Compressed economic activity - has analysts and politicians essentially posturing in a way that oddly enough underestimates what can unfold 'if' we don't get Covid-19 prophylactic and treatment drugs, very very quickly. And the urgency of this situation isn't fully appreciated, judging by both sides of the political spectrum arguing about a reduced (mistake) testing regimen, versus complete shutdown if doctors suggest (it's likely a mistake too), as the whole situation spirals with greater confusion.
Executive summary:
- The super-cap 'bandwagon' rolls on, but the trail may become a winding one, especially after the Fed's 'perceived' boost to low rates and new inflation.
- All year I've argued (and still do): 'don't fight the Fed', but let me add that the Fed isn't entirely sure about the 'policy course' they're presumed plotting, so let's not presume a degree of omnipotence that isn't going to be entirely warranted.
- Hence while the general view is the Fed fuels a juggernaut extension, and while we have argued against shorting or fading for months, let's be more cautious and perhaps cull a bit of gains (especially from big-caps) into strength.
- Covid testing and treatment (preferably prophylactic or before severe disease) remains key to both contending with the pandemic, and evolving afterwards.
- Fed policy changes will be viewed in a different light if a pill emerges for Covid, in which case holding 'expansive policy' for 5 years would itself set-up a plunge.
- Meanwhile Abbott's (ABT) 15-min test approval is terrific, however it still 'needs a lab' to be evaluated, we eagerly await (several) rapid tests requiring no labs.
- Oh unfortunately the Abbott test requires a nasal swab and FDA in their Letter to Abbott said that 'specificity and test sensitivity' was unknown (interesting), oh, in another twist on the '15-minutes' that's 15 minutes after inserting the swab into a test-card kit, which is only authorized to be used in a certified lab (so people do not get a result 15 minutes after the swab is thrust up their nostrils).
- It is the political season, and the pressures are everywhere, take most with a grain of salt, especially as relate to discussions 'as if' the pandemic was history (no idea where Kudlow got that idea), or even involving trade and geopolitics, it seems there's a growing propensity to sugarcoat a still-serious Covid situation.
- Prepare for enormous costs and huge reconstruction boom (?) for years after devastation that tragically is going to thrash the U.S. Gulf Coast starting now.
- Hurricane Laura is a strong 'Cat 4', with risks of a 'Cat 5', catastrophic and not survivable in the surge area (I saw the aftermath of 'Andrew', a Cat 5, and had some damage 60 miles North of that), so this is not to be taken lightly, and as so many Oil refineries and chemical facilities are in the area, it will be toxic too.
Tomorrow the Federal Reserve Chairman's 'virtual' Address will do more to confuse, than to clarify,perhaps because they won't really know how presumed-inflationary policies, over a considerably long duration, will somehow actually help the economic recovery. It should be evident from 'Going Japan' as the saying goes, how low rates in themselves can actually retard economic activity and even degrade optimism.
However if they combine relief on the Debt front and somehow manage to trigger the inflation they want (contrary to their price-stability mandate), they get to repay Debt with depreciated Greenbacks, and that relieves pressure on Banks and so on as we discussed last night. If the economy were 'pretty good' overall, you wouldn't have the Fed in this mode.
If there's anything characteristic of this market, it's the absence of valuation investing while the concentration in a handful of (mostly technology) big-caps has been more than resilient, but has compressed the S&P to the upside in a way that is generally viewed as slightly-shy of 'insane', and yet prevails.
Dammed if you do and dammed if you don't might be the view about broadening the commitment of funds outside of these narrow sectors of participation, but if (and that is not an easy call) you could see the broadening without tanking the 'super-caps', of course that would help the S&P hold together. It's tough, and now there's a political aspect to all this, with a presumption the market prefers a Trump reelection, whether or not that's what occurs. That's not to endorse, just reflect. There's plenty to contend on either side of the issues, not to mention the social and climate issues (which the hurricane brings home, along with recognition of more flood-prone areas than most Federal maps will recognize, even after the preceding revision of that data).
In-sum: we'd be cautious about the response to the 'virtual Jackson Hole' gathering, and recognize that 'low rates forever' is an argument for growth at a mediocre pace. So there is obviously more contemplated in the 'thoughtful' presentation forthcoming, as Chairman Powell knows that 'merely' replicating Tokyo's monetary policy, or even moving as Berlin did with NIRP, will not generate the inflationary growth he wants.
What isn't considered is that the difficulties related to the pandemic, which of course is at the core of everything being debated. Any argument, bullish or bearish, or ours (which is the bifurcated pattern that recognizes the Fed-dependence and dominance by the FANG-types well before everyone caught-onto this market characteristic) has to consider variables not only dependent on a vaccine, but a dramatic difference 'if', by any chance, one of the companies working on a 'therapeutic / prophylactic' .. pill.. actually succeeds. I have contended for months that's what we need, and nothing is changed on that front, other than at least two companies are working towards such a goal, while a couple others are hoping to develop an injection that stimulates T-Cells to mount such an effective response that it overwhelms any invader neutralizing the virus without triggering an excessive immune response (like a cytokine storm).
Bottom-line: for decades I've blended what mattered at a given time, and I've tried to proportion the varying influence of technicals and fundamentals. So yes, that's the psychology of the marketplace I've referenced. It's also why I've mitigated the insane price movements of a handful of big-caps, arguing not to fight the uptrend or the Fed. This can't be a market that goes after the work-from-home sector forever.
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