August 7, 2020

Caution Isn’t Pessimism

“Taking a profit may be a mortal sin in the eyes of the Pindudes, but I must admit it’s a lot more fun than taking a loss”

Today the Bureau of Labor released its monthly data for payroll growth and the unemployment rate. I refrain from listing the data because the numbers make no sense to the common thinker other than to frighten those uninformed and embolden those who believe themselves informed. Which is why I remain constructive on the broad indexes, where I see technical momentum, and cautious of the reckless interpretations that emanate from the financial pundits. This is because we are currently positioned to focus less on the external distractions in favor of more concrete objectives. Namely, not will the markets correct, but when will they correct, and for now, in my opinion, could very well occur when an FDA approved vaccine for Covid is released. At that point markets could return to predictable corrections and rebounds, earmarks of the old normal that have no reason to dissipate in the new normal.


The markets began the week in favorable technical condition, with confirmation coming from a number of important earnings reports that showed favorable  positioning and reasonable guidance. Even Disney (DIS) saw a steep decline in film, sports, and park activity, but its recently introduced streaming subscription service signed up over 10 million new viewers reaching over 60 million worldwide. But much of the focus of the analyst community is more pessimistic, hence the better than expected results from many companies reporting. This is also characterized by attempts for some analysts to have it both ways. This week saw Bank of America downgrade Apple (AAPL) on strict fundamental valuation, but then the same analyst raised  the expected price target.  I bring this up because it frames my constructive/cautious description, not as a prediction, but as a strategy. Besides the tactical allocation of cash to manage overall risk my aim is to not only see valuations as over or under, but more importantly to the balance of portfolios, pre or post Covid. 


On the economic front besides the reasonably favorable employment report today, and the decrease in jobless claims yesterday there has been  a handful of signs that the recent reopening has resulted in, not necessarily economic strength, but better characterized as  encouraging rebounds. The week began with Monday’s release of the second quarter estimate for GDP which showed the steep decline in economic activity, and although it was expected it was also politically misrepresented for convenience. So when the week came with a Trade Deficit rise in Exports over Imports, responding to recent declines in the US Dollar it was followed by a rise in the ISM Non-Manufacturing Index to 58.1 (over 50 suggests expansion) responding in part to a pick up in inventories to meet the recent reopening rise in consumer retail activity. As I always look to emphasize the economic data that comes out during the pandemic is rarely indictive of a growing economy, more simply a rebounding economy that is prone to  headwinds. As states and municipalities react to rises in cases each comes with civil regulations that target the food and hospitality  sectors, it should come as no surprise should consumer activity wind down at the summer winds down.

External Events

At this moment, the most market influential noise is coming from the inability for politicians to dispense with proselytizing  and commit to initiating a stimulus package that, in my opinion, is still needed and should likely be coming soon. From a less general position, the challenge the administration’s fight with China poses to companies that are relying on the benefit of a more open Chinese economy and more optimistic ones amongst the European countries will depend on the cooperation from governments also  challenged by international security concerns. Lastly, my concern that little is discussed regarding the structure of the domestic economy and the focus on where the stimulus actually touches down. It’s easy to surmise that manufacturing has been struck hard by the virus and activity has declined below its customary 12% of GDP. The consumer, however, is being goaded by politicians with cash, and at the same time speculative lockdowns around the country are revealing something about generating consumer demand at the expense of consumer employment. With the aid of any further declines in the US Dollar, the condition could introduce something we’ve not seen in this country for over a decade, inflation. 

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