflection of food lines, unemployment, closed schools, and full ICUs. To be sure, travel and leisure companies, restaurants, and some consumer-facing businesses are impacted, but that impact is drowned out by market share shifts to the largest companies. That local restaurant forced to shut down may be losing its customers to Starbucks# and McDonald’s#.
There are two other factors to remember. First, stocks look forward. Today, that means beyond the current viral surge. Second, record low interest rates mean higher values for financial assets. That isn’t changing any time soon. That doesn’t mean all clear. After an 11%+ gain in November, stocks can hardly be labeled as cheap. Washington transitions can often be messy. Wall Street doesn’t like messy. Economic data over the next 90 days are more likely to be worse than expected, rather than exceed expectations, without another stimulus bill. Finally, while Wall Street doesn’t dislike gridlock, some industries are crying for additional aid from Washington.
December is rarely a bad month. New money flows in as year-end bonuses are paid. Those with gains often defer realizing them until January for tax reasons. More buyers, fewer sellers. It is why December is one of the best months for stocks seasonally. But valuation always matters in the long run, and no one likes a decelerating economy. Thus, for a repeat of November, investors need to see some uplifting news to support an improving outlook. That may take a few more months to evolve. While not predicting either a bear market or even a correction, when optimism is too high, it isn’t the best time to chase.
Today, Chrissy Teigen and Kaley Cuoco both turn 35. Ben Stiller is 55 while Mandy Patinkin celebrates his 68th birthday.
James M. Meyer, CFA 610-260-2220