VIDEO: Running With The Bulls
Here’s my video presentation for today, in which I analyze the latest political, economic and financial trends and what they mean for investors. My article below provides greater details.
As all of us grapple with quarantines and business lockdowns, it’s been a tough 2020. In particular, we face a brutal winter, marked by surging coronavirus cases and deaths.
The country with the highest number of COVID-19 cases worldwide? The United States. The country with the highest number of deaths worldwide? The United States.
The U.S. is home to more than 17.8 million cases and more than 317,000 deaths due to the coronavirus (as of updated figures on December 21, according to Johns Hopkins). The rate is increasing exponentially; the next three months will test our resolve.
The emergence of a new and more contagious strain of the virus in the United Kingdom is providing an unexpected headwind. In pre-market futures trading Monday morning, stocks were trading lower. You can expect volatility to continue over the near term, depending on pandemic headlines.
Yes, building wealth is important. But so is the safety and health of your family. Follow the precautions recommended by scientists and public health officials; don’t take the pandemic lightly. Now let’s do the numbers.
Despite the pandemic, Wall Street has been bullish. Driving the markets higher has been the emergence of effective vaccines, fresh fiscal stimulus, and the prospects of a return to political normalcy (more or less) in 2021.
Stocks finished in positive territory last week, with all three major U.S. stock market indices posting new all-time highs. Equities traded in a narrow range, reflecting the mix of good and disappointing news. The tech-heavy NASDAQ has been on a tear this year (see table).
The coronavirus is spreading, and yet the S&P 500 year-to-date has rallied about 15%. That puts the S&P 500’s forward price-to-earnings ratio at 24.1, above the 5-year average (17.4) and above the 10-year average (15.6). Stocks are getting expensive again, with optimism about next year baked into current prices. I’m bullish about next year but brace yourself for dips along the way.
It’s heartening to see Congress finally do its job. Lawmakers on Friday approved a two-day federal government funding extension to avoid a government shutdown and buy more time for fiscal stimulus negotiations, which continued over the weekend. My experience as a congressional staffer taught me that the best way to get legislative results in Washington is with a do-or-die deadline.
On Sunday night, after contentious talks, Congress at the 11th hour agreed to a stimulus package worth nearly $1 trillion that includes $600 stimulus checks, $300 federal unemployment benefits, funds for vaccine distribution, and aid to small businesses. President Trump is expected to sign the measure.
The stimulus package is limited in scope and far from perfect, but it’s probably a “down payment” on more significant stimulus in 2021. Why did stimulus pass, despite the mistrust and ideological division in Congress? A major factor was pressure from Wall Street.
Earnings lag but improve…
To be sure, corporate earnings are in the doldrums. The estimated year-over-year earnings decline for the S&P 500 for calendar year 2020 is -13.7%, which is below the 10-year average annual earnings growth rate of 10.0% (see chart).
However, earnings projections are improving. According to research firm FactSet, the estimated earnings decline for the S&P 500 in the fourth quarter of 2020 is -9.9%. However, that’s a marked improvement from the estimated Q4 earnings decline of 12.7% made on September 30.
In Q4, the health care sector is expected to report the highest year-over-year earnings growth of all 11 sectors at 10.5%. The energy sector is expected to report the highest year-over-year earnings decline at a whopping -107.2%.
Does the stock market rally have momentum? Or do we find ourselves in the midst of a bubble that’s about to pop? It’s a fine line between justifiable bullishness and delusion.
Markets are forward looking and Wall Street remains bullish about 2021. I share this optimism. Fiscal stimulus, approved vaccines, diminishing political chaos, the cessation of trade tensions, and a continuation of the Federal Reserve’s dovish monetary policy are factors that should propel stocks higher. Another tailwind is pent-up consumer demand, combined with higher rates of household savings.
FactSet reports that industry analysts in aggregate predict the S&P 500’s closing price will exceed 4000 in 12 months.
But risks remain. The Census Bureau reported last Wednesday that retail sales were estimated to be 1.1% less than in October, missing expectations. The combination of a resurgent coronavirus and weakening employment is spooking consumers.
The U.S. Labor Department reported Thursday that new applications for unemployment benefits rose again for the week ending December 12, reaching 885,000 for state programs and 455,000 for the federal Pandemic Unemployment Assistance (PUA) program, for a total of 1.34 million, an increase of 5% over the previous week (see chart).
The consensus estimate was that initial claims would fall to 808,000. The worse-than-expected increase in claims should come as no surprise given the resurgence of COVID-19 throughout the country, which last Wednesday killed the most Americans in a single day since the pandemic began. The alarming rise of coronavirus deaths has prompted new government stay-at-home mandates and restrictions on which businesses can remain open.
Add geopolitical risk to the equation. In 2021, we‘re likely to see America’s adversaries test the resolve of the new Biden administration. A flare-up of international tensions could torpedo the stock market’s rise.
A reminder of Russia’s continuing threat to the U.S. occurred last week, when it was revealed that Russian hackers had staged a massive breach of U.S. government agency computer systems. It could take years to assess and fix the damage caused by Russian cyber intruders within America’s top secret data files.
Outsized growth, with less risk…
How can you partake of growth in 2021, without falling victim to risk? One way to reap sustainable gains is to latch onto transformative trends with long-term momentum. Few trends are as powerful as the global implementation of 5G (“fifth generation”) wireless technology.
5G technology provides faster and higher capacity transmissions to carry the massive amounts of data generated by the Internet of Things. The companies involved in 5G include telecoms, chipmakers, modem/IP suppliers, and systems integrators, among others.
We’ve pinpointed a company that’s a crucial player in 5G. In fact, without this company’s proprietary technology, 5G would grind to a halt. This investment play is flying under the radar and the time to buy shares is now. For details click here.