Pfizer has hit the headlines over the last two weeks with news of a vaccine for the corona virus. The effectiveness of the vaccine for the “general population” appears to be 90-95% which is a grand-slam home run. Intuitively this will relieve many of the fears of a resurgence of the “pandemic” now that North America is heading toward winter. The stock market has responded accordingly by heading toward new highs on confidence that economic shutdown will not be “necessary.” Interestingly, long term interest rates are slightly higher in the last few weeks which at least indicates that the economy is finding its legs after the shutdowns. To that point, consider this: earnings season is nearly over, with around 90% of the S&P 500 companies having reported now. Around 84% have reported a positive surprise on earnings and 72% have reported a positive surprise on sales. Of course, we have to take this with a grain of salt, because Wall Street has developed a game of lowering expectations in front of a report so you can claim you beat said expectations. But there still is a surprising resilience in the American economy that outperforms - especially Europe- much of the rest of the world right now.
The presidential election, reminiscent of 2000 Bush vs Gore, hasn’t been settled yet and we don’t know when that will be resolved. Of course, who is in the White House will have some effect on specific portions of the markets we watch every day and speculation on that makes tabloid publications tick. However, in the grand scheme of things historically, whether the White House is occupied by a Republican or Democrat has ALMOST NO EFFECT on the overall trend of the markets. Speculation on the social effects (rioting, violence, boycotts etc.) of Trump or Biden winning is exactly that at this point – speculation.
This week is full of economic news and on the central bank front, we’ll hear from a number of speakers including ECB President Lagarde, Bank of England Governor Bailey and Fed Vice Chair Clarida. The main policy decisions will be coming from emerging markets, however, including the Central Bank of Turkey, the South African Reserve Bank and Bank Indonesia, who are all announcing their decisions on Thursday. We are not sure if these will be large decisions – but Thursday is definitely on our radar.
With the support of the Federal Reserve asset markets as defined by stocks, bonds and real estate have defied gravity through the “pandemic” of Covid-19. As we stated above, the economy is performing remarkably well, all things considered. But the market is waaay overbought by historical measures. Take a look at the “Buffet Indicator” which measures the total value of the stock market in comparison to the total GDP of the economy…
This shows a market richly priced even in comparison to the bubbles of 2000 and 2007. Keep in mind, however that overbought markets can continue to get more overbought. We don’t see that the Federal Reserve will back away and stop buying assets or raise interest rates which could halt this overvaluation of assets. But understand that the “rubber band” is getting stretched and there needs to be some sort of reset – when and how that comes to pass is anyone’s guess. But with all of the uncertainty on everyone’s front burner right now, the fact that things are more than holding together gives us some confidence that rallies will continue. Things that could change the investing landscape are, of course wild changes in the election results or central bank decisions – so STAY TUNED!!!
Regards and good investing,