We have another normal week for economic reports, featuring retail sales and housing data (NAHB Index, building permits, housing starts). Industrial production is from November, so it is a bit stale. Jobless claims continue to be a current and reasonably reliable indicator.

The economy remains secondary for market participants. It has been ignored for months, so why change now? Attention has mostly been on more fiscal stimulus, with daily market moves registering even small hints of progress. It is a symptom of a greater problem – a gridlocked government. Since investors can expect more of this in the years ahead, it is time to ask: What can investors expect from a gridlocked government?

xkcd gets to the heart of the matter.

Last Week Summary

In my last installment of WTWA, I provided an assessment of three rebounds: the pandemic, the economy, and the market. These represent three quite different stories. More of the punditry is starting to analyze these discrepancies, but investors must look hard to find helpful contributions. Understanding these themes and how they fit together is the most important investor challenge. It is worth some careful thought.

Key Charts

I always start my personal review of the week by looking at some great charts. This provides a foundation for considering news and events. Whether or not we agree with Mr. Market, it is wise to know his current mood.

I am featuring Jill Mislinski’s chart of the market week. Her approach combines several key variables in a single readable format.

Another helpful example from this chart-laden post shows the increase in significant daily moves in 2020.

The folks at CNBC no longer get worked up about a “triple digit move” in the DJIA!

Sector Trends

Sector movement is another important clue to market trends.

Once again, Juan Luque provides us with some words of wisdom from the Incline trading desk:

The S&P 500 Index finished this week down 0.96% amid uncertainty of additional stimulus and increased Covid-19 virus cases. The Energy sector continues being the big winner moving strongly along the improving quadrant with almost a 20% return in the last month. It finished 1.14% up this week accompanied by a 0.10% return for the  Communication Services as the only two sectors that were up in the week.  The Financials sector is entering the Leading quadrant despite being down slightly for the week. Utilities continues losing momentum and is fast approaching the weakening quadrant with over a 6% loss in the last month.

Comment

The market declined 1.0% on the week with a trading range of only 2.2%. You can monitor this reduced volatility in my Indicator Snapshot, featured in the Quant Corner below.

Personal Note

Looking ahead at the calendar, my plan is to write WTWA next week, but not for the following two weeks – Christmas and New Year’s. I am looking forward to more family time, and I hope readers are as well. I hope to contribute a few shorter posts on some different topics.

Noteworthy

Statista dramatically illustrates the critical shortage of ICU beds.

The News Overview

Each week I break down events into good and bad. For our purposes, “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too.

My continuing assessment is that many of the normal economic indicators are not helpful in the wake of the COVID lockdown decline. Too many sources are focused on a change in direction, even if very modest, which has painted an overly optimistic picture. As the economy stalls, there will be a rapid switch in the diffusion indexes. The early signs are emerging. I expect some dramatic shifts over the next month or so.

Good

COVID-19 Vaccines

• The FDA approved Pfizer’s vaccine for emergency use. The first injections are expected as soon as Monday. UPS and FedEx are cooperating in plans to begin distribution (NYT).

At a news conference on Saturday, Gen. Gustave F. Perna, the chief operating officer of Operation Warp Speed, the federal effort to bring a vaccine to market, said that boxes were being packed at Pfizer’s plant in Kalamazoo, Mich., and would be shipped to UPS and FedEx distribution hubs, where they would be dispersed to 636 locations across the country. Pfizer said shipping would start early Sunday morning.

Mr. Perna specified that 145 sites would receive the vaccine on Monday, 425 on Tuesday and 66 on Wednesday.

“Make no mistake, distribution has begun,” he said. UPS said it expected to start transporting the vaccine on Sunday morning, when employees stationed at Pfizer’s facility in Michigan will affix special Bluetooth- and radio-enabled tracking tags to each shipment. An aircraft waiting nearby will take the vaccine to the company’s Worldport air cargo hub in Louisville, Ky., a sprawling 5.2 million-square-foot sorting facility. Future shipments of the vaccine will also be transported by truck to the Louisville hub, which is up to a six-hour drive from Michigan.

• The FDA provides the official timeline for development and approval and offers assurances that safety has not been sacrificed for speed.

FDA has rigorous scientific and regulatory processes in place to facilitate development and ensure the safety, effectiveness and quality of COVID-19 vaccines.

• Pre-orders account for over 10 billion doses.

• Access to the vaccines varies dramatically (Nature).

Some countries will have supplies only for about 10% of their population this year, with full coverage years away (Oxfam).

Consumer Sentiment

• The Michigan Consumer Sentiment index (preliminary for December) surprised to the upside with a reading of 81.4. This beat expectations of 75.0 and November’s 76.9. Jill Mislinski provides the best chart on sentiment, drawing together all of the important factors.

• Sentiment is closely linked to stock prices. People’s expectations can have an important effect on the economy. How will these two data series converge: Lower stock prices or improved sentiment?

• Confidence is stronger among high-income consumers.

Perhaps this is why, since these totals reflect home values and investments.

Bad

Business Sentiment

• NFIB Small Business Optimism for November dropped to 101.4 from October’s 104.0. David Templeton (HORAN) analyzes the data, including these key charts.

Employment

• Initial jobless claims, as many feared, spiked much higher after the Thanksgiving week. The report for the week ending on 12/5 was 853K, much higher than expectations of 720K or the prior week’s 716K.

• Continuing claims lag by a week, but that number, 5.757M, was also much higher than the prior week’s 5.527M.
• Job openings increased slightly at the end of October to 6.562M from September’s (upwardly revised) 6.494M. This series is more important to analyze labor market structure and changes than overall economic strength. The results are usually linked to the payroll numbers, but the technical notes show that this has been suspended. One key aspect to consider is the ratio of those looking to the number of openings. And keep in mind that many have quit looking. From the BLS report:

Coronavirus Closures

• The number of cases is increasing dramatically, no matter how you calculate the changes. Some say that more testing means that we find more cases. I have been tracking data on US tests and new cases since June. In the last two weeks the positive rate has been 11%. In September, it was below 5%.
• Small business is taking the brunt of the economic impact.

• Returning to the office has stalled.

Ugly

More budget pressure. When crises strike, spending seems inevitable. It is something to keep in mind when economic times are good.

Calendar

We have another normal week for economic reports, featuring retail sales and housing data (NAHB Index, building permits, housing starts). Industrial production is from November, so it is a bit stale. Jobless claims continue to be a current and reasonably reliable indicator.

The regional Fed indexes, PMI’s, and leading indicators will not provide much fresh information.

Briefing.com has an excellent weekly calendar and many other useful features for subscribers.

Theme and comment

The successful development of vaccines in record time is excellent news for everyone. It raises everyone’s hopes about a return to normal. As attention turns to distributing doses, it is apparent that “normal” is at least a few months away. There are some who need more help to get through that time. Most believe that immediate action is necessary.

Despite this support, U.S. leadership has been unable to reach a package that can garner enough support. Daily market moves are often attributed to “breaking news” about a stimulus package. Investors are curious: What does Washington gridlock mean for investment portfolios?

Background

As I write this week’s post, the stimulus package prospects are grim. The Hill describes both the multi-month history and the status of negotiations.

There’s now growing skepticism about the prospects for a sweeping agreement. With the clock ticking, lawmakers are warning there are too many moving parts and too many competing factions.

“I think it absolutely might not be possible,” said Sen. Roy Blunt (Mo.), a member of GOP leadership, while acknowledging that not getting any coronavirus relief would be a “huge failure.”

Sen. John Cornyn (R-Texas), who has been involved in bipartisan negotiations, added that “everybody is staring each other down right now, but we have a deadline coming up.”

Congress did pass a defense appropriations bill after Sen. Rand Paul delayed action over an issue he deemed important. I mention this because it illustrates the problem in speedy action at this time of the legislative session. Many routine procedures require unanimous consent. While Pres. Trump has threatened to veto the bill, the majorities were large enough to override a veto. (The Hill).

Congress also passed, and Pres. Trump signed, legislation to keep the government open for another week while seeking a compromise on that front. (The Hill).

What is behind the differing results on these three issues?

Consensus on Goals

There is widespread consensus surrounding the defense budget. This is especially true when payrolls and bonuses are at stake. It helps to put a face on the issue.

Even in this case there was disagreement. Some pushed to include non-germane items. This is typical, especially when leaders are searching for votes. In this case it was possible to pass what is called a “clean” bill.

Avoiding a shutdown is generally desired, but the budget complexity invites temporary “solutions.”

Intractable Positions

At the risk of over-simplification (essential short of a book-length case study) here are some example that illustrate the challenges to a compromise.

• Help for state and local governments. Without the ability to engage in deficit spending, these governments are unable to continue current services, much less any added vaccine responsibilities.
• Mandates – what, when, and where. I read opinions that businesses have suffered because of variability in local rules. Often these are the same voices that usually advocate local decision-making. How does one tell a state that it can not impose a quarantine on new arrivals? How can we order a city to keep restaurants open as COVID-19 cases spike? How can we order teachers to work when conditions are unsafe? Or direct state and local governments to over-rule school boards and order schools to open? As a nation, we are still struggling to achieve agreement about wearing masks and social distancing.
• Costs. For some, the cost of pandemic actions is simply too great. It is crippling for the Federal budget. The personal and emotional costs of student school failures, depression, and increased suicide levels defy a dollar measure, but are no less important.

Leadership Failure

Attacking political leaders is easy. Just go after those who disagree with you.

Leaders represent constituencies. That is the real source of the disagreement. Some people do not accept that COVID-19 causes deaths. They believe that shutting down businesses has been an expensive waste. Others see any additional deaths as isolated to certain groups with co-morbidity. If you represent a district where this is the consensus viewpoint, what should you do?

Partial Solutions

These are easier said than done. Agreeing to part of a bill means that other important objectives may be lost for months, causing irreparable damage. That is how Democrats feel about help for State and Local government. It is how Republicans feel about liability protection provisions.

Political Leverage

Senator Sanders favors direct payments and wants to be heard. He will probably not be alone. In building a coalition to pass legislation, the current situation provides blocking power to many.

Needed coalition members include the following:

• A majority in the House. Basically, that means agreement by Democrats.
• A majority in the Senate. Since GOP Senators are split on the cost issue, that will require a bipartisan compromise.
• Willingness of Leader McConnell to allow legislation to reach the Senate floor.
• Signature by President Trump.

It is a challenge to craft a compromise that works for all these elements.

Investor Outlook

Eddy Elfenbein’s weekly review is a must-read for me. I am also looking forward to his annual announcement of new portfolio stocks for 2021. This week he begins with a quotation from Jack Bogle: “If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.”

Eddy joins in with his explanation of why the market seems to have diverged from the stalling economy. His explanation demonstrates the importance of my choice of a theme for this week.

The silver lining is that the soggy economic news may help spur along negotiations for an economic stimulus. On Capitol Hill, politicians have reached the crucial “finger-pointing stage.” This boring dance will probably go on for a few days. The important fact is that a bi-partisan group of lawmakers put forth a $908 billion plan, and both House Speaker Nancy Pelosi and Senate Minority Leader Check Schumer seem to favor the bill. Given the state of the economy, I suspect that some sort of deal will be reached before the end of the year.

Paul Schatz’s most recent commentary is spot on:

I fully expect the media to again report on the plethora of negative news. Record COVID cases, hospitalizations and deaths. Stimulus stalled for the umpteenth time. Government runs out of money tonight.

But keep remembering.

Stocks are trading like it is Q2 2021. The market is long passed COVID, like it or not. Airline stocks are flying. Energy stocks are pumping. We have greed. We have euphoria. We have the ducks quacking. We have an IPO boom that should become a mania in 2021. The ill-advised investor is now down 20% in both DoorDash and AirBnB from their highs.

Fool’s Gold

Over-trading your bankroll. And most importantly, know whether you are a trader or an investor. The use of leverage by retail investors is setting records. (WSJ).

The hunt for bigger returns has led many investors to take bold gambits that have the potential for big gains and even bigger losses. More investors are using options than ever before to juice returns, and some have gambled on bounces in the share prices of bankrupt companies. Investors put more than $14 billion into leveraged and inverse ETFs in March and April alone, when those funds moved dramatically in tandem with the indexes they track.

Golden Nugget

Do you own Tesla (TSLA)? If not, you are probably about to buy it. If yes, get ready to buy more. Tesla Is Joining the S&P 500. Why This Could Be a Problem for Many Investors

Evie Liu writes as follows:

Tesla will join the S&P 500 next week. The electric-car maker will be the most valuable company to ever be added to the widely followed index, and it will likely land as the eighth-largest stock. This will have a huge impact on the massive amount of assets, both passive and active, tied to the benchmark index.

Her calculation is that index funds will buy about 17% of the stock’s total free float and more than three times its average daily volume. It will not happen in one day, but it will happen. In addition, many managed funds need exposure to hit their benchmarks. ETF and fund investors will find this article very interesting.

Bonus Gold

I was not sure where to include this article, but after mentioning it to her Mrs. OldProf told me to find a place. It does fit well with this week’s theme since it explains why all those folks who disagree with you are wrong! Even if they seem to be smart. Cognitive Ability and Vulnerability to Fake News

As one alarming example, an analysis by the internet media company Buzzfeed revealed that during the final three months of the 2016 U.S. presidential campaign, the 20 most popular false election stories generated around 1.3 million more Facebook engagements—shares, reactions, and comments—than did the 20 most popular legitimate stories. The most popular fake story was “Pope Francis Shocks World, Endorses Donald Trump for President.”

Fake news can distort people’s beliefs even after being debunked. For example, repeated over and over, a story such as the one about the Pope endorsing Trump can create a glow around a political candidate that persists long after the story is exposed as fake. A 2017 study published in the journal Intelligence suggests that some people may have an especially difficult time rejecting misinformation.

Quant Corner

I have a rule for my investment clients. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update, featuring the Indicator Snapshot.

Indicators

For a description of these sources, check here.

Comment

Technical measures remain mixed.

My continued bearish posture for long-term investors is based upon both valuation and fears about the continuing recession. As always, I expect good times – but not yet.

Guest Commentary

James Picerno continues his analysis of the change in inflation expectations, a measure that we report weekly.

Todd Hurlbut writes about The Endless Search for Yield, starting with recognition of a new record: $17 trillion in global debt with a negative yield.

…(I)nvestors are being pushed further out on the risk curve of investing in high yield bonds and stocks. In fact, many investors are shunning bonds altogether and for good reason as they are now being deemed “return free risk.” Do investors need to take the significant risk of owning nearly all equities to achieve attractive returns or is there a way to invest in bonds, capture positive real yields, and control for risk?

Check out the full post for his ideas about reducing the risk in high yield bonds.

Final Thought for Investors

There are good reasons for equity investors to be optimistic. Here are two that you might have missed last week. Usually we hear about corporate debt, but there is plenty of cash to fuel business investment.

And the pandemic has spurred practices that will stimulate productivity growth.

I look forward to these developments, but from experience I know that it will take time. I do not attempt to time markets, but I am always cognizant of risk. Risk timing is easier than market timing since you remove a key variable — the emotional responses of Mr. Market. I have done well in following the economy and major trends. This often is a different tack from the current market winds.

My Portfolios

I continue to maintain higher than normal cash levels as a cushion against the continuing recession. It is possible to do this and still meet your goals provided you do not make extreme decisions. I am doing well in all stock portfolios, mostly by selecting less risky stocks. I am finding some new ideas based upon the Great Reset principles. The problem is that Mr. Market has jumped the gun on some of these names, so patience is required.

I also added some positions to my Enhanced Yield program, but I am being fussy. While income, not capital appreciation, is the goal of the program it remains wise to buy low and sell high! Last week I wrote a post about Gilead (GILD) illustrating how I am trading the stock and describing my program for yield boosting. It is a good description for those who want to learn more about the method. I must have done something wrong, since most people in the comments were more interested in discussing the stock rather than my method.

Most important takeaway

Investors should accept the results of gridlock. We cannot change them, so invest accordingly.