【December 3, 2020】S&P 500 hits a new all-time high 【Tetsu Emori Real Trading Strategy】
US stocks rose further as expectations for progress in economic stimulus talks continued to grow. The S&P 500 closed at a new high. ADP, a private U.S. payroll services company, reported in its November national employment report that private payrolls in the nonfarm sector rose by 307,000 from the previous month, below market expectations. Meanwhile, UK authorities announced they had approved emergency use of the COVID-19 vaccine developed by Pfizer and others. With concerns about the labor market recovery and hopes for vaccine rollout intertwined, the Dow opened lower. The decline briefly exceeded 200 points. However, New York Governor Andrew Cuomo said that if the safety and effectiveness of Pfizer’s vaccine are recognized, 170,000 doses would be received by the 15th.
In Congress, House Speaker Pelosi and Treasury Secretary Mnuchin spoke by phone for the first time since the presidential election regarding economic stimulus. Optimism for a normalization of the economy and for an early stimulus package grew, and a buyback rally expanded, turning the Dow to gains. Fed Chair Powell’s testimony to Congress that the central bank would continue easing until there is confidence in overcoming the COVID crisis also contributed to market comfort. The Fed’s Beige Book reported that in four of the twelve districts, economic growth was “little to none.”
Industries sensitive to economic cycles and normalization—such as airlines, finance, energy, and leisure—rose. American Airlines Group rose 4.1%, United Airlines 3.1%, Wells Fargo 2.8%, Carnival 5.0%, Exxon Mobil 3.8%, and Boeing 5.1%. Pfizer gained 3.5%. Salesforce.com, which announced it would acquire Slack on the 1st, fell 8.5%. Slack also dropped 2.6%. In the S&P 500, financials and energy rose while consumer staples fell. A rotation into value stocks continued.
The ADP’s November national employment report showed private payrolls in the nonfarm sector increasing by 307,000, below market expectations of 410,000. October’s figure was revised up to 404,000 from 365,000. An ADP executive noted that “employment growth continues to slow.” By sector, the goods-producing sector added 31,000 jobs, with mining and resources up 1,000, construction up 22,000, and manufacturing up 8,000.
The services sector added 276,000 jobs, with trade/transport/utilities up 31,000, information unchanged, financials up 8,000, professional/business services up 55,000, education/health up 69,000, and leisure up 95,000. In terms of size, large firms added 58,000 jobs, mid-sized firms 139,000, and small firms 110,000.
The National Retail Federation (NRF) said that 186.4 million people shopped during the five days from Thanksgiving (Nov. 26–30). Although below the all-time high for the period in 2019 (189.6 million), online shopping was strong and down only 1.7%. The 2018 Thanksgiving-period figure was 165.8 million. Online shoppers on Black Friday rose 8% year over year, and on the following day (Nov. 28) rose 17%. Those who shopped online exclusively across the five-day period totaled 95.7 million, up 44% from a year earlier.
Meanwhile, in-store Thanksgiving traffic fell 55% year over year due to the pandemic, and Black Friday traffic dropped 37%. Five-day spending per person averaged $311.75, down from $361.90 a year earlier. Purchases were led by clothing at 52%, followed by toys at 32%.
The Mortgage Bankers Association (MBA) reported weekly mortgage applications fell 0.6% from the prior week.
The Fed published the Beige Book on economic conditions from all 12 districts, stating that “growth expanded modestly to gradually in most districts.” However, due to renewed COVID-19 outbreaks, some regions saw slower activity and a less optimistic business outlook. Overall, the report affirmed continued economic recovery, but four districts were weak and five districts below pre-crisis levels. The Philadelphia Fed noted that activity worsened earlier in November due to the resurgence, and three Midwest districts including the St. Louis Fed indicated a slowdown had begun.
There were notable improvements in manufacturing, logistics, and housing. Banks reported deterioration in lending to the commercial and leisure sectors, with an expectation of higher loan delinquencies next year. Beyond the virus, with stimulus not yet assured, corporate sentiment remained cautious. Employment rose, but the pace slowed; wages rose modestly and prices rose only modestly. The report was based on information collected through November 20 and will serve as the discussion material for this year’s final FOMC meeting on the 15th and 16th.
President-elect Biden said that on foreign policy, he would not immediately dismantle the Phase 1 U.S.–China trade deal signed under the Trump administration, nor would he immediately remove tariffs on Chinese goods. His top priority, even before taking office, is to pass a large-scale economic stimulus through Congress. Under the Phase 1 deal signed earlier this year, China agreed to boost purchases of U.S. goods and services by at least $200 billion in 2020 and 2021, and the 25% tariffs on about $250 billion of Chinese products and tariffs on $100 billion of Chinese goods would remain in place.
Biden said, “The United States needs leverage in negotiations with China,” and “I do not intend to act quickly. Tariffs included. I will not prejudge my options.” He indicated that under his administration, policies would address China’s “unfair practices” such as intellectual property theft, dumping, improper subsidies to Chinese firms, and forced technology transfers from U.S. companies to Chinese firms.
At the same time, he emphasized the need to build bipartisan consensus and to increase government-led investments in R&D, infrastructure, and education to compete more effectively with China, stating, “Invest in America first and fight hard.” He also suggested that the best strategy against China is to work with allies. Regarding Iran, he maintained that sanctions would be lifted if Iran returns to strict compliance with the nuclear deal. Iran’s Foreign Minister Zarif commented last month that if the Biden administration lifts sanctions, Iran would fully implement the 2015 nuclear agreement. Biden also said he would consult with allies and partners to strengthen and extend Iran’s nuclear-related restraint and engage in additional agreements or negotiations to address its missile program.
On the 2nd, Mnuchin and Powell testified at a House Financial Services Committee hearing, urging lawmakers to pass additional relief measures so that small businesses can weather the coming months until broad coronavirus vaccination becomes possible, thereby entrenching a broad economic recovery. Powell emphasized that further fiscal support is highly beneficial and important to get through winter, noting that progress occurred sooner than expected, but COVID-19 cases have surged and could weigh on economic activity.
Mnuchin also urged Congress to act in the coming weeks. The testimony largely followed what he said the day before at a Senate Banking Committee hearing. Ahead of the testimony, Mnuchin indicated that President Trump intends to sign the coronavirus relief bill proposed by Senate Majority Leader McConnell the day before.
However, Republicans and Democrats in Congress have yet to reach an agreement on additional COVID-19 relief measures. Senate Republicans’ McConnell proposed a plan resembling a previously rejected Democratic proposal, including about $332.7 billion in new lending and grants for small businesses. Senate Democratic Leader Schumer said McConnell has not secured Democratic support and expressed skepticism that the bill would pass the House. He argued that McConnell should not waste Senate time with an inadequate, partisan proposal and urged bipartisan talks to quickly meet the nation’s needs.
In addition to the COVID-19 relief, Congress must pass a spending bill by December 11 to avoid a government shutdown. House Democratic Whip Hoyer said he expects leadership in both chambers to reach a bipartisan agreement on the relief bill and the budget by the weekend, and that aid to states and localities opposed by Republicans should be included in the relief package.
NY Fed President Williams said that the U.S. economy had been recovering more strongly than expected, but with nationwide COVID-19 expansion not abating, government fiscal support that had helped many households is expiring, and growth is slowing. He also warned that the United States has not yet escaped a severe downturn, and it’s crucial to assess how much the second wave and the winding-down or expiration of fiscal support will affect the outlook. The next-year outlook hinges on the timing of broad vaccine distribution.
Philly Fed President Harker projected that the economy would grow modestly this year and into early 2021, but still stay below pre-pandemic levels. He argued that some Fed emergency lending facilities should continue beyond year-end, and forecast that growth would recover in late 2021 and through 2022, with a slower pace in 2023. The outlook assumed multiple vaccines would be widely distributed by spring to next summer, and roughly $1 trillion in additional COVID-19 stimulus would be enacted.
Conversely, he noted that Mnuchin’s decision to end the Fed’s emergency lending facilities by year-end should be reconsidered, arguing that the facilities should continue beyond year-end. Given lingering economic uncertainty, he stated that keeping the emergency lending programs intact is prudent. He also highlighted that many jobs lost to the pandemic—especially those that cannot be done remotely—are at the highest risk of automation, citing meatpacking and similar roles as likely to face further automation.
He warned that studies show many jobs lost to the pandemic may not return, and that technological advancement cannot be stopped. However, the automation wave is forcing workers who lost jobs to think seriously about how to obtain new, stable employment. Harker was a voting member on this year’s FOMC.
U.S. 2-year yield: 0.162% (−0.0117)
U.S. 5-year yield: 0.416% (−0.0108)
U.S. 10-year yield: 0.941% (＋0.0069)
U.S. 30-year yield: 1.694% (＋0.0184)
U.S. 2–10 year yield spread: −0.779% (−0.0189)
U.S. 10-year Treasury futures: 137.844 (±0)
U.S. high-yield bonds (HYG): 86.44 (+0.24) <+0.28%>
U.S. 10-year TIPS yield: -0.931 (−0.03) <+3.44%>
MOVE index: 43.92 (+2.39) <+5.75%>
U.S. Treasuries rose in yield. The UK government’s approval on the 2nd of a COVID-19 vaccine was seen as supportive for the normalization of economic activity, leading to selling of long-term bonds. Expectations for progress in bipartisan talks on additional U.S. stimulus also contributed to selling of safe-haven Treasuries.
US Stocks Trading Strategy
U.S. stocks remain near highs but face evident headwinds. Those who bought on vaccine news have likely finished buying, making further purchases difficult without additional funds. If there is no additional capital, prices may not advance. A pullback might be needed before buying. As noted below, for a long-term portfolio strategy, buying on dips is fundamental. If you don’t wait for a pullback, costs won’t come down. In short, the entry point is crucial for taking a position.
For short-term trading strategy, buy in uptrends and sell in downtrends. And then…
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