Hard Economic Data Suggests A Continued Strengthening Of The Economy

Tuesday's release of the Chemical Activity Barometer (CAB) by the American Chemistry Council clearly is representative of an economy that is strengthening. The report for April showed a twelfth straight month over month increase in the CAB index. The significance of this is the fact the CAB Index leads the trough in the economy by an average of four months. The year over year increase equaled 21.7% and was the largest YOY increase since the 22.6% YOY increase in March 1951. The diffusion index for the CAB data was 100%. This means all the contributors to the index were positive.

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Stock Buyback Rate Continues To Increase

S&P Dow Jones Indices recently reported stock buyback results for the fourth quarter of 2020 noting a 28.2% increase in the quarter versus the third quarter increase of 14.8%. This increase in buyback activity for S&P 500 companies follows a steep contraction in Q2 2020, i.e., $88.7 billion versus $198.72 billion in Q1 2020. Aggregate dividends paid in Q4 2020 increased to $118.84 billion versus $115.54 billion in the third quarter last year. Buybacks totaled $130.5 billion versus Q3 buybacks of $101.8 billion. This level of buybacks pushes the quarterly back amount above the dividends paid in the quarter as seen with the red and purple lines in the below chart.

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Small Improvement In Small Business Optimism, But Large Positive Labor Market Signs

The March NFIB Small Business Optimism Index increased to 98.2 compared to the prior month reading of 95.8. The report notes seven of the 10 index components had improvements. However, the uncertainty component increased six points as business owners were more uncertain about whether this was a good time to expand and make capital expenditures.

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Positive Job Market Developments: Openings And Quit Rate Are Increasing

Earlier this week the February Job Openings and Labor Turnover Survey (JOLTS) was released showing job openings continued to increase. For the February period job openings equal nearly 7.4 million and is approaching the peak job openings level of 7.5 million reached in late 2018. This represents a positive sign that economic activity is increasing and businesses are experiencing increasing demand; hence, the need for more employees.

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Individual Investor Sentiment Is Elevated

The  American Association of Individual Investors reported a jump in bullish sentiment to 56.9%. This is the highest bullishness level since the reading reached 59.7% for the weekly reporting period ending January 4, 2018. As the below chart shows, higher levels of bullishness have a tendency to occur near market tops; however, the pullbacks can be brief or short lived. Also, bullish sentiment can get to higher levels as happened in 2003 when bullishness was reported in the low 70 percent level.

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So Far, A Better Year For The Dogs Of The Dow

In 2020 the Dogs of the Dow strategy significantly lagged the return of the broader S&P 500 Index. For the 2020 calendar year the Dow Dogs returned a minus 8% versus the S&P 500 Index return of 18.4%. Several factors led to the Dow Dog underperformance. First, the 2020 Dow Dogs held two energy stocks out of the total ten stock portfolio. Exxon Mobil (XOM) was down 36% and Chevron (CVX) was down 29% last year. In the technology space, the two Dogs were IBM and Cisco (CSCO), down 1.2% and down 3.5%, respectively. For 2021 though, the Dow Dogs have jumped out to a strong start up 12.0% versus the SPDR Dow Jones Industrial Average (DIA) up 8.9% and the SPDR S&P 500 Index (SPY) up 7.5% as seen in the below table.

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A Change In Equity Market Leadership Is A Positive

One favorable aspect of the current equity market is the broader favorable performance across a wider range of asset classes and investment styles. I wrote about this in mid September last year and at the time raised the question whether this rotation or change in leadership had more room to run. The below chart clearly shows that a shift in leadership has carried through the first quarter of this year. The blue line on the chart represents the average total return of the six stocks, Facebook (FB), Amazon (AMZN), Netflix (NFLX), Google (GOOGL), Microsoft (MSFT) and Apple (AAPL). Collectively, these six stocks are trailing in performance relative to the other asset classes shown. Up until September though, the asset class returns were essentially reversed as seen in the second chart.

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The Consumer Is Spending, A Major Driver To The Economic Recovery

As is often said actions speak louder than words and with the consumer at the moment, both survey results and spending activity are moving in the same direction. The consumer accounts for 70% of GDP or the economy, so as the consumer goes, so goes the economy. Today's Conference Board Consumer Confidence reading for March is reported at 109.7, up from 90.4 in the previous month. Consumer confidence has yet to reach the higher pre-pandemic level, but it is moving up from its low after not declining as much as it did during the financial crisis. CEO confidence on the other hand is near a record high.

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Oil Inventory Level Remains High Potentially Limiting Steeper Rise In Energy Prices

A number of factors will influence the price of oil over time, but the supply level and active rig count provide useful insight. Other variables come into play as well, like Middle East conflicts and the level of the U.S. Dollar. The price of West Texas Crude has increased from around $15 per barrel in April of 2020 to its current $66 per barrel. On the surface it seems oil inventory levels are at a sufficiently high level, as the green line in the below chart indicates, that oil prices should not continue to trend higher at a pace similar to the pace over the last year. With the rig count beginning to turn higher, additional oil supply will eventually find its way onto the market; however, there is a lag in oil production growth vis-à-vis rig count growth.

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Equity Market May Be Entering A Period Of Further Strength

Going back to 2016 I was writing about the current bull market that began in 2013 and how it resembled the bull market of the 1950's and 1980's. At the time of those earlier posts I certainly did not foresee the pandemic and a .5% yield on the 10-year U.S. Treasury. Nonetheless, as this current recovery unfolds, a rise in the 10-Year U.S. Treasury yield has occurred and may continue. Higher interest rates in and of themselves are not necessarily a headwind for stocks though, especially when rising from a very low level.

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Earnings Growth Supports Strong Equity Market Advance

Fourth quarter 2020 earnings reports are nearing an end as 495 companies in the S&P 500 Index have reported results. Refinitiv's report dated March 5, 2020 notes results have come in better than history. Nearly 80% of companies have reported earnings above analyst estimates, exceeding the long-term average of 65%. Expectations for the next two quarters shows earnings growth accelerating with the second quarter 2021 estimate currently indicating growth of 51.2% on a year over year basis.

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Spiking The Punch Bowl

A nearly $2 trillion Covid relief package is working its way through Congress. There is differing commentary about the amount of the stimulus that is going to "Covid" relief, but assuming much of it is relief in some form or the other, how does it get spent? Is the relief targeted? In aggregate the stimulus that has been sent to individuals prior to this most recent package does not all seem to have been spent. The below chart shows the spike higher in the savings rate, currently running over 20% of disposable personal income.

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Economically Sensitive Stock Market Sectors Lead Performance

A look at S&P 500 Index sector returns after the market close on Thursday shows since the March 23, 2020 low, energy is the top performing sector up 117.6% and followed by materials and financials. The industrial and technology sectors round out the top five performing sectors as seen below.

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Travel And Leisure Companies Should Benefit From Satisfying Pent-Up Demand

The travel and leisure segments of the market may be some of the most value oriented ones as their business has essentially been shutdown due to the COVID-19 virus. As the global economy began to be shuttered in February last year, travel companies like Carnival (CCL) and Norwegian Cruise Line (NCLH) experienced significant price contractions as seen in the below chart. When comparing their returns since the beginning of 2020, many of the stocks remain down far more than the broader market or S&P 500 Index. One outlier is Expedia that is up 49.5% versus the S&P 500 Index return of 20.4% since the beginning of 2020.

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Value Stocks Outperforming For Now

Large cap value stocks have come to life this year after underperforming growth for most of the last 15-years. As the below chart shows, the Invesco Pure Value Index (RPV) is up nearly 15% this year compared to the Invesco Pure Growth (RPG) Index return down .12%.

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Interest Rates Pressuring Bond Returns

It is not uncommon for the yield curve to steepen as the economy exits a recession and transitions into expansion mode. After another Fed induced yield curve inversion in August of 2019, the economy dipped into a recession at the end of 2020. Certainly the pandemic shutdown contributed to the recession, but possibly the economy was headed in that direction anyway following the yield curve inversion.

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High CEO Confidence Not Reflected In Consumer Confidence

Last week the Conference Board reported the Measure of CEO Confidence for the first quarter of 2021 at 73, a 17-year high for the reading. A as the Board notes, readings above 50 reflect there were more positive than negative responses. The survey was conducted January 14 through January 29. As reflected by the consumer though, the Conference Board's reading shows consumer confidence at 89.3 and far below the 135 reading prior to the pandemic induced recession. The consumer reading is anticipated to be updated in the coming week. Of significance is the fact other consumer confidence and sentiment readings, like University of Michigan's, also show lower levels of consumer confidence.

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Continued Deterioration In Small Business Optimism

Today's Small Business Optimism Report by the National Federation of Independent Business (NFIB) shows continued deterioration in business owners optimism in January. The Index fell .9 points to 95.0 versus December's reading and taking it below the 47-year average of 98. The quarter over quarter absolute change is a minus 9 points and is the largest change since the -13.4 and -10.1 point change in April and May of 2020.

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A Weaker Jobs Recovery Seems To Be Unfolding

In a post I wrote in late January I noted the headwind that an increased regulatory and tax burden is likely to have on economic growth. Last week's jobs reports provided further evidence that a slower economic environment may be taking hold. As the below chart shows, the level of employment seems to be trending sideways and is approaching the trajectory of the slow job recovery following the financial crisis in 2008/2009.

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Most Shorted Stocks Power Higher

At the end of November last year I highlighted the fact the most shorted stocks had started to gain momentum at the beginning of October. Fast forward to the start of February and Refinitiv's U.S. Most Shorted Stock Index has continued to generate outsized gains. For the last four months the Refinitiv U.S. Most Shorted Index is up 92.8% versus 10.4% for the S&P 500 Index. Half of this gain has occurred in January with the Shorted Index up 40% as seen in the second chart below.

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