Is The Economy Weakening?

Everyone would normally want to know if the economy was weakening and by how much. However, traders have moved on to the post-COVID-19 economy. Frankly, we thought they would move on a few months earlier. This market has become very short-term oriented which sort of makes it surprising that it is looking to next year when the economy reopens. 

On the other hand, the market is bullish on everything, so maybe we shouldn’t be surprised reopening stocks are doing well. With that being said, we must cover how the economy is doing in December even though most are looking past it.

As you can see from the chart above, there has been a moderate mobility decline in retail & recreation as well as transit stations in the past few weeks. Workplace mobility has held up better and grocery shopping remained normal as you’d expect. This data doesn’t account for the recent more stringent restrictions California has enacted. 

Retail stores can only open at limited capacity. Many bears were clamoring for this news to knock down stocks, but it didn’t do anything. That’s because markets are focused on the vaccines going out. By the time we reach herd immunity, the reopening trade will be over. In order for that to happen, reopening stocks must rally in December and January when the pandemic is still bad.

Redbook same store sales growth fell from 9.2% to 2.1% in the week of December 5^th as sales growth came down from the holiday high. It will be interesting to see how Target and Wal-Mart say the holiday shopping season went.

NFIB Small Business Confidence Fell As I Expected

Any expectation that the NFIB small business confidence index would fall in December was correct. Small firms don’t like Democrats and they have been hurt by the 3^rd wave. People are surprised the index didn’t fall more. Specifically, the index fell from 104 to 101.4 which missed estimates for 102.5, and the lowest estimate which was 102. 

The main driver of the decline was the 19 point decline in expectations for the economy to improve. It’s now just 8%. That’s likely because of the election. The pandemic is worse than it was in November, but no one should be surprised it’s worse.

The other notable declines were in plans to increase inventories and earnings trends which fell 7 and 4 points to 5% and -7%. Plans to increase employment rose 3 points to a net 21% which doesn’t really make sense if firms actually are negative on the economy. 

If you think the economy will be worse in 6 months, you won’t hire new workers. This inference is small businesses got negative on the economy in the short term, but they see the economy reopening next year which is why they plan to hire more people.

More Optimism

The American Staffing Association’s staffing index rose from -9% to -7.7% in the week of November 28^th. That correlates with growth in the BLS’s temporary help measurement. It means the cyclical improvement in the labor market is continuing. 

This is a cyclical recovery in the midst of a speculative blow-off in stocks. Some investors are moderately bearish on the S&P 500 and on the Nasdaq 100, yet are bullish on the economy. As you can see from the top chart below, the 2020 Q4 CEO economic outlook survey hit 88% which is above where it was before the recession.

Furthermore, the CAPEX plans index rose to 34% which is also above where it was in early 2020. If it wasn’t for COVID-19, the economy would have had a cyclical upturn in the first half of 2020 following a modest slowdown. Instead, we had a recession which made the economy worse in the short term but will make the recovery stronger in the intermediate-term.

Finally, the hiring plans index rose to 7.1% just like the NFIB small business index. This one isn’t yet back to pre-recessionary levels. Don’t worry, this will increase throughout 2021. The labor market has the potential to approach fullness by the end of the year if the vaccine rollout is successful. 

The first vaccines are going out now. We should know how well the entire rollout will go by mid-January. I’m not saying it will be over by then. That’s when we will have solid visibility.

Commodities Scream Recovery

The economy is recovering according to the Markit PMIs. Vaccines are going out and a stimulus looks more likely. According to Treasury Secretary Mnuchin, he presented Speaker Pelosi with a $916 stimulus bill which is $8 billion more than Pelosi and Schumer agreed with. 

The best part of this news is McConnell is on board with it. The bad news is Pelosi disagrees with the details, so more work is needed. There is a 75% chance something passes in December. As a reminder, the Georgia Senate votes are January 5^th. There aren’t any new polls. We don’t know if polls will help us because there won’t be data around the holidays. Both races are a toss-up.

Commodities are all aboard the reopening train. As you can see from the chart above, despite a rough start to the year because of the recession, copper is up 25% year to date and iron ore is up 50%. Freeport-McMoRan stock is up 85.4% year to date because of the recovery in metals. Once the economic recovery is in full swing, take profits in FCX stock.

Conclusion

Mobility waned in the 2^nd half of November. Imagine how bad it got in the first half of December given the record high in hospitalizations and the government restrictions in California. Investors are looking past the December and January slowdown as commodity prices are exploding. 

Small business confidence fell a little, but CEO confidence was strong. Of course, the NFIB numbers make small businesses look better than they are doing. Small businesses will only get a modest amount of help from this stimulus, but we could get a bigger one next year if the Dems win both Georgian elections. A guess is it will be a split.