Stocks blaze higher after receiving multiple encouraging headlines. But is it enough to fuel another sustained leg higher for the market?
The biggest monthly jump in retail sales … ever.
This morning we learned that retail sales rose 17.7% from April to May. That soars above the 8% forecast.
This comes after the 16.4% plunge in retails sales from the prior month.
Now, this data alone would be enough to lift Wall Street, but then we received additional good news …
It’s reported that President Trump is considering a $1 trillion infrastructure plan. Although most of the money would go to public projects like roads and bridges, some funding would be provided for 5G wireless infrastructure and enhanced rural broadband.
On the news, Wall Street soared nearly —
But wait, there’s more!
This morning, we also learned that drugmaker, Moderna, says that data reflecting the efficacy of its COVID-19 vaccine could be available as soon as Thanksgiving.
As I write, Moderna’s potential vaccine is in second-stage trials. Final-stage trials should begin next month.
On the trifecta of good news, stock markets surged in the morning, with the Dow rising 700 points which helped it top 26,500.
***Hold your horses …
By mid-morning, the Dow dropped, giving up about 500 points after Federal Reserve Chairman Jerome Powell remarked during his semiannual testimony before Congress that he didn’t want to “run through the bond market like an elephant.”
Powell’s comment was a follow-up to yesterday’s news that the central bank would start buying individual corporate bonds on top of the exchange-traded funds it is already purchasing.
Today, Powell clarified that this buying would be “out of an excess of caution to preserve these gains for market function by following through.”
Apparently, Wall Street prefers the elephant approach. The Dow sold off hundreds of points before recovering the rally later in the day. As I write early afternoon, the Dow is still up more than 550 points.
During the testimony, Powell also warned about “significant uncertainty” regarding the pace of the U.S. economic recovery, especially for small businesses.
From Powell:
The levels of output and employment remain far below their pre-pandemic levels, and significant uncertainty remains about the timing and strength of the recovery.
Much of that economic uncertainty comes from uncertainty about the path of the disease and the effects of measures to contain it. Until the public is confident that the disease is contained, a full recovery is unlikely …
The pandemic is presenting acute risks to small businesses, if a small or medium-sized business becomes insolvent because the economy recovers too slowly, we lose more than just that business. These businesses are the heart of our economy and often embody the work of generations.
***So, what now?
Let’s not tiptoe around it …
This market is a headscratcher.
On one hand, we are officially in a recession as the historic 128-month U.S. expansion is officially over.
In May, core unemployment was at 5%, up from 4.6% in April. What this “core” increase figure shows is that a rising number of people are tipping into sustained unemployment.
Meanwhile, as we’ve pointed out several times here in the Digest, the S&P 500 is trading at a forward price-to-earnings ratio of 21.7 times. That’s near levels seen during the dot-com bubble.
And even though there’s optimistic news of a COVID-19 vaccine, it’s hardly a certainty. Meanwhile, we’re seeing a resurgence in cases across the U.S. that’s threatening to lead to localized economic lockdowns (or pauses on re-openings).
On the other hand, despite all of this, the stock market has surged nearly 40% from its late-March low.
What now?
Well, first, let’s remember one of the stock market realities we highlighted from a Digest earlier this month:
Momentum trumps valuation.
Just because stocks are expensive doesn’t mean they can’t grow more expensive … then nosebleed expensive … then “furious-at-yourself-for-not-investing-12-months-ago” expensive …
Now, let’s add to this …
***Market tops tend to form when investors are wildly-confident, bullish, and greedy, while bottoms are typically carved out when investors are despairing and hopeless
Today, we’re seeing headlines about what I’ll call “localized greed.” This refers to a small group of retail investors who are taking huge risks, betting on stocks like Hertz and American Airlines.
So, far, they’re winning big.
The combination of the market’s massive rally since March and the wins of these risky retail traders are painting the picture of a “greedy” stock market. And to some degree, that’s true.
But there’s a great deal of data suggesting that investor sentiment is not this bullish on a larger scale.
To illustrate, according to a just-released Bank of America survey, a record percentage of investors believe stocks are overvalued.
Specifically, 78% of money managers believe the market is overpriced. That’s the most since the survey began back in 1998, and it exceeds the reading back when the dot-com bubble burst.
Digging into the details, 53% believe this is a bear market rally. Only 37% believe it’s a real bull market.
This has led professional money managers to lighten their stock allocations over the last few months.
They’re not alone. We’ve seen the same dynamic with retail investors.
You might be surprised to learn that while the market has surged nearly 40% off its March-lows, money has also flooded into money-market accounts. According to data from Refinitiv Lipper, assets in the funds recently swelled to about $4.6 trillion — that’s the highest level on record.
And speaking of that near-40% rally, it’s happened without the participation of many investors. According to Deutsche Bank, overall stock positioning among investors remains among the lowest levels of the past decade.
Why?
Fear.
From The Wall Street Journal (WSJ)
:
Many investors, nervous about the economic downturn, are questioning if stocks have soared too far, too fast, and have chosen the safety of cash over investing in the market. Others are keeping cash on the sidelines, ready to deploy when they spot an attractive buying opportunity.
Many institutional investors are also looking for buying opportunities.
Back to WSJ, profiling the chief investment officer at an investment firm:
… he moved some of his portfolio into cash earlier this year when volatility first started creeping into markets –marking the first time in at least a decade that he hasn’t been fully invested in stocks or other assets …
… he put some money back into the market in mid-May and would like to gradually wade back into stocks, especially if share prices drop further.
Bottom-line, if bull-market-tops require everyone to be fully-invested, while also being wildly-confident and bullish, we’re simply not there.
If anything, a substantial number of investors, retail and professional alike, are feeling FOMO, and waiting for market-pullbacks to put their stockpile of cash to work.
So, we have bullish momentum combined with dollars looking to get back into the market. This suggests more room to run.
***But remember the second stock market reality from our earlier Digest
It’s not so much a stock market as it is a market of stocks.
Instead of thinking of “the market” as a monolithic entity into which you put money, we prefer to focus our attention on individual industries and companies. There’s quite a lot happening behind the curtain we call the Dow Jones Industrials Average.
Given this, combined with all the uncertainties in today’s market, be very selective about your investments.
For example, rather than follow the herd of retail investors into the “Hertz” trade, which is based on emotion and the greater-fool-theory, you could take the smarter approach and invest according to cold, hard data — this is Louis Navellier’s approach.
Specifically, Louis focuses on sales growth, operating margin growth, earnings growth, earnings momentum, earnings surprises, analyst earnings revisions, cash flow, and return on equity.
Louis then buys and sells according to what these numbers tell him — not what his gut tells him.
For example, just this morning, Louis sent an alert to his Accelerated Profits subscribers to lock in gains on Globant S.A., a global developer of software products.
Why would Louis sell as the market surges?
From Louis:
… looking forward to the second quarter, analysts are now expecting Globant’s earnings to decline 5.7% year-over-year to $0.50 per share. Earnings forecasts have also been lowered by 24% in the past three months. Let’s take that as our cue to exit.
This exit locks in official profits of 128%. That’s the power of a numbers-approach.
As we wrap up, yes, it’s a challenging market, but it appears there’s still room for bigger gains. That said, you’ll be safer investing today if numbers-strength is driving your picks rather than herd-based emotion.
Have a good evening,
Jeff Remsburg
