A disciplined approach to investing blog
S&P Dow Jones Indices' recent report on buyback activity for the third quarter shows buyback activity increasing to $101.79 billion from $88.66 billion in the second quarter. With the economy mostly reopening, at least through Q3 2020, companies reported an improvement in 'as reported earnings,' increasing to $273.2 billion versus $98.5 billion for the first quarter. As the red line in the below chart shows though, buybacks remain far below the fourth quarter 2018 peak of $222.98 billion.
In the blog post I wrote about a year ago commenting on the October 2019 Job Openings and Labor Turnover Survey (JOLTS) I noted the employment market was extremely strong and there were not enough workers to fill job openings. At that time the unemployed workers per job opening ratio was .81. In other words there were more job openings than unemployed. Fast forward one year later to the October 2020 JOLT survey released last week, that ratio now stands at 1.66. Too many potential workers are now out of the labor force.
The NFIB's November Small Business Optimism Index declined 2.6 points to 101.4. As NFIB notes in their report the Index level is at a historically high level with the 47-year average reading equaling 98. Below are a few key findings in the report:
It seems a broad range of equity indices are hitting new all time highs every day and some investors question whether this can continue. The S&P 500 Index closed at an all time high Friday, December 6, bringing its year to date return to 14.5% on a price only basis. In earlier posts I discussed the roller coaster ride of the market as it traversed the coronavirus shutdown and reopening. The S&P 500 Index fell 33.9% from February to March and has bounced higher by 65.3% from the March 23 low. And since the election in early November, the S&P 500 Index is up 12.5% with only one of the five weeks down a fractional .76%.
This week the government released the second estimate of third quarter U.S. GDP at 33.1% growth at an annual rate, unchanged from the earlier advanced estimate. This is a sharp snapback from second quarter's 31.4% contraction. Of course this significant swing is a result of the virus mandated economic shutdown and reopening.
If the performance of Refinitiv's U.S. Most Shorted Stocks Index is any indication, the shorts have been caught off guard since the market has accelerated higher over the last two months. Most of the move began subsequent to the U.S. election. As the below chart shows the Most Shorted Index is up over 30% while the S&P 500 Index is up 7.9%. Investors likely are not surprised by some of the performance contributors over the last month like, Nordstrom (JWN) up 91%, Plug Power (PLUG) up 74%, Macy's (M) up 52%, Carnival (CCL) up 34%, just to name a few of the companies in the Short Index.
The dominant investment theme since the financial crisis in 2008/2009 has been the outperformance of the growth investment style versus the value style, evident in the large, mid and small cap stock space. As the below chart shows, growth has dominated value in large caps since 2008 and has accelerated higher this year.
Based on this week's AAII Sentiment Survey, over the course of one week individual investors are now super bullish. The survey notes bullish investor sentiment jumped 17.9 percentage points to 55.8%. The below chart shows bullish sentiment is above the plus one standard deviation level. From week to week the sentiment readings can be volatile; thus, looking at the 8-period moving average removes some of this volatility. For this week the 8-period moving average of the bullishness reading is 35.7% and far below an extreme.
Yes, there was a presidential election in the U.S. this past week and up until election day on Tuesday, the uncertainty around the election seemed to weigh on the markets. With Joe Biden now leading in the electoral count, some of the uncertainty seems to be behind the market and the S&P 500 Index rallied 7.13% in the week ending 11/6/2020. President Trump and his team is indicating they will challenging some of the ballots counted in swing states so this could lead to some market uncertainty near term.
One unique aspect of the difficult economic environment that followed the virus mandated shutdown, was the underperformance of high quality dividend paying stocks. From the S&P 500 Index peak in mid February to the bottom on March 23, 2020, one of the weakest performing asset classes was dividend paying stocks. As the below chart shows, the iShares Select Dividend ETF (DVY), the SPDR Dividend ETF (SDY) and the Proshares S&P 500 Dividend Aristocrats ETF (NOBL) were some of the weakest performing large cap equity categories. The second chart below shows the dividend paying categories have kept pace with the broader market since bottom in March.
There is no denying the consumer has been a surprising bright spot during the pandemic. Government financial support programs have certainly contributed to favorable consumer sentiment. This positive sentiment is evident in last Friday's above expectation increase in month over month retail sales of 1.9%. Some may find it surprising that total retail sales are now above the pre shutdown level.
It probably goes without saying but bond market interest rates have been driven down to unforeseen levels, near zero, causing investors to search for yield in other places. The actions of Central Banks around the world are contributing to this low or no interest rate environment. As the bottom panel in the below chart shows, since the financial crisis in 2008/2009, the spread between the dividend yield on the S&P 500 Index and the 10-year Treasury yield has oscillated between a positive and negative level. Currently, the S&P 500 Index yield is greater than the 10-year U.S. Treasury yield with a spread of 88 basis points.
The one thing investor know about company earnings reports is it is a rearview mirror look on what has occurred on a quarterly or annual basis. This backward view may add little insight into what expectations might unfold in the future. Over the long run though, stocks do tend to follow earnings and or cash flow. Having noted this, the S&P 500 index bottomed in March while earnings bottomed in the second quarter, thus, the market seemingly anticipated an improved earnings environment. Subsequent to the market's March bottom, the S&P 500 Index has moved higher on a nearly uninterrupted path as seen in the below chart.
Today's release of the Chicago Business Barometer for September jumped 11.2 points to 62.4. This is further evidence of an economy that is rebounding strongly from the virus initiated recession. The release noted, "all five main indicators saw monthly gains in September, with Production and New Orders leading the way."
Improvement is being made in the job market as the continuing claims data and unemployment rate continue to decline. In addition to the continuing claims category and as a result of the pandemic, another category of unemployment insurance has been created, the Pandemic Unemployment Assistance (PUA) category. The PUA program had 11.5 million individuals receiving benefits as of the week ending September 5. This category is almost as large as the regular unemployment category which totaled 12.3 million individuals for the same ending week. As can be seen in the below chart, continuing claims, including PUA has improved; however, unemployment assistance across these categories remains at too high of a level.
So far for most of the month of September, the large cap value stock space has outperformed large cap growth. Since the end of the financial crisis of 2008/2009 I have probably written about the market's turn to favoring value at least a dozen times. If performance is the yardstick, the growth style has ultimately been favored by investors for the last ten or eleven years as seen in the below chart.
The first two days of September saw the S&P 500 Index get off to a nice positive start, up 2.29% on a price only basis. Since then though the market has declined 5.4% on a total return basis. This decline has been led by the large cap technology stocks in the index. The blue line in the below chart represents the average return of six large cap technology companies in the index, Facebook (FB), Amazon (AMZN), Apple (AAPL) Netflix (NFLX), Alphabet f/k/a Google (GOOGL) and Microsoft (MSFT).
- "the S&P 500 Index fell 20% in one day, rose 15% the next 2 days, then returned to the low the following week."
- "then rose 15% again and retested the original low 6 weeks later,"
- "and finally the S&P 500 Index was up 25% a year later and back at prior highs 2 years later."
"We don’t just respond faster to pessimism. We coddle it for longer than is necessary. Optimism demands facts and is ditched at the first sign of trouble. Pessimism can be grown from a crazy thought and clutched indefinitely."
