Stimulus negotiations continue in Washington as a growing percentage of small and mid-size businesses view additional funding as “critical” to their survival. Companies are working hard to shore up their balance sheets and the resultant drop in share buybacks—in combination with a robust IPO market—has contributed to the U.S. equity market expanding for the first time in a decade. Equity valuations are at unprecedented highs, especially in comparison to interest rates, so it’s no wonder companies are looking to capitalize on the opportunity. But will market performance continue to depend on Fed intervention, and is the pattern sustainable?
1. Are the politicians in Washington listening?!
Source: The Daily Shot, from 12/9/20
2. Has the trade war with China backfired?
Source: Bloomberg, from 12/9/20
3. Covid is inducing corporations to keep their cash balances the highest in ~70 years. Dry powder for when the vaccines take hold?
Source: The Daily Shot, from 12/8/20
4. A robust IPO market and drastically reduced stock buybacks are expanding the markets’ shares outstanding for the first time in ten years…
Source: The Daily Shot, from 12/8/20
5. Forget ESG, pluggers have known for decades that sin stocks tend to outperform…
Source: The Daily Shot, from 12/8/20
6. Where are we valuation-wise? Data is from 1925, a valid dataset
Source: The Daily Shot, from 12/8/20
7. Another reason the 60/40 type portfolio may be in trouble: the model research was conducted on a dataset that is too short and assumes a negative bond correlation to stocks. Ooops…
Source: The Daily Shot, from 12/8/20
8. Market dependency on Fed bond buying is not without ramifications. Will this widening cycle continue? If so, the next leg down will be brutal…
Source: The Daily Shot, from 12/9/20
9. Does the “emperor have no clothes?” The U.S. Treasury issues a bond and the Fed buys it. Instant asset creation and dilution of the backing. Now the Fed owns more Treasuries than all other central banks combined. Another reason the USD is weakening?
Source: The Daily Shot, from 12/8/20
10. If/when we do get new stimulus from Washington, it is assumed the Fed will step in to buy the new supply of bonds. If not, a massive increase in supply and steady demand will force yields to rise substantively to attract buyers, which would quickly choke off economic recovery. Either way, this should put pressure on the USD…
Source: The Daily Shot, from 12/9/20
11. As investors stretch for yield, are we watching a slow-motion train wreck?
Source: Bloomberg, from 12/8/20
12. Japan, the world’s third-largest economy, is getting hit with a third Covid wave. In response, a new massive 73 million Yen stimulus package was announced. Is Japan pushing on a string?
Source: NLI Research Institute, as of 11/30/20