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Delta Insights A Weekly Commentary on Investing
Trend Boost
The stock market is in a strong, upward trend. Micro-cap stocks are in a really strong, upward trend. Through the first seven trading days of 2021, the Russell Micro Cap Index is up 9.4% which is the best start for the index since its inception in 2007. By contrast, the S&P 500 index was up 1.2% during this first trading week of 2021.
Rising Above the Chaos
Despite the chaos on Capitol Hill, the stock market moves higher. Often, chaos raises investor uncertainty which places downward pressure on stock prices. But not this time.
Blackjack! 21 Beats 20 – Happy New Year 2021!
The number question we hear from investors is how can the stock market can be at all-time highs when the world is under siege from the COVID pandemic. Some things are hard to explain. "The market is forward looking. Not all businesses are suffering. The market is telling us things will be better." Like Annie sang, "The sun'll come out tomorrow, bet your bottom dollar."
Passive Expansion
n 1992, Vanguard launched its Total Stock Market Index (VITSX) fund. At the end of its first year, it had $512 million of assets. Today, assets exceed $1 trillion. Passive mutual funds and Exchange Traded Funds (ETFs) now represent about half of the stock market. At the end of last year, there were roughly 6,970 ETFs and 7,945 mutual funds (not all of these funds are passive) versus roughly 3,670 public companies (U.S. stocks).
Lots and Lots of Money and Low, Low Rates
Congress is about to pass another COVID relief bill which is expected to put an additional $900 billion in to the U.S. economy. The Federal Reserve is buying $80 billion worth of U.S. treasury securities every month and at least $40 billion worth of mortgage-backed securities. Since March, the Fed has expanded its balance sheet by over $3 trillion.
From August 1999 to March 2000, the NASDAQ index appreciated from about 2,500 to 5,000. At the time, "NASDAQ 5000" seemed mind-boggling high. Day trading was popular. Buying almost any stock made investors feel intelligent as the overall market was making a historic bull move. "NASDAQ 5000" became an adjective to describe conspicuous consumption.
End of Year Considerations
2020 is almost over. Trading volumes fall off significantly around mid-December. Generally, you should attempt to complete your 2020 stock market/account management activities by December 18.
The Case for International Stocks
The U.S. stock market has been the best performing large economy stock market over the past decade.
Delta 2021 Outlook
The stock market almost always has positive calendar year returns during years the economy does not experience a recession. We do not foresee a recession in 2021 making the probability of enjoying a positive investment year in U.S. equities high.
Crash Course: Interest Rates and Stock Values
Stocks are categorized by size (small vs. large) and type (growth vs. value). During 2020, large capitalization growth stocks significantly outperformed the rest of the stock market. Year-to-date through November 9, the five largest stocks (all growth stocks) of the S&P 500 are up collectively 48% versus the remaining 495 stocks which are up 4%.
From an investment perspective, the election results are in.
Uncertainty and volatility collapsed. In advance of the election, many investors were anxious and bought insurance (via put options on the S&P 500) to protect their stock portfolios. Apparently, fear may have been overblown and the insurance protection is being unwound. Technically, unwinding put option insurance creates buying pressure. Fundamentally, less anxious investors are more willing to own risk assets.
Certain Uncertainty
Since 1788 and thanks to George Washington, the most popular president of all-time, we have held presidential elections once every four years. The four-year presidential cycle in the U.S. is certain. What is uncertain is who will win the election. On, or shortly after, election day (Tuesday, November 3, 2020), we gain certainty on who won.
Bank on It
The ping-pong like back-and-forth action of the bailout debate and the presidential election have narrowed the scope of headline news and captivated investor attention. Hey, we are in earnings season! The major banks reported last week and said important things that appear to have gone mostly unnoticed.
18 More Days
In 18 more days, the presidential election will take place. We have had one raucous debate. Trump has questioned the validity of an election dominated by mail-in ballots and has suggested he may not accept the election result if it is not favorable to him. The drama so far has caused the upcoming election to be one of the leading sources of anxiety for investors.
Conversation with Hundred Billion Dollar Manager
We are in the fourth quarter of one of the most unusual stock market years in history. The economy experienced peak output and then one of the most severe recessions in history. We are 25 days from a presidential election. The economy is beset by COVID-19 while stocks have reached all-time highs.
The Fourth Quarter
On September 30, the last day of the third quarter, the S&P 500 (SPY) closed at 3,363 and is +5.5% YTD. Given that 837,000 people filed initial unemployment claims this week and 11.7 million people are receiving continuing unemployment claims, the S&P 500 is performing surprisingly well. The market cap-weighted index is benefiting from mega cap technology companies. The equal weighted S&P 500 (RSP) is -4.8% YTD.
COVID-19, Market Wave 3
The COVID crisis is impacting the stock market in waves. Wave 1 struck in March with a mandated global economic shutdown and 35% market collapse. Wave 2 arrived mid-summer with a significant rise in confirmed cases and renewed business closures. Between the June 8 high and June 15 low, the S&P 500 lost about 8% of its value. Despite a brief pullback in June, the S&P 500 quickly looked through the case spike partly because the number of deaths remained low, expectations of additional federal stimulus, record low interest rates and further economic reopening later in the year.
XLE.EEK!
The S&P 500 energy sector ETF (XLE) is down over 40% year-to-date. EEK! It is the worst performing sector of the S&P year-to-date, down by more than twice as much as the next worst performing sector, financials (XLF -17%). These are the only S&P 500 industry sectors with double digit declines YTD.
The U.S. economy is measured by its Gross Domestic Product (GDP). GDP is a summation of economic activity by individuals, businesses and government. Over the past 45 years, government expenditures have contributed about one third of GDP. In a COVID-19 world with many business activities restricted and record amounts of federal stimulus, government expenditures now represent over half of all U.S. economic activity.
Let Inflation (and the Stock Market) Run
Chairman Powell of the Federal Reserve says the Fed would like to see inflation average at about 2% rather than be capped at 2%. To the ears of investors, this statement translates into low rates for even longer. Inflation is running well below the Fed's 2% average target.
Crossing the Karman Line
Occasionally, markets rocket higher. In 1998, between July 21 and October 8, the NASDAQ lost about 33% of its value. The NASDAQ then appreciated by 278% from about 1,357 to 5,132 on March 10, 2000. The fuel was investor enthusiasm for the endless growth possibilities of the Internet.
Getting Ahead of COVID-19
China and much of Western Europe seems to be well ahead of the United States in managing the prevalence of COVID-19 and in re-opening economically. In China, mall traffic is back to about 85% of pre-COVID levels and China domestic air travel is fully recovered.
Interest versus Dividend
When is the best time to plant a tree? Many years ago. When is the second-best time to plant a tree? Now. The same goes for investing. The best time to invest was a long time ago. Given the best option may no longer be available, the second-best time is now. Like a tree, investments generally grow over time.
Adding Up the Numbers
The total civilian labor force of the U.S. is roughly 160 million persons. The labor force includes all people "16 years of age and older residing in the 50 states and the District of Columbia who are not inmates of institutions (e.g., penal and mental facilities, homes for the aged), and who are not on active duty in the Armed Forces."
Google This: "Next July"
Google (Alphabet) is a California headquartered company. California is mostly shut-down. San Mateo is the only coastal county still open from Mendocino all the way to the Mexican border.
Small-Cap Catch-Up
The COVID-19 pandemic has created significant uncertainty. For the most part, the stock market has held up surprisingly well with the S&P 500 now having a small positive gain for the year. The key bullish drivers have been tremendous monetary/fiscal stimulus and an acceleration to on-line commerce which is benefiting the very large capitalization companies in the market..
Commodity Prices Signal Global Recovery
Copper prices are largely influenced by the health of the global economy. Copper is used in power generation and transmission, construction, factory equipment and electronics. Copper prices are used as a leading indicator by some economists. Lumber, oil and silver are similar to copper as their prices measure global supply and demand. Many commodity prices are trading at 52-week highs.
The COVID-19 Defensive Trade Lifts Markets
COVID-19 is a major driver of trading activity since February. At the start of the crisis, the obvious projection was to say an economic shut-down would severely curtail economic activity and the equity market would suffer. For the first month, this is what happened. The S&P 500 declined by about 35% from late February into March.
Hyper Speed Creates Uncertainty
J.P. Morgan Asset Management calculates the recession that began in March ended in May. The pace of change in the markets and the economy is moving at record speed. The pace of change is creating apparent dichotomies that make the investment landscape confusing. The Covid-19 headline news is persistently negative. Corporate earnings are forecast to fall by about 44% in the second quarter. Yet, the NASDAQ is at record highs and the S&P 500 is close to breakeven after enjoying its best quarterly performance in the past 22 years.
An Expected Rise
Two months ago, the U.S. reached a single-day record of 34,203 new Covid-19 infections. This week on Wednesday, we set a new daily high of 38,115. A rise in Covid cases should not come as a surprise given social distancing requirements are being relaxed, testing has increased and there were mass protests over the past several weeks. Several states are contemplating plans to slow down the reopening process.
Surprising Strength
You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time" - Abraham Lincoln.
Low Inflation, Cheap Oil – Multi-Year Investment Implications
Predicting the future price of oil may be one of the most difficult assignments for a financial analyst. In the past twelve years, crude oil prices moved in a range of $150/barrel to $20/barrel. At one point this year, crude oil futures prices were negative $40/barrel. In the past month and a half, the price of crude oil has doubled.
Pandemic, Riots, Presidential Election, War: A Good Year for Investing
Pandemic, riots, presidential election and war sounds a lot like 2020. What these words best describe, however, is 1968.
•	The H3N2 pandemic (avian influenza A virus originating in China) killed an estimated one to four million people worldwide and about 100,000 in the U.S.
Technically Even Stronger
Last week, the Delta Insights newsletter highlighted the building technical strength of the stock market. The S&P 500 gained strength this week and is now above its 200-day moving average. Momentum usually has persistence and a crossover above the 200-day moving average is a widely used positive momentum indicator.
Technically Strong, Fundamentally Rich
COVID-19 Phase Shift Change
COVID-19 is accelerating change in a way that Influenza, Ebola, Rabies, Polio, SARS, Smallpox, HIV and Dengue did not. COVID-19 shut down most of the major economies of the world. Some of the immediate consequences of the shut-down are extraordinary unemployment and all-time high Federal debt levels. Hopefully, these changes will not be permanent. .
Time of Exposure
You can pass your hand quickly through flame and feel virtually no pain. If your hand is held to the flame, it will burn. How long the COVID-19 crisis lasts will greatly determine how much economic pain will be felt.
Green Shoots in a Hot Market
Expansion, recession, collapse and recovery…all at once. In February, the first quarter GDP growth was expected to be about 3% (expansion). First quarter GDP (advance estimate) was reported this week at -4.8%. It is almost certain that 2Q GDP growth will be substantially more negative. Two sequential quarters of negative GDP growth is the definition of recession.
COVID-19 has much of America caught in a loop when every day seems the same. Businesses are closed and we wait to see what happens next. Repeat.
COVID-19 Winners and Losers
By March 23, the S&P 500 had declined roughly 35% from its all-time high on February 19. It was the fastest transition from bull to bear market in the past 120 years.
Peak in Sight
According to the Institute of Health Metrics and Evaluation (IHME), the peak usage in the United States for total hospital beds, intensive care beds and ventilators is April 11, 2020. The peak in deaths per day is projected to be April 12. Total U.S. deaths are projected to reach 60,415 by August 4. 60,415 deaths are a greatly reduced estimate from the roughly 100,000-240,000 projected a couple of weeks ago..
Taking the Temperature of the Market
COVID-19 causes some people, including healthy young people, to require intensive care and ventilation. In advance, we do not know who will suddenly require intensive care. Most people who get COVID-19 suffer minor symptoms and will recover at home.
Bear Market Signposts
The mandated economic shutdown and corresponding collapse in asset values (stocks and bonds) as a result of COVID-19 seems unprecedented. In about a month, the economy transitioned from economic expansion to severe contraction and bear market. From the February 19 high in the S&P 500 to the low on March 23, the market was down 35.4%.
We have collectively pressed "Pause" on the economy. Having the economy come to a stand‑still is unlike anything we have experienced in our lifetimes. Typically, recessions are part of a cycle…
Bear Shock
The stock market sell-off from the high on February 19th (down 20%) is the fastest on record, 15 trading days…
A Whole New (Fixed Income) World
A week ago, the Fed Funds futures were pricing in a 100% chance that the Fed would cut the Fed Funds rate by the March 18th meeting…
What if the current outbreak of coronavirus spreads significantly more than expected? This is the question the market is attempting to discount into stock prices…
Whoomp! There It Is
The Leading Economic Index (LEI) is an important indicator of recession risk. When the six-month moving average of the percent change month/month turns negative, recession risk is elevated. For the past three months, this has been the case.
LovE Is Prevalent
When we say LovE, we are referring to Leverage and Equity. Goldman Sachs prime brokerage (custodian for a significant number of hedge funds) reports they saw the largest net buying of Equities by hedge funds in nearly five months. Net Leverage increased as well.
1.	Manufacturing
In the fourth quarter of 2019, GM reopened 30 factories after a month-and-a-half strike. On January 15, the U.S. and China signed a Phase One trade deal. This week, China announced it will reduce tariffs by 50% next Friday on $75 billion worth of imported goods from the U.S.
Getting Behind the Numbers, Time to Panic?
Delta uses the Leading Economic Index (LEI) as a predictive indicator of recession. Four of the past five months have shown negative month-over-month readings. On a stand-alone basis, this is not bullish.
New Home Sales vs. Leading Economic Index?
Niners vs. Chiefs? Ali vs. Frazier? Monitor vs. Merrimack? Some questions are just really tough to answer in advance. Two well matched forces with only one possible winner.
Finally Time to Go Abroad?
The U.S. stock market (S&P 500) has dramatically outperformed both international developed and emerging markets since the start of 2009.
Stock Market Lessons of War
For the past thirty years, the United States military has been highly active in the Middle East. Some of the activity has been initiated by the United States including the events listed below. In three out of four cases, the stock market was up over the next twelve months.
Looking into the New Year
A New Year and new decade is underway. On the first trading day of last year, the S&P 500 opened at 2,476.96 which was 15x the forward twelve-month earnings. 2020 began with the S&P 500 at 3,244.67 and 18.2x the expected forward twelve-month earnings. From a valuation perspective, one might conclude the S&P 500 is less attractive today than it was twelve months ago. In the next several weeks, we will see important data points that should provide more clarity on the attractiveness of stocks.
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Investing involves the risk of loss.
Past performance is not an indication of future performance.
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